How Are Tax Reserves for VAGLB Determined for Pre-2010 Contracts?

In March 2010, the Internal Revenue Service (IRS) issued Notice 2010-29, which provided interim guidance on tax reserve issues that arise from the NAIC’s adoption of Actuarial Guideline (AG) 43 relating to reserves for variable annuity contracts with guaranteed benefits. AG 43 was effective on Dec. 31, 2009, and superceded all prior NAIC actuarial guidelines for these contracts. Notice 2010-29 provides generally that, for purposes of computing the amount of federally prescribed reserves under I.R.C. § 807(d)(2), the provisions of AG 43 for determining the Standard Scenario Amount are taken into account, but not those for determining the Conditional Tail Expectation (CTE) Amount. While the interim guidance from the IRS was timely and welcome, it left open several important issues, including whether the CTE Amount is includible in statutory reserves under I.R.C. § 807(d)(6) for purposes of determining the limitation on the amount of deductible tax reserves.

Another important issue not addressed in Notice 2010-29 is how tax reserves should be computed for contracts issued prior to Dec. 31, 2009. Although AG 43 applies for statutory reserve purposes to variable annuity contracts issued on or after Jan. 1, 1981, Notice 2010-29 states that AG 43 will apply for tax purposes only to contracts issued on or after Dec. 31, 2009. For previously issued contracts, the Notice states that “the tax reserve method under § 807(d)(2)(A) and (d)(3) is the method applicable to such contract when issued, as prescribed under relevant actuarial guidance in effect before the adoption of AG 43.” Presumably, the IRS would conclude that the relevant guidance is AG 34 for guaranteed minimum death benefits (GMDB) provided under variable annuities, at least for contracts issued after AG 34’s effective date. But what about guaranteed minimum living benefits?