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IRS Approves Another Annuity Fee Payment Arrangement

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The Internal Revenue Service has released a private letter ruling that blesses efforts by a life insurer to pay fees to a customer’s fee-based financial advisor directly from the annuity contract value.

The holder of an annuity covered by the ruling will not have to include the amount spent on advisory fees in federal taxable income, according to the IRS.


The new letter ruling, Private Letter Ruling 202104001, appears to be nearly identical to three annuity advisory fee letter rulings the IRS sent in December 2020.

Rebecca Baxter, the IRS official who signed the letter rulings sent out in December, also signed the latest ruling.

Similar to those in December, the new ruling covers payments of fees equal to up to 1.5% of contract cash value per year, on a family of products that includes a variable annuity, a non-variable indexed annuity, and an indexed annuity that’s registered with the U.S. Securities and Exchange Commission as a variable product.

The recent letter rulings’ references to SEC-registered indexed annuities, or registered index-linked annuities (RILAs), makes the new rulings somewhat different from similar rulings released about a year ago which covered traditional variable annuities and non-variable indexed annuities.

The typical IRS letter ruling leaves out the name of the requester. None of the RILA letters identifies the names of life insurers or law firms involved.

The latest letter ruling was issued to a correspondent who sent in a request dated Oct. 29, 2020.

The letters sent December were issued in response to a request dated Sept. 25, 2020.

The IRS uses letter rulings to give taxpayers advice about how the IRS will handle one particular tax situation. One life insurer cannot apply another life insurer’s private letter ruling to its annuity products. Each taxpayer need to ask the IRS for its own private letter ruling.

— Read IRS Rules for Nationwide and Lincoln on Annuity Advisory Feeson ThinkAdvisor.

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