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IRS Helps Federal Agencies Tap Variable Life and Annuity Users

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IRS headquarters (Photo: Allison Bell/TA)

The Internal Revenue Service has come out with new guidelines that could help two other federal agencies use cash from variable life and variable annuity holders to support federal mortgage loan guarantees.

The IRS gave the federal mortgage agencies the boost with Revenue Procedure 2018-54.

Two major federal mortgage agencies — the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) — want to team up to offer a new type of “uniform mortgage-backed security” (UMBS) through a Single Security Initiative (SSI) program.

The new IRS guidelines clear away an investment asset diversification rule that could have reduced life insurers’ ability to put the new UMBS products in variable life and variable annuity customers’ separate accounts.

(Related: The Danger of Rising Bond Yields, and the Opportunities)

Section 817(h) of the Internal Revenue Code requires life insurers that offer variable life or variable annuity separate accounts to support the customers’ separate accounts with “segregated accounts” filled with a variety of assets.

IRC Section 817(h) requires, for example, that a life insurer keep less than 55% of the account value in any one investment, and less than 90% of the value in any four investments.

For variable account diversification purposes, The IRS treats mortgage-backed securities from Freddie Mac and Fannie Mae as securities from different issuers.

The IRS notes that, given the way UMBS sales will work, life insurance company purchasers may have no way to know whether they will be getting Freddie Mac UMBS or Fannie Mae UMBS.

The IRS says it will solve the problem by having the Federal Housing Finance Agency, the agency that oversees Freddie Mac and Fannie Mae, publish a “deemed-issuance ratio” every year.

The deemed-issue ratio, such as 60% to 40%, would state how much of a UMBS came from Fannie Mae and how much came from Freddie Mac.

Life insurers and their variable life and variable annuity could use the deemed-issuance ratio to figure out how UMBS purchases might affect their separate account diversification levels, officials say.

An insurer choose whether or not to use the deemed-issuance ratio.

The revenue procedure will take effect once the new UMBS are available, officials say.

The IRS lists Katherine Hossofsky as the principal author for the revenue procedure.

A copy of Revenue Procedure 2018-54 is available here.

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