Session 65 PD, Product Tax Update Moderator: Jeffrey Thomas Stabach, FSA, MAAA Presenters: Kristin R. Norberg, ASA, MAAA Alison Peak, JD SOA Antitrust Disclaimer SOA Presentation Disclaimer
2017 Life & Annuity Symposium Kristin R. Norberg, ASA, MAAA, Presenter Alison R. Peak, JD, Presenter Jeffrey T. Stabach, FSA, MAAA, Moderator Product Tax Update Session 65 May 9, 2017
SOCIETY OF ACTUARIES Antitrust Notice for Meetings Active participation in the Society of Actuaries is an important aspect of membership. However, any Society activity that arguably could be perceived as a restraint of trade exposes the SOA and its members to antitrust risk. Accordingly, meeting participants should refrain from any discussion which may provide the basis for an inference that they agreed to take any action relating to prices, services, production, allocation of markets or any other matter having a market effect. These discussions should be avoided both at official SOA meetings and informal gatherings and activities. In addition, meeting participants should be sensitive to other matters that may raise particular antitrust concern: membership restrictions, codes of ethics or other forms of self-regulation, product standardization or certification. The following are guidelines that should be followed at all SOA meetings, informal gatherings and activities: DON T discuss your own, your firm s, or others prices or fees for service, or anything that might affect prices or fees, such as costs, discounts, terms of sale, or profit margins. DON T stay at a meeting where any such price talk occurs. DON T make public announcements or statements about your own or your firm s prices or fees, or those of competitors, at any SOA meeting or activity. DON T talk about what other entities or their members or employees plan to do in particular geographic or product markets or with particular customers. DON T speak or act on behalf of the SOA or any of its committees unless specifically authorized to do so. DO alert SOA staff or legal counsel about any concerns regarding proposed statements to be made by the association on behalf of a committee or section. DO consult with your own legal counsel or the SOA before raising any matter or making any statement that you think may involve competitively sensitive information. DO be alert to improper activities, and don t participate if you think something is improper. If you have specific questions, seek guidance from your own legal counsel or from the SOA s Executive Director or legal counsel. 2
Presentation Disclaimer Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice. 3
Agenda Washington update Regulatory reform Tax reform Tax expenditures Life insurance contracts update Annuity contracts update 4
Washington Update 5
Regulatory Update Regulatory Freeze Memorandum (Jan. 20, 2017) Halted federal rulemaking activity Temporarily postponed effective dates for 60 days 2-for-1 Executive Order (EO 13771) (Jan. 30, 2017) For every new regulation, identify 2 regulations for elimination Total regulatory costs capped at zero Any new regulatory costs must be offset 6
Regulatory Update Office of Information and Regulatory Affairs Guidance (Feb. 2 and Apr. 5, 2017) 2-for-1 order only applies to significant regulatory action > $100M Independent agencies exempt Executive Order on Enforcing the Regulatory Reform Agenda (Feb. 24, 2017) Operationalizes regulatory reform agenda by creating Regulatory Reform Officers and Regulatory Reform Task Forces Ensure regulatory reform orders are implemented Identify regulations for elimination 7
Timeline For Regulatory Reform 8
Treasury and IRS Guidance Under Regulatory Reform EO Identifying and Reducing Tax Regulatory Burdens (Apr. 21, 2017) Review all significant (not defined) tax regulations Reconsider exemption from OMB review Treasury remarks on routine guidance Priority guidance plan? 9
Tax Reform Starting point: Trump Tax Reform Outline Fate of House Republican Blueprint? Budget reconciliation only alternative Timing? 10
Trump Tax Reform Outline Light on details; single page Goals: Grow economy Create jobs Simplify tax code Provide tax relief to middle income families Lower the business tax rate 11
Trump Tax Reform Outline Individual income taxes Reduce individual income tax rates (10, 25, 35%) Repeal AMT, Estate Tax, and 3.8% NII Tax Restore 20% capital gains and dividends tax rate Business taxes Reduce corporate tax rate to 15% (also for pass-throughs) Reform international tax rules (territorial system, repatriation) 12
Tax Reform Unlike House Blueprint, no corresponding revenue raisers No border adjustment tax Other ways to raise revenue? Roth? Former Chairman Camp s proposals? DAC tax Reserve deductions DRD Effect on retirement plans? 13
Budget Reconciliation Cannot be filibustered, subject only to germane amendments, needs only 51 votes to pass in the Senate Can be used to change: Revenues Entitlement spending Debt limit Provisions need to have a budgetary consequence as their primary purpose Cannot increase budget deficit outside 10-year window, though can increase debt within window subject to budget reconciliation instructions 14
