Insurance Benefits

August 27, 2024

275 / How is a corporation taxed on payments under an annuity contract?

<div class="Section1"> With respect to the tax consequences to a corporation under an annuity or on living proceeds from endowment and life insurance contracts, the same rules that are applicable to personal insurance and endowment contracts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="10">10</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="62">62</a>) apply.<a href="#_ftn1" name="_ftnref1">1</a> The same rules that apply to increases in the cash value of policies for personal insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8">8</a>) also apply to business-owned insurance. To the extent that contributions are made after February 28, 1986 to a deferred annuity contract held by a corporation or other entity that is not a natural person, the contract is not treated for tax purposes as an annuity contract. Income on the contract is treated as ordinary income received or accrued by the owner during the taxable year.<a href="#_ftn2" name="_ftnref2">2</a> Thus, if payments received in a year plus amounts received in prior years plus the net surrender value at the end of the year, if any, exceed premiums paid in the year and in prior years plus amounts included in income in prior years, the excess amount is includable in income. The rule and exceptions are discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="513">513</a>. To the extent an annuity contract is not subject to this rule, payments received under the contract will be subject to the rules applicable to personal annuity contracts. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 11(a). <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 72(u). </div></div>

August 27, 2024

337 / What nondiscrimination requirements apply to self-insured health plans?

<div class="Section1"> Nondiscrimination requirements apply to self-insured health benefits, although the IRS announced in Notice 2011-1 on December 22, 2010, that compliance with nondiscrimination rules for health insurance plans will be delayed until regulations or other administrative guidance has been issued. This guidance remains pending. The IRS indicated that the guidance will not apply until plan years beginning in specified periods after guidance is issued. Some plans will be grandfathered. Benefits under a self-insured plan generally are excludable from an employee’s gross income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8794">8794</a>). If a self-insured medical expense reimbursement plan or the self-insured part of a partly-insured medical expense reimbursement plan discriminates in favor of highly compensated individuals, certain amounts paid to highly compensated individuals are taxable to them. A self-insured plan is one in which reimbursement of medical expenses is not provided under a policy of accident and health insurance.<a href="#_ftn1" name="_ftnref1">1</a> According to regulations, a plan underwritten by a cost-plus policy or a policy that, in effect, merely provides administrative or bookkeeping services is considered self-insured.<a href="#_ftn2" name="_ftnref2">2</a> A medical expense reimbursement plan cannot be implemented retroactively. To allow this would render meaningless the nondiscrimination requirements of IRC Section 105.<a href="#_ftn3" name="_ftnref3">3</a> A self-insured plan may not discriminate in favor of highly compensated individuals either with respect to eligibility to participate (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="338">338</a>) or benefits (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="339">339</a>). <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 105(h)(6). <a href="#_ftnref2" name="_ftn2">2</a>.     Treas. Reg. § 1.105-11(b). <a href="#_ftnref3" name="_ftn3">3</a>.     Wollenburg v. U.S., 75 F. Supp. 2d 1032 (D.C Neb. 1999); American Family Mut. Ins. Co. v. U.S., 815 F. Supp. 1206 (W.D. Wis. 1992). See also Rev. Rul. 2002-58, 2002-38 IRB 541. </div></div>

