The Internal Revenue Service wants to permit Section 529 college savings programs to invest in the same funds that variable life and annuity contracts use.
The IRS has described the proposed change in Diversification Requirements for Variable Annuity, Endowment and Life Insurance Contracts, a “notice of proposed rulemaking” that appears today in the Federal Register.
One of the changes would affect Section 817(h) of the Internal Revenue Code. That section tries to discourage ordinary investors from benefiting from life insurance and annuity tax breaks by requiring that life and annuity segregated funds invest in at least 5 investments each.
“Congress directed that these standards be imposed because ‘by limiting a customer’s ability to select specific investments underlying a variable contract, [adequate diversification] will help ensure that a customer’s primary motivation in purchasing the contract is more likely to be the traditional economic protections provided by annuities and life insurance,” IRS officials write in a preamble to a draft of the proposed regulation.
Insurers that fail to show that life or annuity contracts are adequately diversified may lose access to the tax breaks normally accorded to life and annuity contracts.