The Internal Revenue Service is suggesting that adopting a proposed variable annuity reserving guideline could have tax consequences.

The IRS makes that suggestion in IRS Notice 2008-18, which identifies IRS and Treasury Department concerns about the possibility that states might adopt the proposed Actuarial Guideline VA-CARVM.

The IRS also raises concerns about the possibility that states might adopt a principles-based reserving, or “PBR,” system now being developed by regulators at the National Association of Insurance Commissioners, Kansas City, Mo.

AG VACARVM is a model that would establish rules for reserving for variable annuities with guarantees.

The PBR project is an effort to develop a reserving system that would depend less on statutory formulas and more on use of general principles and sound actuarial judgment.

The NAIC has been working on the PBR project for 3 years together with actuaries, life insurers and state insurance regulators.

Both advocates and critics of the AG VACARVM and PBR efforts have emphasized the importance of finding out how the Treasury Department will view any changes and how those views might affect the taxes that life insurers and their customers pay.

In the new notice, IRS officials say they are thinking about the following topics:

- The possibility of issuing guidance that would require insurers to keep using statutory reserves for purposes of the IRS reserve ratio test, even if those reserves were determined under the proposed AG VA-CARVM or PBR.

- The possibility of requiring the use of an AG VA-CARVM standard scenario amount or a “deterministic reserve” for purposes of the IRS reserve ratio test.

- Questions about whether it is “inappropriate for a change in statutory accounting under Section 807(d) to effect a wholesale change in the standards for qualification of contracts as ‘life insurance contracts under Section 7702.”

The Treasury and the IRS might exercise their authority under Section 7702 to require use of certain mortality tables or to permit continued use of the 1980 Commissioners’ Standard Ordinary mortality and morbidity tables, or to provide a reasonable interpretation of the prevailing mortality tables, officials write.

Officials are asking for comments about the status of any efforts to model AG VA-CARVM and PBR on a company-by-company and product-by-product basis or on an industry-wide basis; how those 2 projects limit or broaden the discretion of the Treasury and the IRS to provide guidance; and how the proposed gross premium valuation method might differ from current valuation methods.

Officials also are asking how revising assumptions and parameters annually would mesh with the existing statutory framework.

Comments are due May 5.

A copy of the notice is available