Tax Expenditure Listings JCT s 2015-2019 budget estimate: Inside buildup is not a tax expenditure No provision of the Federal tax law specifically allows an exclusion of the investment income on life insurance contracts Change in interpretation result of a new emphasis on the phrase provisions of the Federal tax laws in the 1974 Budget Act 15
Tax Expenditure Listings Treasury report: The Tax Expenditure for Life Insurance Inside Buildup Identify tax expenditure from Code provisions Death benefit exclusion from gross income Basis definition Tax-deductible reserves Treasury concludes possible to identify inside buildup as a tax expenditure, even under JCT s revised interpretation of the Budget Act 16
Life Insurance Contracts Update 17
Reasonable Mortality for 7702 and 7702A Notice 2016-63 Issued Oct. 19, 2016 Updated safe harbor to incorporate 2017 CSO tables Supplements Notice 88-128 (1958 and 1980 CSO) Modifies and supersedes Notice 2006-95 (2001 CSO) Does not affect Rev. Proc. 2010-28 (maturity after age 100) 18
Reasonable Mortality for 7702 and 7702A Notice 2016-63 safe harbor 2017 CSO is permitted for contracts issued in 2017-2019, if the state permits or requires 2017 CSO 2017 CSO is required for contracts issued in 2020 or later For both 2001 and 2017 CSO, safe harbor requires mortality rates that do not exceed 100% of the applicable CSO mortality rates and do not exceed contract guarantees 19
Reasonable Mortality for 7702 and 7702A Grandfathering As in Notice 2006-95, need not change to new CSO table if a policy change is pursuant to the terms of the contract, the state does not require the new table, and the contract continues on same policy form New: Need not change to new CSO table if the only change to an existing contract is a reduction or deletion of benefits provided under the contract New: Illustrative list of policy changes expands reinstatements to include reinstatement of a policy as required under applicable state or foreign law New rules for reductions and reinstatements apply to 2001 CSO safe harbor as well 20
Reasonable Mortality for 7702 and 7702A What s missing? Safe harbor for treatment of maturity after age 100 on 2017 CSO contracts ACLI has requested conforming updates to Rev. Proc. 2010-28 Changes that are not strictly pursuant to the terms of the contract E.g., routine, established, consistent administrative practices Permanent guidance to accommodate new tables vs. new interim notice each time As with earlier notices, substandard mortality is not contemplated in safe harbor 21
Implementation of 2017 CSO Tables SOA and NAIC jointly conducted a survey in July 2016 on planned use of VM-20 and 2017 CSO tables for contracts issued in 2017 72 survey respondents, all U.S. life insurance companies, currently selling term or ULSG, and potentially early writers of products subject to VM-20 Does company plan to use 2017 CSO table: Yes No Don t Know For valuation of any products issued in 2017? 44% 38% 18% For minimum cash values on any products issued in 2017? For developing and filing updated forms and nonforfeiture values with the IIPRC* in 2017? 26% 54% 19% 33% 47% 19% *IIPRC is the Interstate Insurance Product Regulation Commission (the Compact) Source: https://www.soa.org/files/research/exp-study/research-2016-pbr-survey-report-part2.pdf 22
Implementation of 2017 CSO Tables If using smoker-composite tables, be sure you have the latest version updated Aug. 29, 2016 Source: https://www.soa.org/resources/experience-studies/2015/2017-cso-tables/ 23
Principle-Based Reserves Operative date Jan. 1, 2017, with a few states outstanding 2017 CSO is permitted for 7702 reasonable mortality, despite possibility of having multiple tables and unlocking in reserves NAIC s intended timeline for adopting future mortality tables should align with 807(d)(5)(B) transition period NAIC Life Actuarial Task Force confirmed in Feb. 2017 NPR mortality unlocking does not affect nonforfeiture values Discussions on reserves and transition rules are ongoing on list of LB&I division s campaigns 24
Annuity Contracts Update 25
Amounts Received as an Annuity Amounts received as an annuity : Received on or after the annuity starting date, Payable in periodic installments, regular intervals, and Total amount payable must be determinable. Annuity starting date is later of: The date the obligations under the contract are fixed, or First day of the period which ends on the date of the first payment. 26
Amounts Received as an Annuity Notice 2016-39 Treatment of payments made under a qualified defined benefit plan during phased retirement Directed at certain government retirement systems Payments are not amounts received as an annuity if: Full retirement date is indeterminate; Plan still has obligations to employee; and Employee elects option that applies to entire plan benefit. 27
Amounts Received as an Annuity Rev. Proc. 2016-36: Notice 2016-39 does not apply to non-qualified annuities Expand circumstances when payments qualify as amount received as an annuity? Further contributions to the contract Subsequent elections under the contract to receive benefit payable under the contract Effect on 72(s)? 28
