IRS Notice Regarding Information for Certain Life Insurance Contract Transactions
On April 26, the IRS released Notice 2018-41, describing the new information reporting requirements for certain life insurance contracts under new IRC § 6050Y, which was added by the Tax Cuts and Jobs Act (TCJA). The new reporting requirements apply to reportable death benefits paid and reportable policy sales made after December 31, 2017.
Notice 2018-41 includes a background section on “Sales of Life Insurance Contracts.” It addresses Life Settlement and Viatical Settlement transactions. Of note, it does not mention sales or transfers of employer-owned life insurance contracts (e.g., by way of typical business mergers and acquisitions).
Overview of New Reporting Requirements
- Section 6050Y(a) imposes reporting requirements on every person who acquires a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale during the taxable year (the “acquirer”).
- The acquirer must file a return with the IRS, setting forth:
- The acquirer’s name, address, and taxpayer identification number (TIN);
- The name, address, and TIN of each recipient of payment in the reportable policy sale;
- The date of the sale;
- The name of the issuer of the life insurance contract sold and the policy number of such contract; and
- The amount of each payment.
- The acquirer must also furnish written statements to each payment recipient and the issuer named in the return.
- Under § 6050Y(b) (1), the issuer must file a return with the IRS, setting forth:
- The name, address, and TIN of the seller who transfers any interest in such contract in such sale;
- The seller’s investment in the contract within the meaning of § 72 (e) (6); and
- The policy number of the contract.
- Under § 6050Y(b) (2), the issuer must also furnish the seller with a written statement that includes the information filed with the IRS, as well as the name, address, and phone number of the issuer’s information contact.
- Under § 6050Y(c) (1), the payor of reportable death benefits during any taxable year must file a return with the IRS, setting forth:
- The payor’s name, address, and TIN;
- The name, address, and TIN of each recipient of such payment;
- The date of each such payment;
- The gross amount of each such payment; and
- The payor’s estimate of the buyer’s investment in the contract within the meaning of § 72 (e) (6).
- Under § 6050Y(c) (2), the payor must also furnish this information to each recipient of such payment.
Intended Proposed Guidance
Among other intentions addressed in the Notice, the IRS indicated that it intends to define the term “acquirer” to be any person who acquires a life insurance contract, or an interest in a life insurance contract, directly or indirectly, and who has no substantial family, business, or financial relationship with the insured apart from the acquirer’s interest in such life insurance contract. The term “indirectly,” for purposes of a reportable policy sale, is defined by the statute as the acquisition of an interest in a partnership, trust, or other entity that holds an interest in the life insurance contract. The IRS noted that the proposed regulations may further refine the definition of both “acquirer” and “indirectly.”
The IRS plans to limit the issuer’s obligation to report the “investment in the contract” on any date to the information that is known to the issuer (in general, the amount of premiums received from the seller for the contract before that date, less the aggregate amount paid to the seller under the contract before that date).
For reportable policy sales and payments of reportable death benefits occurring after December 31, 2017, and before the date final regulations under § 6050Y are published in the Federal Register, Treasury and the IRS intend to allow additional time after the date final regulations are published to file the returns and furnish the written statements required by § 6050Y.
Request for Comments
This Notice requests public comments on the implementation of these provisions and includes a series of specific questions for commenters. It may be worth noting that all of the specified questions from the IRS relate to contemplated activity with respect to life settlement transactions.
Comments are due by June 13.
Federal Reserve Board Seeks Comment on Proposed “Stress Capital Buffer” for Large Banks
On April 10, the Federal Reserve Board released a proposal that would simplify its capital rules for large banks by introducing a “stress capital buffer,” or SCB, which would in part integrate the forward-looking stress test results with the FRB’s non-stress capital requirements.
The SCB would be sized through the CCAR stress test and would be part of a firm’s ongoing capital requirements. The press release sets forth the following example:
If a firm has a common equity tier 1 capital ratio of 9 percent and it declines to 6 percent under the hypothetical severely adverse scenario of the stress test, its SCB for the coming year would be 3 percent.
The SCB would then be added to the minimum 4.5 percent common equity capital requirement, which remains unchanged. This would result in a 7.5 percent common equity capital requirement for the coming year.
Impact of Proposed Changes
Relative to current requirements, the proposed changes would generally maintain or somewhat increase the amount of capital required for GSIBs. The increase would occur in the risk-based requirements because the standardized approach capital conservation buffer requirement—which, for a GSIB, would include both the stress capital buffer requirement and the GSIB surcharge—would be greater than the amount of capital required under the current requirements, both post-stress and ongoing.
For firms with over $50 billion in assets that are not GSIBs, the proposal generally would result in a reduction to a firm’s required level of capital relative to what is required today. This reduction occurs because the supervisory stress test, as modified, generally would require less capital than the current post-stress capital assessment in CCAR, which is the requirement that currently binds most of these firms.
The proposal was published in the Federal Register on April 25. Comments on the proposal must be submitted by June 25, 2018.
NAIC Statutory Accounting Principles (E) Working Group Focuses on Private Placement Variable Products – Update
To follow up on our update on this topic last month, the NAIC has retroactively modified its official exposure draft for Private Placement Variable Annuities (PPVA). In particular, the exposure document removed the proposed changes to SSAP No. 21. However, the NAIC staff notes that the exposure draft requests information that “will be used to develop subsequent revisions to SSAP No. 21.”
The original exposure document (which we described last month) caused the ACLI to take the unusual step of commenting on the agenda item prior to its being exposed for comment during the March 24, 2018 meeting. In its letter, the ACLI suggests that PPVA are a seldom-used, emerging product for which regulatory consideration is timely. In contrast to PPVA, the ACLI states that Private Placement Life Insurance (PPLI) “has been recognized as having much different characteristics as life insurance and whose accounting has been understood and accepted for decades.”
This letter makes clear that the life insurance industry’s initial reaction to regulators becoming aware of insurers’ attempts to arbitrage the capital regime with I-COLI is to seek to preserve the status quo entirely for I-COLI. It will be interesting to follow the development and see if the industry is able to keep the regulators in the dark.
As we noted last month, this topic is of little significance to a BOLI owner.
NY DFS Updates Its Proposed Life Insurance and Annuity “Best Interest” Standard
On April 27, the NY Department of Financial Services issued a press release stating that it was updating its proposed regulation to adopt a “best interest” standard for those licensed to sell life insurance and annuity products. We had previously covered this topic in our January LRA update and noted that, at that time, the proposed regulation would have applied to BOLI/COLI (but not to policies involving NQDC arrangements).
Consistent with industry feedback at the time, the updated guidance adds BOLI/COLI to the list of products excluded from this regulation. The proposed regulation now also excludes policies used to fund “terminating employee pension plans or to assume liability of certain segments of ongoing plans, such as for terminated vested participants, or existing accrued benefits for currently active participants.”
Social Security Administration Announced Additions to Death Master File
In April, the Social Security Administration (SSA) announced that it will be adding over 8 million death records to the publicly available Limited Access Death Master File (LADMF) during 2018. The records are for deaths currently maintained in SSA records that the SSA determined should be included in the LADMF. Two sets of records, totaling approximately 3 million records, were added in April. To our knowledge, the SSA has not provided any information on when to expect the remaining 5 million records. It is our understanding that the additional records are for deaths that were previously unreported due to missing or illegible information in the original paperwork. We also understand that the first set of 1 million records added had dates of death spanning from 1937 to 1976.
As you may recall, since November 1, 2011, the SSA has not included, in the LADMF, death records received through contracts with the states. It is unclear if any of the additional 8 million records will include records that may have been incorrectly excluded as being state reported records.