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December 29, 2020 at 11:02 AM
The Internal Revenue Service has issued three new private letter rulings that may help life insurers offer registered index-linked annuities through fee-based advisors.
Resources
- Copies of the new letter rulings are available here, here and here.
- An earlier article about annuity advisory fee letter rulings is available here.
IRS official Rebecca Baxter addressed each letter to a life insurer that wants to sell traditional variable annuity contracts, non-variable indexed annuity contracts, and “hybrid advisor contracts” through fee-based advisors.
Baxter told each insurer that it can pay advisory fees directly to an annuity owner’s investment advisor, from the cash value of all three types of contracts, without the annuity owner having to pay federal income taxes on the cash flowing to the advisor.
Section 72(e) of the Internal Revenue Code describes the kinds of annuity-related payments that may end up in a contract owner’s taxable income.
In the scenarios described by the three life insurers asking for the new letter rulings, “the fees are an expense of the adviser contract, not a distribution to the owner,” Baxter writes in the letters. “We rule that fees taxpayer deducts from the adviser contract’s cash value and remits to the adviser will not be treated as an ‘amount received’ by the owner of the adviser contract for purposes of Section 72(e).
Baxter applies the same legal provisions, regulatory provisions and analytical principles to the hybrid annuities that the IRS applies to the variable annuities and the fixed indexed annuities.
The life insurers that asked for the letter rulings said the advisory payments could amount to up 1.5% of the cash value in a hybrid advisor contract per year.
Definitions
Many life insurers once called all indexed annuities, or annuities with crediting rates based at least partly on the performance of an investment index, “equity indexed annuities,” or EIA contracts.
Annuity issuers and sellers began a major push to call the products “fixed indexed annuities” around 2006, when the National Association of Securities Dealers and the U.S. Securities and Exchange Commission were trying to have the SEC regulate EIA contracts as securities, just as the SEC regulates variable annuity contracts and variable insurance policies as securities.
Issuers of “fixed indexed annuities” wanted to emphasize that the products offer consumers guaranteed protection of account value, just as traditional fixed annuity contracts do, and that the index-linked provisions always served to increase the contract owner’s income and contract value, never to reduce income and value below what a traditional fixed annuity would provide.
Issuers of non-variable indexed annuities ended up winning a hard-fought war with the SEC and persuading Congress to leave regulation of non-variable indexed annuities to state insurance regulators.