Section 817(h) Diversification Rules Notice 2016-32: 817(h) diversification rules for segregated asset accounts that invest in government money market funds (MMFs) Under 817(h) a segregated asset account (SAA) must be adequately diversified Hold at least five investments Subject to certain concentration limits All securities of same issuer = same investment Each gov t agency or instrumentality = separate issuer 29
Section 817(h) Diversification Rules SEC changes to fees imposed on MMFs that are not government MMFs Government MMF invests 99.5% of assets in: Cash Gov t securities Repurchase agreements fully collateralized by cash items or gov t securities Concern that gov t MMF = one issuer, violate 817(h) rules 30
Section 817(h) Diversification Rules Treasury/IRS intend to amend Treas. Reg. 1.817-5 Until then, rely on alternative diversification requirement under Notice for SAA that invests in government MMF Under Notice, an SAA is adequately diversified for purposes of 817(h) if: (1) No PH has investor control, and (2) Either (a) SAA is a government MMF under SEC Rule 2a-7(a)(14), or (b) SAA invests all of its assets in insurance-dedicated investment company, partnership, or trust as defined in Treas. Reg. 1.817-5(f)(1) that qualifies as a government MMF under SEC rule 31
PLR 201632004 PLR 201632004 involves a deferred income annuity ( DIA ) rider added to non-qualified deferred annuity contract PLR facts Irrevocably allocate account value to DIA rider, provide life annuity payments commencing on a specified future date Payments may commence from DIA rider while the contract otherwise remains in deferred status 72(a)(2) permits partial annuitizations [i]f any amount is received as an annuity for a period of 10 years or more or during one or more lives under any portion of an annuity contract 32
PLR 201632004 IRS conclusions Each time partial transfer of AV to DIA rider a separate contract arises for purposes of 72 Pro rata allocation of portion of investment in the contract based on the percentage of AV transferred Each separate contract will have its own annuity starting date for purposes of 72 Treatment of subsequent withdrawals from base contract Taxed under 72(e) Investment in the contract transferred to DIA rider not included 33
1035 Exchanges PLR 201625001 addresses an attempted 1035 exchange of annuity contracts Beneficiary under an inherited non-qualified annuity contract wanted to exchange contract for a new one Beneficiary mistakenly submitted a withdrawal request form instead of an exchange request form Total value was deposited into beneficiary s checking account To correct mistake, beneficiary applied amount to purchase a new annuity contract 34
1035 Exchanges IRS concluded transaction does not qualify for nonrecognition treatment under 1035 Lump sum payment from original annuity contract taxable under 72(e) in year received Cited to Rev. Rul. 2007-24 (endorsing a check from a life company to another life company not a valid 1035 exchange) Distinguishes qualified plan 60-day rollover rules 35
Purchase Rate Guarantees CCA 201702037 addresses whether contracts must have guaranteed purchase rates to be treated as annuity contracts for federal income tax purposes Context: Does a company issuing contracts labelled annuity contracts qualify as an insurance company under 501(c)(15)? Cannot be a life insurance company Gross receipts do not exceed $600,000 36
Purchase Rate Guarantees CCA facts: Company issued two contracts labelled annuity contracts One characterized as a deferred variable contract Other characterized as an immediate annuity contract No contractual guarantees No guaranteed purchase rates No specified settlement option in contract Legislative history and Rev. Rul. 77-286: Require permanent purchase rate guarantees to be an annuity contract 37
Purchase Rate Guarantees IRS found contracts lacked guaranteed purchase rates and thus are not annuity contracts for tax purposes Immediate annuity viewed no differently than the deferred variable contract IRS could not conclude whether company qualified under 501(c)(15) Life company status uncertain Gross receipts limitation of $600,000 likely exceeded Observations 38
Investor Control PLRs Two PLRs (201651002 and 201651012) on investor control doctrine and insurance-dedicated funds (IDFs) investing in other funds IRS concluded insurance company is owner; not policyholder Comfort rulings? Possible issue on future priority guidance plan? June 2016 ABA Section of Taxation letter 39
Required Minimum Distribution Rules IRS Info. Letter 2016-0071: Distributions to nonspouse beneficiaries under RMD rules Confirms that terms of Roth IRA govern whether distributions begin timely under RMD rules Cf. PLR 201532026 (applying 72(s) rules) PLRs 201628004, 201628005, and 201628006: retroactive state court orders changing IRA beneficiaries Retroactive reformation by state court does not change tax consequences of completed transaction Thus, IRA does not have a designated beneficiary under RMD rules 40
Questions? 41