August 22, 2024

An Overview

<div class="Section1"> <h4 class="HA-P" style="margin-bottom: 0.3pt;text-align: center">Valuation Tables</h4> Note: New valuation tables were issued in 2009. See heading below for effective date and transitional rules. The value of an annuity, an interest for life or term of years, or a remainder or a reversionary interest, is valued for most income, estate, gift, and generation-skipping transfer tax purposes using the following valuation tables and the current interest rate for the month in which the valuation date occurs. See <a href="/faqs_page/valuation/pugpig_index.html#faq-922">Q 922</a>. The Section 7520 interest rate for each month is published at www.TaxFactsOnline.com. For purposes of these tables, round the age of any person whose life is used to measure an interest to the age of such person on his birthday nearest the valuation date. Selected single life and term certain factors are provided here. [See <a style="text-decoration: none" href="/taxfacts2018/tfinv/apps/apps-inv/appa-inv/Pages/appa-01-TF2.aspx">Appendix A</a> in Tax Facts on Investments for selected unitrust tables.] Both the single life and term certain tables provide factors for remainder interests that can be converted into an income factor or an annuity factor. A remainder interest is converted into an income factor by subtracting the remainder factor from 1. An income factor is converted into an annuity factor by dividing the income factor by the appropriate interest rate for the month. The value of a remainder or income interest is equal to the principal amount multiplied by the appropriate remainder or income factor. The value of an annuity payable annually at the end of each year is equal to the aggregate payment received during the year multiplied by the annuity factor. If the annuity is payable other than annually at the end of each period, the value of an annuity payable annually at the end of each year is adjusted to reflect the more frequent payments by multiplying such value by the appropriate Table A annuity adjustment factor. If an annuity is payable at the beginning of each period during the life of one individual (or until the death of the survivor of two persons), add the amount of one additional payment to the calculation of the value of an annuity payable at the end of each period. If the annuity is payable at the beginning of each period during a term certain, the value of an annuity payable annually at the end of each year is adjusted to reflect the more frequent payments by multiplying such value by the appropriate Table B annuity adjustment factor. 2009 Change in Valuation Tables The valuation tables underlying Section 7520 were updated with new valuation factors based on Mortality Table 2000CM. The most recent valuation tables are generally effective for valuation dates after April 2009. However, May and June 2009 were transitional months. A person with a valuation date in May or June 2009 could elect to use either the new or the prior valuation tables (based on Table 90CM). If a person was mentally incompetent on May 1, 2009, such person’s executor may be able to elect later to use either the new or the prior valuation tables. If a charitable deduction is involved, a person can use the Section 7520 interest rate for either of the two preceding months or the current month. If a person made a charitable gift during May or June 2009 and elected to use a Section 7520 rate for a month before May 2009, the prior valuation tables must be used. If a person made a charitable gift during May or June 2009 and elected to use a Section 7520 rate for May or June 2009, the person can elect to use either the new or the prior valuation tables. If a person makes a charitable gift after June 2009, the person must use the new valuation tables. <div style="border-top: solid 0.5pt windowtext;padding-top: 1pt;border-bottom: solid 0.5pt windowtext;padding-bottom: 1pt"> <div> Planning Point: During this valuation table’s transitional phase, it is probably more important than ever to run the numbers as planners attempt to increase charitable deductions and reduce taxable gifts. </div> </div> Example Calculations Example 1. Jack Jones set up a trust funded with $100,000 to provide income to his mother (age seventy) for life with remainder to his son, Tom. Assume the valuation table interest rate for the month is 3.0 percent. The factor for the present value of the remainder interest which follows a life estate given to a person age seventy at a 3.0 percent interest rate is .67291 (Single Life Remainder Factors Table). Consequently, Jack has made a gift of $67,291 to Tom ($100,000 × .67291). The factor for the present value of the income interest given to Jack’s mother is .32709 (1 – .67291). Consequently, Jack has made a gift of $32,709 to his mother ($100,000 × .32709). The gift to Jack’s mother is a gift of a present interest which may qualify for the annual exclusion. Example 2. Bob Martin (age sixty-six) transferred property in exchange for a private annuity of $12,000 a year, payable annually at the end of each year for life. Assume the valuation table interest rate for the month is 3.0 percent. The present value of an annuity payable at the end of each year for the life of a person sixty-six years of age at an interest rate of 3.0 percent is calculated as follows. (1) The remainder factor is .62383 (Single Life Factors Table). (2) The income factor is .37617 (1 – . 62383). (3) The annuity factor is 12.5391 (.37617 ÷ 3.0%). (4) The present value of the private annuity is $150,469 (12.5391 × $12,000). If the annuity is payable monthly (i.e., $1,000 per month) at the end of each period, the annuity payable annually at the end of each year as calculated above is adjusted as follows. Multiply the value of the annuity payable annually at the end of each year ($150,469) by an annuity adjustment factor of 1.0137 (Annuity Adjustment Factors Table A). Thus, the value of such an annuity is equal to $152,531 ($150,469 × 1.0137). If the annuity in either of the two preceding paragraphs is payable at the beginning of the period, add one payment to the value of the annuity calculated above. The value of the $12,000 annual annuity payable at the end of each year is increased to $162,469 ($150,469 + $12,000) if made payable at the beginning of the year. The value of the $1,000 monthly annuity payable at the end of each period is increased to $153,531 ($152,531 + $1,000) if made payable at the beginning of the period. Example 3. Kim Brown (age forty) transferred property worth $100,000 in exchange for a private annuity payable for her life. Assume the valuation table interest rate for the month is 3.0 percent. To calculate what quarterly payments payable at the beginning of each period should be, the following steps are taken. (1) Calculate the annuity factor for an annuity payable annually at the end of each year during the life of a person forty years of age at a 3.0 percent interest rate. This factor, 21.9370, is obtained by (a) locating the remainder factor of .34189 in the Single Life Remainder Factors Table, (b) subtracting (a) from 1, and (c) dividing (b) by the interest rate of 3.0 percent. (2) Locate the annuity adjustment factor of 1.0112 from the Annuity Adjustment Factors Table A. (3) Multiply (1) by (2) to obtain a product of 22.1827 (21.9370 × 1.0112). (4) Divide 1 by the number of periodic payments per year (i.e., 1/4, or .25) [if payments at end of period, equals 0]. (5) The sum of (3) and (4) is equal to 22.4327 (22.1827 + .25). (6) Annuity payments should be $4,458 per year ($100,000 ÷ 22.4327). (7) Quarterly payments should be $1,114 ($4,458 ÷ 4). </div>

June 13, 2024

268 / Are premiums paid by a corporation on life insurance to fund a stock redemption agreement taxable to an insured stockholder?

