26 U.S.C. § 807 — Rules for certain reserves
submitted 42 years ago by Pub. L. 98-369 to r/title-26-INTERNAL-REVENUE-CODE · 2,012 words · no verdicts yet
This section determines when reserve decreases are income and reserve increases are deductions for life insurance companies. It defines the reserves included, gives reserve formulas and special rules, and governs changes in the reserve-computation method.
(a) If the opening balance of the subsection (c) items exceeds the closing balance after subtracting the policyholders’ share of tax-exempt interest and of the year’s increase in covered policy cash values, the excess is gross income under section 803(a)(2). (b) If that adjusted closing balance exceeds the opening balance, the excess is a deduction under section 805(a)(2). (c) The items are: life insurance reserves* under section 816(b); unearned premiums and unpaid losses included in total reserves under section 816(c)(2); appropriately discounted amounts needed for obligations under contracts that, at the computation time, do not involve life, accident, or health contingencies; dividend accumulations and other interest-bearing contract amounts; advance premiums and premium-deposit liabilities; and reasonable special contingency reserves for group term life or group accident and health insurance for retired lives, premium stabilization, or both. The proper interest rate for the third item is the highest rate permitted by the National Association of Insurance Commissioners when the reserve is determined, and that item cannot be less than the contract’s net surrender value. Unpaid non-life losses use the discounted amount defined in section 846. (d)(1) Except for variable contracts, life insurance reserves are the greater of net surrender value or 92.81 percent of the reserve under paragraph (2). For variable contracts, they are the greater of net surrender value or the separately accounted section 817 reserve, plus 92.81 percent of any excess of the paragraph (2) reserve over that first amount. These reserves cannot exceed statutory reserves and no item may be counted twice. (2) The paragraph (2) reserve uses the tax reserve method for the contract. (3) That method is CRVM for covered life contracts, CARVM for covered annuities, the prescribed National Association method for noncancellable accident and health contracts, and the prescribed method—or the most appropriate consistent method if none is prescribed—for other contracts. CRVM and CARVM mean the respective Commissioners’ methods in effect when the reserve is determined. No method may increase a reserve because an assumed net premium exceeds the charged premium or consideration. (4) “Statutory reserves” means annual-statement amounts for section 807(c) items, excluding a reserve for deferred and uncollected premiums when section 811(c) does not permit it. (e)(1) Net surrender value includes surrender penalties and charges but not market-value adjustments. For a pension contract, the policyholder-fund* balance is the net surrender value, including penalties or forfeitures but excluding market-value adjustments. (2) A qualified supplemental benefit’s reserve is computed separately. It is a listed supplemental benefit with a separately identified charge and no access to another benefit’s surrender value: guaranteed insurability, accidental death or disability, convertibility, disability waiver, or another regulation-prescribed benefit supplemental to a contract with a subsection (c) reserve. (3) For a qualified foreign contract, the reserve cannot be below the foreign regulator’s minimum, and cannot exceed net level reserves. It must be issued by a foreign branch of a domestic life insurer to a resident of that country, the company must have been required to operate there through a branch, and the country cannot border the United States. (4) For a qualifying term or annuity benefit in a pre-1989 contract under an existing plan, compute that benefit’s reserve separately. An existing plan is one filed in one or more States before January 1, 1984 and on file in the appropriate State. (5) For listed nonlife reserves, use 80 percent of the otherwise determined opening and closing balances. The items are unearned premiums and advance premiums under insurance contracts not described in section 816(b)(1)(B). (6) The Secretary* must require reports about opening and closing balances and reserve-computation methods. (f)(1) If the basis for an item’s year-end computation changes, the difference between the new-basis and old-basis amounts attributable to pre-year contracts is treated under section 481 as a taxpayer*-initiated accounting-method change made with the Secretary’s consent. (2) Except for section 381(c)(22), if the taxpayer is not a life insurance company for a year, the remaining adjustments are taken into account for the preceding year.
If for any taxable year*—
the opening balance for the items described in subsection (c), exceeds
the closing balance for such items, reduced by
the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies,
such excess shall be included in gross income under section 803(a)(2).
If for any taxable year—
the closing balance for the items described in subsection (c), reduced by
the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, exceeds
the opening balance for such items,
such excess shall be taken into account as a deduction under section 805(a)(2).
