IRS Proposes Regulations Clarifying Section 409A Regulations
On June 21, 2016, the IRS proposed regulations to clarify Section 409A regulations. The proposed regulations address certain specific provisions of the final regulations (which were published in December 2008) and are not intended to propose a general revision of, or broad changes to, the final regulations. Although the proposed regulations are not final yet, the IRS states that taxpayers may rely on the proposed regulations immediately. Comments and requests for a public hearing are due by September 20, 2016.
The Overview section of the guidance identifies 19 topics that the proposed regulations address, including provisions for what is and is not considered payment of compensation for 409A purposes, treatment of beneficiaries, payments on death, and the anti-abuse requirements of the correction opportunity allowed for noncompliant deferred compensation.
NAIC Adopts Principle-Based Reserving
On June 10, 2016, the NAIC adopted a recommendation from the Principle-Based Reserving Implementation Task Force that will activate principle-based reserving (PBR) starting on January 1, 2017.
In order for states to implement PBR, they must adopt both the NAIC’s Standard Valuation Model Law (MDL 820) and the NAIC’s Standard Nonforfeiture Law (MDL 808) or a substantially similar law. According to the NAIC, 45 states, representing approximately 80% of direct written life and health premiums in the United States, have enacted these (or legislation with substantially similar terms and provisions).
Currently, an insurer’s reserves are based on a formulaic approach. PBR, in essence, replaces the formulaic approach with a system based on the insurer’s models. The level of reserves required for an insurance company will likely increase with respect to some products and decrease with respect to others. A report issued in January 2015 by the American Academy of Actuaries estimated that after 5 years, reserves would decrease by 5%. However, in looking at this estimate it is important to understand that PBR only applies to policies issued subsequent to implementation of PBR. The same report also projected a decrease of 38 to 64% of reserves for term life products, and a 44% decrease to 63% increase for Universal Life with Secondary Guarantee. Therefore, it is likely that PBR will continue to decrease reserve requirements as more policies are written that are subject to PBR.
PBR has been largely well received by the states, with the notable exception of New York. New York’s opposition to PBR was explained in a 2012 letter to the NAIC from the New York State Department of Financial Services. The thrust of the objection is that PBR will decrease reserves and therefore make insurance companies less likely to be able to meet long-term obligations to consumers.