<div class="Section1"> No. The premiums are not income to a stockholder even though the stockholder has the right to designate the beneficiary, provided the beneficiary’s right to receive the proceeds is conditioned on the transfer of stock to the corporation.<a href="#_ftn1" name="_ftnref1">1</a> Likewise, premiums are not taxable income to an insured stockholder when a trustee is named beneficiary, provided the trustee is obligated to use the proceeds to purchase the insured’s stock for the corporation.<a href="#_ftn2" name="_ftnref2">2</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Sanders v. Fox, 253 F.2d 855 (10th Cir. 1958); Prunier v. Commissioner, 248 F.2d 818 (1st Cir. 1957); Rev. Rul. 59-184, 1959-1 CB 65. <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Rul. 70-117, 1970-1 CB 30. </div>

May 31, 2024

1 / What is life insurance?

<div class="Section1">Life insurance is a contract under which, in exchange for premium payments, an insurance company agrees to pay a death benefit if the person whose life is insured dies while the contract is in force. There are two general categories of life insurance: term coverage and permanent coverage. Term coverage is for a specific period of time, which can last for as little as one year or possibly as long as 30 years. Permanent insurance is intended to cover an insured for the rest of the insured’s life. Permanent life insurance can be financed with a single premium, a fixed number of premiums over several years, or premiums paid over the remainder of the insured’s life.</div>

June 04, 2024

Appendix C-1 - Static Mortality Tables

Age MALE MALE MALE FEMALE FEMALE FEMALE 2018 Non-Annuitant Mortality Rate 2018 Annuitant Mortality Rate 2018 Optional Combined Tablefor Small Plans 2018 Non-Annuitant Mortality Rate 2018 Annuitant Mortality Rate 2018 Optional Combined Tablefor Small Plans 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 0.050067 0.057467 0.065843 0.073396 0.083709 0.092919 0.103019 0.117040 0.132854 0.146819 0.165921 0.180722 0.200931 0.216754 0.232553 0.254433 0.270045 0.285214 0.307507 0.322050 0.336045 0.358628 0.371685 0.383040 0.392003 0.397886 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 1.000000 0.050067 0.057467 0.065843 0.073396 0.083709 0.092919 0.103019 0.117040 0.132854 0.146819 0.165921 0.180722 0.200931 0.216754 0.232553 0.254433 0.270045 0.285214 0.307507 0.322050 0.336045 0.358628 0.371685 0.383040 0.392003 0.397886 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 1.000000 0.050067 0.057467 0.065843 0.073396 0.083709 0.092919 0.103019 0.117040 0.132854 0.146819 0.165921 0.180722 0.200931 0.216754 0.232553 0.254433 0.270045 0.285214 0.307507 0.322050 0.336045 0.358628 0.371685 0.383040 0.392003 0.397886 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 0.400000 1.000000 0.038490 0.042601 0.047227 0.052439 0.058321 0.066628 0.076203 0.087152 0.097072 0.110532 0.122153 0.134140 0.146213 0.162113 0.173875 0.185013 0.195353 0.209923 0.218415 0.225671 0.231601 0.244834 0.254498 0.266044 0.279055 0.293116 0.307811 0.322725 0.337441 0.351544 0.364617 0.376246 0.386015 0.393507 0.398308 0.400000 0.400000 0.400000 0.400000 0.400000 1.000000 0.038490 0.042601 0.047227 0.052439 0.058321 0.066628 0.076203 0.087152 0.097072 0.110532 0.122153 0.134140 0.146213 0.162113 0.173875 0.185013 0.195353 0.209923 0.218415 0.225671 0.231601 0.244834 0.254498 0.266044 0.279055 0.293116 0.307811 0.322725 0.337441 0.351544 0.364617 0.376246 0.386015 0.393507 0.398308 0.400000 0.400000 0.400000 0.400000 0.400000 1.000000 0.038490 0.042601 0.047227 0.052439 0.058321 0.066628 0.076203 0.087152 0.097072 0.110532 0.122153 0.134140 0.146213 0.162113 0.173875 0.185013 0.195353 0.209923 0.218415 0.225671 0.231601 0.244834 0.254498 0.266044 0.279055 0.293116 0.307811 0.322725 0.337441 0.351544 0.364617 0.376246 0.386015 0.393507 0.398308 0.400000 0.400000 0.400000 0.400000 0.400000 1.000000