The items referred to in subsections (a) and (b) are as follows:
The life insurance reserves* (as defined in section 816(b)).
The unearned premiums and unpaid losses included in total reserves under section 816(c)(2).
The amounts (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies.
Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts.
Premiums received in advance, and liabilities for premium deposit funds.
Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof.
For purposes of paragraph (3), the appropriate rate of interest is the highest rate or rates permitted to be used to discount the obligations by the National Association of Insurance Commissioners as of the date the reserve is determined. In no case shall the amount determined under paragraph (3) for any contract be less than the net surrender value of such contract. For purposes of paragraph (2) and section 805(a)(1), the amount of the unpaid losses (other than losses on life insurance contracts) shall be the amount of the discounted unpaid losses as defined in section 846.
For purposes of this part (other than section 816), the amount of the life insurance reserves for any contract (other than a contract to which subparagraph (B) applies) shall be the greater of—
the net surrender value of such contract, or
92.81 percent of the reserve determined under paragraph (2).
For purposes of this part (other than section 816), the amount of the life insurance reserves for a variable contract* shall be equal to the sum of—
the greater of—
the net surrender value of such contract, or
the portion of the reserve that is separately accounted for under section 817, plus
92.81 percent of the excess (if any) of the reserve determined under paragraph (2) over the amount in clause (i).
In no event shall the reserves determined under subparagraphs (A) or (B) for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining statutory reserves (as defined in paragraph (4)).
In no event shall any amount or item be taken into account more than once in determining any reserve under this subchapter.
The amount of the reserve determined under this paragraph with respect to any contract shall be determined by using the tax reserve method applicable to such contract.
For purposes of this subsection—
The term “tax reserve method” means—
The CRVM in the case of a contract covered by the CRVM.
The CARVM in the case of a contract covered by the CARVM.
In the case of any noncancellable accident and health insurance contract, the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract as of the date the reserve is determined.
In the case of any contract not described in clause (i), (ii), or (iii)—
the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract (as of the date the reserve is determined), or
if no reserve method has been prescribed by the National Association of Insurance Commissioners which covers such contract, a reserve method which is consistent with the reserve method required under clause (i), (ii), or (iii) or under subclause (I) of this clause as of the date the reserve is determined for such contract (whichever is most appropriate).
For purposes of this paragraph—
The term “CRVM” means the Commissioners’ Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined.
The term “CARVM” means the Commissioners’ Annuities Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined.
Nothing in any reserve method described under this paragraph shall permit any increase in the reserve because the net premium (computed on the basis of assumptions required under this subsection) exceeds the actual premiums or other consideration charged for the benefit.
The term “statutory reserves” means the aggregate amount set forth in the annual statement with respect to items described in section 807(c). Such term shall not include any reserve attributable to a deferred and uncollected premium if the establishment of such reserve is not permitted under section 811(c).
For purposes of this section—
The net surrender value of any contract shall be determined—
with regard to any penalty or charge which would be imposed on surrender, but
without regard to any market value adjustment on surrender.
In the case of a pension plan contract*, the balance in the policyholder’s fund* shall be treated as the net surrender value of such contract. For purposes of the preceding sentence, such balance shall be determined with regard to any penalty or forfeiture which would be imposed on surrender but without regard to any market value adjustment.
For purposes of this part, the amount of the life insurance reserve for any qualified supplemental benefit shall be computed separately as though such benefit were under a separate contract.
For purposes of this paragraph, the term “qualified supplemental benefit” means any supplemental benefit described in subparagraph (C) if—
there is a separately identified premium or charge for such benefit, and
any net surrender value under the contract attributable to any other benefit is not available to fund such benefit.
For purposes of this paragraph, the supplemental benefits described in this subparagraph are any—
guaranteed insurability,
accidental death or disability benefit,
convertibility,
disability waiver benefit, or
other benefit prescribed by regulations,
which is supplemental to a contract for which there is a reserve described in subsection (c).
In the case of any qualified foreign contract, the amount of the reserve shall be not less than the minimum reserve required by the laws, regulations, or administrative guidance of the regulatory authority of the foreign country referred to in subparagraph (B) (but not to exceed the net level reserves for such contract).
For purposes of subparagraph (A), the term “qualified foreign contract” means any contract issued by a foreign life insurance branch (which has its principal place of business in a foreign country) of a domestic life insurance company if—
such contract is issued on the life or health of a resident of such country,
such domestic life insurance company was required by such foreign country (as of the time it began operations in such country) to operate in such country through a branch, and
such foreign country is not contiguous to the United States.
