LB&I directive - Hedging of variable annuity guaranteed minimum benefits by insurance companies 

July 18:  The IRS Large Business & International (LB&I) division has released a directive as guidance for LB&I examiners with directions not to challenge the eligibility of an insurance company’s guaranteed minimum benefit (GMxB) hedges to qualify as hedging transactions under Reg. section 1.1221-2(b). LB&I-04-0514-0050 (July 17, 2014)

The LB&I directive also directs LB&I examiners not to challenge an insurance company’s:


  • Mark-to-market values of “eligible GMxB hedges” if they conform to the mark-to-market values reported in the company’s annual statement
  • Method of accounting for income, deductions, gains, and losses relating to “eligible GMxB hedges” for variable annuity contracts issued before December 31, 2009

According to this LB&I directive, the intention is to provide an efficient and uniform method of accounting for certain GMxB hedge income, deductions, gains and losses that will allow LB&I and taxpayers to manage their audit resources effectively.


The LB&I directive applies only to the portion of the aggregate net “eligible GMxB hedge” gain or loss related to the variable annuity contracts issued before December 31, 2009.


Eligible GMxB hedge gain or loss related to variable annuity contracts issued on or after December 31, 2009, are to be accounted for using a method consistent with the matching requirements in Reg. section 1.446-4(e)(1).


Additionally, if an insurance company does not meet the requirements of this LB&I directive, regular audit procedures will apply to GMxB hedges for all of the company’s variable annuity contracts.




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