May 27, 2024

Summary and Status of State-Level Legisltion on Digital Assets as of November 3, 2017

Status of State-Level Legislation on Digital Assets1 State Status of Legislation Alabama Status: Uniform Act adopted (2017). Statute (codified): Ala. Code §§ 19&lrm;&lrm;‑&lrm;&lrm;1A-1 – 19&lrm;&lrm;‑&lrm;&lrm;1A-18. Enacting legislation: Ala. Sess. Laws Act 2017&lrm;&lrm;‑&lrm;&lrm;316. Ala. Sess. Laws Act 2017&lrm;&lrm;‑&lrm;&lrm;316, enacting Ala. Code §§ 19&lrm;&lrm;‑&lrm;&lrm;1A-1 – 19&lrm;&lrm;‑&lrm;&lrm;1A-18. https://alisondb.legislature.state.al.us/ALISON/SearchableInstruments/2017&lrm;RS/PrintFiles/HB138-enr.pdf (accessed June 16, 2017).

May 29, 2024

Appendix C-2 - Applicable Mortality Table for Distributions

Age Mortality Rate Age Mortality Rate Age Mortality Rate 0 0.002327 41 0.000368 81 0.042142 1 0.000141 42 0.000400 82 0.047336 2 0.000095 43 0.000439 83 0.053242 3 0.000076 44 0.000486 84 0.059995 4 0.000059 45 0.000541 85 0.067626 5 0.000052 46 0.000608 86 0.076267 6 0.000048 47 0.000685 87 0.086016 7 0.000044 48 0.000775 88 0.096873 8 0.000039 49 0.000877 89 0.108929 9 0.000035 50 0.000995 90 0.122286 10 0.000031 51 0.001116 91 0.136576 11 0.000033 52 0.001267 92 0.151466 12 0.000043 53 0.001442 93 0.166679 13 0.000053 54 0.001645 94 0.182208 14 0.000063 55 0.001951 95 0.197901 15 0.000073 56 0.002348 96 0.215845 16 0.000083 57 0.002701 97 0.234417 17 0.000093 58 0.003092 98 0.253767 18 0.000104 59 0.003526 99 0.273753 19 0.000114 60 0.004029 100 0.294309 20 0.000123 61 0.004629 101 0.315174 21 0.000135 62 0.005297 102 0.336021 22 0.000147 63 0.006056 103 0.356761 23 0.000157 64 0.006793 104 0.377020 24 0.000163 65 0.007601 105 0.396564 25 0.000160 66 0.008513 106 0.415512 26 0.000160 67 0.009419 107 0.433450 27 0.000163 68 0.010399 108 0.450441 28 0.000168 69 0.011477 109 0.466489 29 0.000175 70 0.012664 110 0.481504 30 0.000185 71 0.013995 111 0.491560 31 0.000197 72 0.015486 112 0.498309 32 0.000210 73 0.017176 113 0.501231 33 0.000225 74 0.019081 114 0.500577 34 0.000239 75 0.021243 115 0.500000 35 0.000253 76 0.023707 116 0.500000 36 0.000266 77 0.026500 117 0.500000 37 0.000282 78 0.029713 118 0.500000 38 0.000299 79 0.033373 119 0.500000 39 0.000318 80 0.037591 120 1.000000 40 0.000342

March 13, 2024

446 / Is an employer permitted to sponsor health FSAs if it does not otherwise offer health coverage to employees?

<div class="Section1">No. An employer cannot sponsor a stand-alone health FSA. An employer may only offer a health FSA if it also offers a major medical plan to the health FSA participants, who are not required to accept the offer of coverage in the employer’s major medical plan.</div>

March 13, 2024

298 / Will sale of a deceased’s stock under a cross-purchase insurance-funded buy-sell agreement result in income tax liability to the deceased’s estate?

<div class="Section1">Normally, no taxable gain will result to a deceased’s estate if stock is sold to surviving individual shareholders at its full market value under a standard buy-sell agreement. At the stockholder’s death, the stockholder’s estate receives a new tax basis in the stockholder’s stock equal to its fair market value at the time of death or an alternate valuation date.<a href="#_ftn1" name="_ftnref1">1</a> Because the sale price under a properly designed buy-sell agreement usually is accepted as the fair market value of the stock, the basis and sale price normally will be the same ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="322">322</a>). Consequently, there should be no capital gain. Since individuals, rather than the corporation, purchase the stock, the payment cannot be regarded as a dividend ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="300">300</a>). However, if the parties to the buy-sell agreement are related, additional caution should be taken to determine that the sale price under the buy-sell agreement is reasonable.<div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 1014. </div></div>