2012-2013 Priority Guidance Plan – What’s In It For Life Insurance Companies?

In mid-November 2012, the Internal Revenue Service (IRS) and Department of Treasury released the 2012– 2013 Priority Guidance Plan, which sets forth some 317 projects as priorities for allocation of their resources during the 12-month period from July 2012 through June 2013. The section for Insurance Companies and Products contains 10 projects, nine of which would address life insurance issues (as opposed to property/casualty issues), seven of which are substantially the same as what was listed in last year’s plan. The two new projects addressing life insurance issues are:

• Guidance to clarify which table to use for I.R.C. § 807(d)(2) purposes when there is more than one applicable table in the 2001 CSO mortality table; and

• Guidance clarifying whether the Conditional Tail Expectation (CTE) Amount computed under Actuarial Guideline (AG) 43 should be taken into account for purposes of the Reserve Ratio Test under I.R.C. § 816(a) and the Statutory Reserve Cap under I.R.C. § 807(d)(6).

The CTE Amount project was expected because these issues were specifically left open by Notice 2010-291 in providing guidance on how to implement AG 43 for tax purposes when it became effective at the end of 2009. However, the 2001 CSO mortality table project came as a surprise to the industry. Because it had not been something discussed at insurance tax conferences and had not been among the projects recommended by the industry through the American Council of Life Insurers (ACLI), it is difficult to infer what specific problem or issue the project will address. Informal feedback from the IRS Insurance Branch indicates that the 2001 CSO mortality table project was added to the Guidance Plan at the request of the IRS Field offices but, if the project is supposed to address some issue that is being identified in exams, it is not an issue about which companies generally are aware. Could what seems like a simple company tax issue have unintended consequences for life insurance products? For example, I.R.C. § 7702(c)(3)(B)(i) cross references the prevailing commissioners’ standard tables defined in I.R.C. § 807(d)(5), which determines the applicable mortality table to be used for the I.R.C. § 807(d)(2) computation. Thus, the 2001 CSO mortality table project could be somewhat of a wild card from the industry perspective. Hopefully the IRS Chief Counsel’s office will bring the industry into the picture to discuss the issue being addressed and any tentative conclusions before reaching any final decision in order to avoid unforeseen and unintended adverse consequences the final guidance might have.