Treatment of variable contracts
Increases and decreases in reserves
For purposes of subsections (a) and (b) of section 807, the sum of the items described in section 807(c) taken into account as of the close of the taxable year with respect to any variable contract shall, under regulations prescribed by the Secretary, be adjusted—
by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the reserves separately accounted for in accordance with subsection (c) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and
by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the taxable year) from such reserves by reason of depreciation in value of assets (whether or not the assets have been disposed of).
The deduction allowable for items described in paragraphs (1) and (6) of section 805(a) with respect to variable contracts shall be reduced to the extent that the amount of such items is increased for the taxable year by appreciation (or increased to the extent that the amount of such items is decreased for the taxable year by depreciation) not reflected in adjustments under the preceding sentence.
Adjustment to basis of assets held in segregated asset account
In the case of variable contracts, the basis of each asset in a segregated asset account shall (in addition to all other adjustments to basis) be—
increased by the amount of any appreciation in value, and
decreased by the amount of any depreciation in value,
to the extent such appreciation and depreciation are from time to time reflected in the increases and decreases in reserves or other items referred to in subsection (a) with respect to such contracts.
Separate accounting
For purposes of this part, a life insurance company which issues variable contracts shall separately account for the various income, exclusion, deduction, asset, reserve, and other liability items properly attributable to such variable contracts. For such items as are not accounted for directly, separate accounting shall be made—
in accordance with the method regularly employed by such company, if such method is reasonable, and
in all other cases, in accordance with regulations prescribed by the Secretary.
Variable contract defined
For purposes of this part, the term “variable contract” means a contract—
which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company,
which—
provides for the payment of annuities,
is a life insurance contract, or
provides for funding of insurance on retired lives as described in section 807(c)(6), and
under which—
in the case of an annuity contract, the amounts paid in, or the amount paid out, reflect the investment return and the market value of the segregated asset account,
in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of the segregated asset account, or
in the case of funds held under a contract described in paragraph (2)(C), the amounts paid in, or the amounts paid out, reflect the investment return and the market value of the segregated asset account.
If a contract ceases to reflect current investment return and current market value, such contract shall not be considered as meeting the requirements of paragraph (3) after such cessation. Paragraph (3) shall be applied without regard to whether there is a guarantee, and obligations under such guarantee which exceed obligations under the contract without regard to such guarantee shall be accounted for as part of the company’s general account.
Pension plan contracts treated as paying annuity
Other special rules
Life insurance reserves
Additional separate computations
Variable annuity contracts treated as annuity contracts
For purposes of this part, the term “annuity contract” includes a contract which provides for the payment of a variable annuity computed on the basis of—
recognized mortality tables, and
the investment experience of a segregated asset account, or
the company-wide investment experience of the company.
Paragraph (2)(B) shall not apply to any company which issues contracts which are not variable contracts.
Treatment of certain nondiversified contracts
In general
Safe harbor for diversification
A segregated asset account shall be treated as meeting the requirements of paragraph (1) for any quarter of a taxable year if as of the close of such quarter—
it meets the requirements of section 851(b)(3), and
no more than 55 percent of the value of the total assets of the account are assets described in section 851(b)(3)(A)(i).
Special rule for investments in United States obligations
Look-through in certain cases
For purposes of this subsection, if all of the beneficial interests in a regulated investment company or in a trust are held by 1 or more—
insurance companies (or affiliated companies) in their general account or in segregated asset accounts, or
fund managers (or affiliated companies) in connection with the creation or management of the regulated investment company or trust,
the diversification requirements of paragraph (1) shall be applied by taking into account the assets held by such regulated investment company or trust.
Independent investment advisors permitted
Government securities funds
Source
(Added Pub. L. 98–369, div. A, title II, § 211(a),Notes
Editorial Notes
Prior Provisions
Amendments
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Effective Date of 1997 Amendment
Effective Date of 1996 Amendment
Effective Date of 1988 Amendment
Effective Date of 1986 Amendment
to contracts issued after
to contracts issued before
Effective Date
Delay in Effective Date for Diversification Requirements With Respect to Accounts for Certain Immediate Annuities
such contract provides for the payment of an immediate annuity (as defined in section 72(u)(4) of the 1986 Code),
such contract was outstanding on
the segregated asset account on which such contract is based was, on
Insurance-Dedicated Exchange-Traded Funds
In General.—
Not later than the date which is 7 years after the date of the enactment of this Act [
Designate Certain Authorized Participants and Market Makers as Eligible Investors.—
The Secretary of the Treasury (or the Secretary’s delegate) shall amend Treas. Reg. section 1.817–5(f)(3) to provide that satisfaction of the requirements in Treas. Reg. section 1.817–5(f)(2)(i) with respect to an exchange-traded fund shall not be prevented by reason of beneficial interests in such a fund being held by 1 or more authorized participants or market makers.
Define Relevant Terms.—
In amending Treas. Reg. section 1.817–5(f)(3) in accordance with subsection (b), the Secretary of the Treasury (or the Secretary’s delegate) shall provide definitions consistent with the following:
Exchange-traded fund.—
The term ‘exchange-traded fund’ means a regulated investment company, partnership, or trust—
that is registered with the Securities and Exchange Commission as an open-end investment company or a unit investment trust;
the shares of which can be purchased or redeemed directly from the fund only by an authorized participant; and
the shares of which are traded throughout the day on a national stock exchange at market prices that may or may not be the same as the net asset value of the shares.
Authorized participant.—
The term ‘authorized participant’ means a financial institution that is a member or participant of a clearing agency registered under section 17A(b) of the Securities Exchange Act of 1934 [15 U.S.C. 78q–1(b)] that enters into a contractual relationship with an exchange-traded fund pursuant to which the financial institution is permitted to purchase and redeem shares directly from the fund and to sell such shares to third parties, but only if the contractual arrangement or applicable law precludes the financial institution from—
purchasing the shares for its own investment purposes rather than for the exclusive purpose of creating and redeeming such shares on behalf of third parties; and
selling the shares to third parties who are not market makers or otherwise described in Treas. Reg. section 1.817–5(f) (1) and (3).
Market maker.—
The term ‘market maker’ means a financial institution that is a registered broker or dealer under section 15(b) of the Securities Exchange Act of 1934 [15 U.S.C. 78o(b)] that maintains liquidity for an exchange-traded fund on a national stock exchange by being always ready to buy and sell shares of such fund on the market, but only if the financial institution is contractually or legally precluded from selling or buying such shares to or from persons who are not authorized participants or otherwise described in Treas. Reg. section 1.817–5(f) (2) and (3).
Effective Date.—
This section shall apply to segregated asset account investments made on or after the date which is 7 years after the date of the enactment of this Act.”