26 USC 807 - Rules for certain reserves

U.S Code last checked for updates: Apr 27, 2024

§ 807.

Rules for certain reserves

(a)

Decrease treated as gross income

If for any taxable year—

(1)

the opening balance for the items described in subsection (c), exceeds

(2)

(A)

the closing balance for such items, reduced by

(B)

the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies,

such excess shall be included in gross income under section 803(a)(2).

(b)

Increase treated as deduction

If for any taxable year—

(1)

(A)

the closing balance for the items described in subsection (c), reduced by

(B)

(2)

the opening balance for such items,

such excess shall be taken into account as a deduction under section 805(a)(2).

(c)

Items taken into account

The items referred to in subsections (a) and (b) are as follows:

(1)

The life insurance reserves (as defined in section 816(b)).

(2)

The unearned premiums and unpaid losses included in total reserves under section 816(c)(2).

(3)

The amounts (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies.

(4)

Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts.

(5)

Premiums received in advance, and liabilities for premium deposit funds.

(6)

Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof.

For purposes of paragraph (3), the appropriate rate of interest is the highest rate or rates permitted to be used to discount the obligations by the National Association of Insurance Commissioners as of the date the reserve is determined. In no case shall the amount determined under paragraph (3) for any contract be less than the net surrender value of such contract. For purposes of paragraph (2) and section 805(a)(1), the amount of the unpaid losses (other than losses on life insurance contracts) shall be the amount of the discounted unpaid losses as defined in section 846.

(d)

Method of computing reserves for purposes of determining income

(1)

Determination of reserve

(A)

In general

For purposes of this part (other than section 816), the amount of the life insurance reserves for any contract (other than a contract to which subparagraph (B) applies) shall be the greater of—

(i)

the net surrender value of such contract, or

(ii)

92.81 percent of the reserve determined under paragraph (2).

(B)

Variable contracts

For purposes of this part (other than section 816), the amount of the life insurance reserves for a variable contract shall be equal to the sum of—

(i)

the greater of—

(I)

the net surrender value of such contract, or

(II)

the portion of the reserve that is separately accounted for under section 817, plus

(ii)

92.81 percent of the excess (if any) of the reserve determined under paragraph (2) over the amount in clause (i).

(C)

Statutory cap

(D)

No double counting

(2)

Amount of reserve

(3)

Tax reserve method

For purposes of this subsection—

(A)

In general

The term “tax reserve method” means—

(i)

Life insurance contracts

(ii)

Annuity contracts

(iii)

Noncancellable accident and health insurance contracts

(iv)

Other contracts

In the case of any contract not described in clause (i), (ii), or (iii)—

(I)

the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract (as of the date the reserve is determined), or

(II)

if no reserve method has been prescribed by the National Association of Insurance Commissioners which covers such contract, a reserve method which is consistent with the reserve method required under clause (i), (ii), or (iii) or under subclause (I) of this clause as of the date the reserve is determined for such contract (whichever is most appropriate).

(B)

Definition of CRVM and CARVM

For purposes of this paragraph—

(i)

CRVM

(ii)

CARVM

(C)

No additional reserve deduction allowed for deficiency reserves

(4)

Statutory reserves

(e)

Special rules for computing reserves

(1)

Net surrender value

For purposes of this section—

(A)

In general

The net surrender value of any contract shall be determined—

(i)

with regard to any penalty or charge which would be imposed on surrender, but

(ii)

without regard to any market value adjustment on surrender.

(B)

Special rule for pension plan contracts

(2)

Qualified supplemental benefits

(A)

Qualified supplemental benefits treated separately

(B)

Qualified supplemental benefit

For purposes of this paragraph, the term “qualified supplemental benefit” means any supplemental benefit described in subparagraph (C) if—

(i)

there is a separately identified premium or charge for such benefit, and

(ii)

any net surrender value under the contract attributable to any other benefit is not available to fund such benefit.

(C)

Supplemental benefits

For purposes of this paragraph, the supplemental benefits described in this subparagraph are any—

(i)

guaranteed insurability,

(ii)

accidental death or disability benefit,

(iii)

convertibility,

(iv)

disability waiver benefit, or

(v)

other benefit prescribed by regulations,

which is supplemental to a contract for which there is a reserve described in subsection (c).

(3)

Certain contracts issued by foreign branches of domestic life insurance companies

(A)

In general

(B)

Qualified foreign contract

For purposes of subparagraph (A), the term “qualified foreign contract” means any contract issued by a foreign life insurance branch (which has its principal place of business in a foreign country) of a domestic life insurance company if—

(i)

such contract is issued on the life or health of a resident of such country,

(ii)

such domestic life insurance company was required by such foreign country (as of the time it began operations in such country) to operate in such country through a branch, and

(iii)

such foreign country is not contiguous to the United States.

(4)

Special rules for contracts issued before January 1, 1989, under existing plans of insurance, with term insurance or annuity benefits

For purposes of this part—

(A)

In general

(B)

Benefits to which this paragraph applies

(C)

Existing plan of insurance

(5)

Special rules for treatment of certain nonlife reserves

(A)

In general

The amount taken into account for purposes of subsections (a) and (b) as—

(i)

the opening balance of the items referred to in subparagraph (B), and

(ii)

the closing balance of such items,

shall be 80 percent of the amount which (without regard to this subparagraph) would have been taken into account as such opening or closing balance, as the case may be.

(B)

Description of items

(6)

Reporting rules

(f)

Adjustment for change in computing reserves

(1)

Treatment as change in method of accounting

If the basis for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between—

(A)

the amount of the item at the close of the taxable year, computed on the new basis, and

(B)

the amount of the item at the close of the taxable year, computed on the old basis,

as is attributable to contracts issued before the taxable year shall be taken into account under section 481 as adjustments attributable to a change in method of accounting initiated by the taxpayer and made with the consent of the Secretary.

(2)

Termination as life insurance company

(Added Pub. L. 98–369, div. A, title II, § 211(a), July 18, 1984, 98 Stat. 726; amended Pub. L. 99–514, title X, § 1023(b), title XVIII, § 1821(a), (s), Oct. 22, 1986, 100 Stat. 2399, 2837, 2843; Pub. L. 100–203, title X, § 10241(a)–(b)(2)(A), Dec. 22, 1987, 101 Stat. 1330–419, 1330–420; Pub. L. 101–508, title XI, § 11302(a), Nov. 5, 1990, 104 Stat. 1388–449; Pub. L. 104–188, title I, § 1704(t)(61), Aug. 20, 1996, 110 Stat. 1890; Pub. L. 104–191, title III, § 321(b), Aug. 21, 1996, 110 Stat. 2058; Pub. L. 105–34, title X, § 1084(b)(2), Aug. 5, 1997, 111 Stat. 954; Pub. L. 108–218, title II, § 205(b)(1), (2), Apr. 10, 2004, 118 Stat. 610; Pub. L. 113–295, div. A, title II, § 221(a)(68), Dec. 19, 2014, 128 Stat. 4048; Pub. L. 115–97, title I, §§ 13513(a), 13517(a)(1)–(3), Dec. 22, 2017, 131 Stat. 2143–2145; Pub. L. 115–141, div. U, title IV, § 401(a)(141), Mar. 23, 2018, 132 Stat. 1191.)

cite as: 26 USC 807