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Method-change rules simplified for insurance firms

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Tax Hot Topics newsletterThe IRS issued Rev. Proc. 2019-34 on Aug. 6 providing simplified procedures for life insurance companies to obtain automatic consent to change their methods of accounting for discounting of life insurance reserves, Section 807(c)(3) reserves and capitalizing specified policy acquisition expenses to comply with the amendments to Sections 807 and 848 made by the Tax Cuts and Jobs Act (TCJA). Life insurance companies are generally required to make changes to comply with the statutory revisions in their first taxable year beginning after Dec. 31, 2017.

Prior to the changes made by the TCJA, tax reserves for life and annuity insurance companies required a complicated actuarial calculation involving the use of special tables and rates, and limits related to the Cash Surrender Value (CSV) and the Statutory Reserve. The TCJA modified Section 807(d) such that a set rate of 92.81% would be used instead of the actuarial tax reserve calculation, but kept the limits related to CSV and the Statutory Reserve.

Section 848 was modified to extend the amortization period of specified policy acquisition expenses from 120 months to 180 months. It also modified the rates used to calculate the premiums that are determined to be specified policy acquisition expenses as follows:

  • Annuity life insurance premiums increases to 2.09% from 1.75%
  • Group life insurance premiums increases to 2.45% from 2.05%
  • Other life insurance premiums increases to 9.20% from 7.70 %

In order to reduce administrative burden, the IRS has provided a simplified process that allows taxpayers to appropriately address the changes required by the TCJA. Rev. Proc. 2019-34 explicitly waives the requirement to file a Form 3115. It also waives the eligibility rules in Section 5 of Rev. Proc. 2015-13, which allows taxpayers to make the change in the final year of a trade or business, or in the year in which the taxpayer engages in a liquidation or reorganization to which Section 381 applies, among other things.

The TCJA requires a life insurance company to compute a transition adjustment for the taxable year of change by calculating its insurance reserves as of the close of the taxable year preceding the first taxable year beginning after Dec. 31, 2017, using the new discount rate and comparing it to the losses computed under the old discount rate. The difference is considered to be the Section 481(a) adjustment required for the change in method and is included in the insurance company’s gross income over an eight-year period. A life insurance company must also compute a separate Section 481(a) adjustment for changes to the Section 807(c)(3) reserves that is generally taken into account entirely in the year of change for a favorable adjustment, and ratably over four years for an unfavorable adjustment. A taxpayer may elect instead to include an unfavorable adjustment entirely in the year of change. Changes required under Section 848 are made on a cut-off basis, and therefore a Section 481(a) adjustment is neither permitted nor required.

A taxpayer following this revenue procedure may generally receive audit protection for prior years’ Section 807(c)(3) and 848 methods. A taxpayer does not receive audit protection for the change related to its life insurance reserves. This procedure is effective for the first taxable year beginning after Dec. 31, 2017.

If a taxpayer properly filed a Form 3115 prior to Aug. 26, 2019, to request consent for any of the three changes described in this revenue procedure, and the Form 3115 is pending with the IRS National Office, the taxpayer may opt to convert the change to the automatic procedures. Notification needs to be sent no later than Sept. 25, 2019, or the date on which a letter ruling is received, whichever comes first.

Contacts:
John Forni
Managing Director
Manhattan Office
T +1 212 542 9865

Gary Berger
Senior Manager
Manhattan Office  
T +1 212 542 9662

Arash Barkhordar
Director
Manhattan Office
T +1 212 542 9526

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