Rev. Rul. 2014-7 - Insurance reserves for variable contracts when accounted for as part of separate account reserves 

February 4:  The IRS today released an advance copy of Rev. Rul. 2014-7 to address the amount of life insurance reserves taken into account under section 807 for a variable annuity contract when some or all of the reserves are accounted for as part of a life insurance company’s separate account reserves.

The IRS concluded that under section 807(d)(1), the amounts of the end-of-year life insurance reserves for a variable annuity contract (under two specific factual situations) when the tax reserve is greater than the net surrender value and less than the statutory reserves, are the amounts of the tax reserve determined under section 807(d)(2).


Rev. Rul. 2014-7 [PDF 20 KB] modifies and supersedes Rev. Rul. 2007-54, and Rev. Rul. 2007-61 is rendered obsolete.

Background

The IRS address the following factual situations—which are the same as the facts in Rev. Rul. 2007-54:


In Situation 1:


  • IC is a life insurance company as defined in section 816(a) and is the issuer of Contract A.
  • Contract A provides for the payment of variable annuity benefits computed on the basis of a recognized mortality table and the investment experience of IC's segregated asset account (separate account).
  • IC bears the mortality risks with regard to the contingencies involved in the variable annuity benefits.
  • Contract A neither provides any “supplemental benefits” (as defined in section 807(e)(3)(D)) nor involves any “qualified substandard risks” (as defined in section 807(e)(5)(B)).
  • Contract A is a “variable contract” as defined in section 817(d) and an “annuity contract” under section 817(g). IC's reserves for Contract A are “life insurance reserves” as defined in section 816(b).
  • For tax years 2012 and 2013, the amounts of end-of-year tax reserves determined under section 807(d)(2) for Contract A are $8,000 and $10,000, respectively.
  • The 2012 and 2013 end-of-year net surrender values determined under section 807(e)(1) for Contract A are $7,840 and $9,830, respectively.
  • The amounts taken into account by IC with regard to Contract A in determining its 2012 and 2013 end-of-year statutory reserves within the meaning of section 807(d)(6) are $8,050 and $10,045, respectively.
  • None of IC's statutory reserves is attributable to any deferred or uncollected premium.

In the second factual situation, the facts are the same except that:


  • Contract A provides a minimum guaranteed death benefit in addition to variable annuity benefits. IC bears the mortality risks and investment risks with regard to the contingencies involved in the provision of the death benefit.
  • For tax years 2012 and 2013, the end-of-year tax reserves determined under section 807(d)(2) for Contract A are $8,155 and $10,165, respectively.
  • The 2012 and 2013 end-of-year net surrender values determined under section 807(e)(1) for Contract A are $8,000 and $10,000, respectively.
  • The amount taken into account by IC with regard to Contract A in determining its 2012 and 2013 end-of-year statutory reserves within the meaning of section 807(d)(6) are $8,210 and $10,215, respectively.
  • If Contract A had not provided the minimum guaranteed death benefit, the 2012 and 2013 end-of-year tax reserves determined under section 807(d)(2) would have been $8,000 and $10,000, respectively.

Conclusion in Rev. Rul. 2014-7

The IRS found that in both factual situations, the end-of-year tax reserves determined under section 807(d)(2) are the appropriate reserves for Contract A, as these reserves exceed the net surrender value of the contract but are less that the statutory reserves.


  • In Situation 1, the amounts of the 2012 and 2013 end-of-year life insurance reserves for Contract A are $8,000 and $10,000, respectively.
  • In Situation 2, the amounts of the 2012 and 2013 end-of-year life insurance reserves for Contract A are $8,155 and $10,165, respectively.

In Situation 2, IC is required under section 817(d) to account for the excess of its obligations under Contract A with the minimum death benefit over its obligations under the Contract without the death benefit as part of the company's general account reserves. Pursuant to section 817(c), IC accounts for its remaining obligations under the Contract A as part of the company's separate account reserves.


Accordingly, for end-of-year 2012, IC accounts for the $155 excess of its obligations under Contract A with the minimum death benefit ($8,155) over its obligations under the Contract without the death benefit ($8,000) as part of the company's general account reserves. IC accounts for the remaining $8,000 as part of its separate account reserves.


For end-of-year 2013, IC accounts for the $165 excess of its obligations under Contract A with the minimum death benefit ($10,165) over its obligations under Contract A without the death benefit ($10,000) as part of the company's general account reserves, and accounts for the remaining $10,000 as part of its separate account reserves.

KPMG observation

The conclusion regarding reserves in Rev. Rul. 2014-7 is fairly straightforward, and restates the conclusion reached in Rev. Rul. 2007-54 on this point. Rev. Rul. 2014-7 eliminates the “required interest” discussion in Rev. Rul. 2007-54, which was controversial. Accordingly, today’s revenue ruling restates only the “valid portion” of Rev. Rul. 2007-54.


For more information, contact a tax professional with KPMG’s Washington National Tax:


Craig Pichette

(312) 665-5267


Jean Baxley

(202) 533-3088




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