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Regulation and Compliance > Federal Regulation > IRS

IRS Blesses COLI Reinsurance Deal in a New Ruling

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The Internal Revenue Service has signed off on a reinsurance deal involving a block of corporate-owned life insurance (COLI) policies.

Dan Phillips, an IRS senior counsel, concluded in a private letter ruling that the reinsurance arrangement would not result in a material change to the policies, or an exchange of the policies.

Phillips also concluded that, for tax purposes, the arrangement would not affect the date the policies were issued or entered into.

The IRS posted the ruling, Private Letter Ruling 202018003, Friday.

The IRS listed the ruling as relating to four subjects: Life Insurance Contract Defined, Modified Endowment Contracts, Amounts Paid in Connection With Insurance (Deductible v. Not Deductible), and Certain Death Benefits (Excluded v. Not Excluded From Gross Income).

IRS officials use private letter rulings to give interpretations of tax rules to specific taxpayers and tax advisors. A private letter ruling may how show the IRS is approaching an issue, but it does not set a binding precedent.

In the new letter ruling, Phillips writes that the COLI case involves private placement variable life insurance contracts.

The taxpayer that sought the ruling is a publicly traded corporate group. Several companies in the corporate group paid “Insurer 1″ for variable life policies that insured the lives of highly compensated employees and directors.

The corporate group has the right to make Insurer 1 transfer the variable life policies to another insurer, through an assumption reinsurance agreement, if Insurer 1 runs into financial problems, or is sold.

Eventually, Insurer 1 was sold and renamed.

The corporate group has now asked Insurer 1 to try to place the COLI policies with another insurer, through a reinsurance transaction.

The corporate group asked the IRS to verify that the transaction would not cause the variable life policies to be treated as having undergone a material change, or as having a new issue date.

In this case, Phillips writes, the IRS must test the life insurance contract to determine whether, for tax purposes, the contract is a new contract.

“In a reinsurance transaction, the reinsurer will assume all obligations under the policies, with the exception of a certain limited category of retained liabilities described in the policies,” Phillips writes. “The terms and obligations of the policies will remain unchanged, including the amount and pattern of death benefits, the premium pattern, the interest rate or rates, and the mortality and expense charges guaranteed. The policies that policyholder will own after a reinsurance transaction will be the same policies that policyholder originally purchased except for the change in insurer.”

Because the only change in this scenario would be the name change, the issuance of the new contract would not constitute a material change in the contract, Phillips writes.

— Read Aflac Ties New Commercial to Fear of Out-of-Pocket Health Care Costson ThinkAdvisor.

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© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.