IRS Requires Use of Prevailing State Minimum Reserve Standard Where There Is No Specific NAIC Guidance at Issue Date

In general, tax reserves qualifying as life insurance reserves are required to be computed under IRC §807(d) and related IRC sections by starting with statutory reserves as computed in the NAIC Annual Statement and then making six adjustments:

1) Use of the tax reserve method prescribed by the NAIC (CRVM for life insurance or CARVM for annuities) as of the issue date;

2) Substitution of the applicable federal interest rate in effect as of the issue date for the statutory rate;

3) Substitution of standard mortality or morbidity tables prevailing in 26 states as of the issue date;

4) Reduction for net deferred and uncollected premiums;

5) Reduction for benefits attributable to excess interest guarantees beyond the end of the taxable year; and

6) Elimination of deficiency reserves.

These actuarially computed tax reserves are then subject to a statutory reserve cap and a net surrender value floor with the cap and floor applied on a contract-by-contract basis.

In TAM 200448046 (Nov. 26, 2004), the IRS addressed a situation where, at the time variable annuity contracts with minimum guaranteed death benefits (MGDBs) were issued, the NAIC had no clear guidance as to how the Commissioner’s Annuity Reserve Valuation Method (CARVM) applied to the MGDBs. The legislative history sets forth general rules to resolve cases like this where there are varying interpretations of CARVM as of the issue date. First, as of the date of issue of a contract, the taxpayer is required to use the method prescribed by the NAIC and take into account any factors recommended by the NAIC for such contracts; factors to be taken into account are generally addressed in actuarial guidelines (AG) issued by the NAIC. Second, where no NAIC AG exists, or for contracts issued prior to the NAIC’s adoption of a guideline, taxpayers are to look to the prevailing interpretation of the Standard Valuation Law, i.e., the interpretation that has been adopted by at least 26 states. Absent an NAIC guideline or a prevailing interpretation of the states, the tax reserve method should follow the interpretation used by the taxpayer for its statutory reserves as long as the statutory method is one of several permissible interpretations of the SVL as of the issue date. This is because, except for the six federally prescribed items outlined above, tax reserve assumptions are required to be the same as those
used for statutory reserves.