For purposes of this part—
In the case of a life insurance contract* issued before January 1, 1989, under an existing plan of insurance, the life insurance reserve for any benefit to which this paragraph applies shall be computed separately under subsection (d)(1) from any other reserve under the contract.
This paragraph applies to any term insurance or annuity benefit with respect to which the requirements of clauses (i) and (ii) of paragraph (3)(C) are met.
For purposes of this paragraph, the term “existing plan of insurance” means, with respect to any contract, any plan of insurance which was filed by the company using such contract in one or more States before January 1, 1984, and is on file in the appropriate State for such contract.
The amount taken into account for purposes of subsections (a) and (b) as—
the opening balance of the items referred to in subparagraph (B), and
the closing balance of such items,
shall be 80 percent of the amount which (without regard to this subparagraph) would have been taken into account as such opening or closing balance, as the case may be.
For purposes of this paragraph, the items referred to in this subparagraph are the items described in subsection (c) which consist of unearned premiums and premiums received in advance under insurance contracts not described in section 816(b)(1)(B).
The Secretary* shall require reporting (at such time and in such manner as the Secretary shall prescribe) with respect to the opening balance and closing balance of reserves and with respect to the method of computing reserves for purposes of determining income.
If the basis for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between—
the amount of the item at the close of the taxable year, computed on the new basis, and
the amount of the item at the close of the taxable year, computed on the old basis,
as is attributable to contracts issued before the taxable year shall be taken into account under section 481 as adjustments attributable to a change in method of accounting initiated by the taxpayer* and made with the consent of the Secretary.
Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if for any taxable year the taxpayer is not a life insurance company, the balance of any adjustments under this subsection shall be taken into account for the preceding taxable year.
Source credit: (Added Pub. L. 98–369, div. A, title II, § 211(a), July 18, 1984, 98 Stat. 726; amended Pub. L. 99–514, title X, § 1023(b), title XVIII, § 1821(a), (s), Oct. 22, 1986, 100 Stat. 2399, 2837, 2843; Pub. L. 100–203, title X, § 10241(a)–(b)(2)(A), Dec. 22, 1987, 101 Stat. 1330–419, 1330–420; Pub. L. 101–508, title XI, § 11302(a), Nov. 5, 1990, 104 Stat. 1388–449; Pub. L. 104–188, title I, § 1704(t)(61), Aug. 20, 1996, 110 Stat. 1890; Pub. L. 104–191, title III, § 321(b), Aug. 21, 1996, 110 Stat. 2058; Pub. L. 105–34, title X, § 1084(b)(2), Aug. 5, 1997, 111 Stat. 954; Pub. L. 108–218, title II, § 205(b)(1), (2), Apr. 10, 2004, 118 Stat. 610; Pub. L. 113–295, div. A, title II, § 221(a)(68), Dec. 19, 2014, 128 Stat. 4048; Pub. L. 115–97, title I, §§ 13513(a), 13517(a)(1)–(3), Dec. 22, 2017, 131 Stat. 2143–2145; Pub. L. 115–141, div. U, title IV, § 401(a)(141), Mar. 23, 2018, 132 Stat. 1191.)
- 1984Enacted · Pub. L. 98-369 · 98 Stat. 726
- 1986Amended · Pub. L. 99-514 · 100 Stat. 2399, 2837, 2843
- 1987Amended · Pub. L. 100-203 · 101 Stat. 1330
- 1990Amended · Pub. L. 101-508 · 104 Stat. 1388
- 1996Amended · Pub. L. 104-188 · 110 Stat. 1890
- 1996Amended · Pub. L. 104-191 · 110 Stat. 2058
- 1997Amended · Pub. L. 105-34 · 111 Stat. 954
- 2004Amended · Pub. L. 108-218 · 118 Stat. 610
- 2014Amended · Pub. L. 113-295 · 128 Stat. 4048
- 2017Amended · Pub. L. 115-97 · 131 Stat. 2143
- 2018Amended · Pub. L. 115-141 · 132 Stat. 1191
A history note hasn’t been published yet. The record shows enactment by Pub. L. 98-369 on 1984-07-18.
all 0 arguments · sorted by: best
no arguments yet — make the first case