26 U.S.C. § 7702 — Life insurance contract defined

Page 4025 TITLE 26—INTERNAL REVENUE CODE § 7702 see section 234(c) of Pub. L. 88–272, set out as a note under section 1503 of this title. EFFECTIVE DATE OF 1962 AMENDMENTS Pub. L. 87–870, § 5(b), Oct. 23, 1962, 76 Stat. 1162, pro- vided that: ‘‘The amendment made by subsection (a) of this section [amending this section] shall apply with respect to taxable years beginning after the date of the enactment of the Revenue Act of 1962 [Oct. 16, 1962].’’ Pub. L. 87–834, § 6(g)(3), Oct. 16, 1962, 76 Stat. 985, pro- vided that: ‘‘The amendment made by subsection (c) [amending this section] shall apply to taxable years be- ginning after the date of the enactment of this Act [Oct. 16, 1962].’’ EFFECTIVE DATE OF 1960 AMENDMENTS Amendment by Pub. L. 86–778 effective Sept. 13, 1960, see section 103(v)(1) of Pub. L. 86–778, set out as an Ef- fective Date of 1960 Amendment note under section 402 of Title 42, The Public Health and Welfare. Amendment by Pub. L. 86–624 effective August 21, 1959, see section 18(k) of Pub. L. 86–624, set out as a note under section 3121 of this title. EFFECTIVE DATE OF 1959 AMENDMENT Amendment by Pub. L. 86–70 effective Jan. 3, 1959, see section 22(i) of Pub. L. 86–70, set out as a note under section 3121 of this title. SAVINGS PROVISION For provisions that nothing in amendment by section 401(b)(54), (55) of Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining liability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. For provisions that nothing in amendment by section 11812(b)(13) of Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. TRANSFER OF FUNCTIONS For transfer of authorities, functions, personnel, and assets of the Coast Guard, including the authorities and functions of the Secretary of Transportation relat- ing thereto, to the Department of Homeland Security, and for treatment of related references, see sections 468(b), 551(d), 552(d), and 557 of Title 6, Domestic Secu- rity, and the Department of Homeland Security Reor- ganization Plan of November 25, 2002, as modified, set out as a note under section 542 of Title 6. Coast Guard transferred to Department of Transpor- tation and all functions, powers, and duties, relating to Coast Guard, of Secretary of the Treasury and of other offices and officers of Department of the Treasury transferred to Secretary of Transportation by Pub. L. 89–670, § 6(b)(1), Oct. 15, 1966, 80 Stat. 938. Section 6(b)(2) of Pub. L. 89–670, however, provided that notwith- standing such transfer of functions, Coast Guard shall operate as part of Navy in time of war or when Presi- dent directs as provided in former section 3 (now 103) of Title 14, Coast Guard. See section 108 of Title 49, Trans- portation. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1998 For provisions directing that if any amendments made by subtitle D [§§ 1401–1465] of title I of Pub. L. 104–188 require an amendment to any plan or annuity contract, such amendment shall not be required to be made before the first day of the first plan year begin- ning on or after Jan. 1, 1998, see section 1465 of Pub. L. 104–188, set out as a note under section 401 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1994 For provisions directing that if any amendments made by subtitle B [§§ 521–523] of title V of Pub. L. 102–318 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1994, see section 523 of Pub. L. 102–318, set out as a note under section 401 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. AUTHORS OR ARTISTS PERFORMING SERVICES UNDER CONTRACT WITH CORPORATION Pub. L. 96–605, title IV, § 402, Dec. 28, 1980, 94 Stat. 3532, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(a) IN GENERAL.—An author or artist performing services under contract with a corporation shall be con- sidered as an employee of the corporation for the pur- pose of applying the provisions specified in section 7701(a)(20) of the Internal Revenue Code of 1986 [for- merly I.R.C. 1954], if, on December 31, 1977, such author or artist was a participant in one or more of the pen- sion, profit-sharing or annuity plans of such corpora- tion which are described in subsection (b)(2). ‘‘(b) DEFINITIONS.—For purposes of this section— ‘‘(1) CONTRACT.—The term ‘contract’ means a con- tract which during its term— ‘‘(A) requires such author or artist to give the corporation first reading or first refusal on writings or drawings of specified types, and prohibits him from offering any such writing or drawing to any other publication unless it has been offered to and rejected by the corporation; or ‘‘(B) requires such author or artist to use his best efforts to produce work of specified types for the corporation. ‘‘(2) CORPORATION.—The term ‘corporation’ means a corporation which for at least 15 years prior to Janu- ary 1, 1978, had in effect one or more pension, profit- sharing and annuity plans, each of which— ‘‘(A) had contained from its inception a definition of the term ‘employee’ that included the category of ‘authors and artists under contract’, and ‘‘(B) had been determined by the Secretary of the Treasury (taking into account the definition de- scribed in subparagraph (A)) to be a qualified plan within part I of subchapter D of chapter 1 of sub- title A of the Internal Revenue Code of 1986 [section 401 et seq. of this title] for all of such years. ‘‘(c) EFFECTIVE DATE.—The provisions of this section shall apply to taxable years ending after December 31, 1980.’’ § 7702. Life insurance contract defined (a) General rule For purposes of this title, the term ‘‘life insur- ance contract’’ means any contract which is a life insurance contract under the applicable law, but only if such contract— (1) meets the cash value accumulation test of subsection (b), or (2)(A) meets the guideline premium require- ments of subsection (c), and (B) falls within the cash value corridor of subsection (d). Page 4026 TITLE 26—INTERNAL REVENUE CODE § 7702 (b) Cash value accumulation test for subsection (a)(1) (1) In general A contract meets the cash value accumula- tion test of this subsection if, by the terms of the contract, the cash surrender value of such contract may not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract. (2) Rules for applying paragraph (1) Determinations under paragraph (1) shall be made— (A) on the basis of interest at the greater of the applicable accumulation test min- imum rate or the rate or rates guaranteed on issuance of the contract, (B) on the basis of the rules of subpara- graph (B)(i) (and, in the case of qualified ad- ditional benefits, subparagraph (B)(ii)) of subsection (c)(3), and (C) by taking into account under subpara- graphs (A) and (D) of subsection (e)(1) only current and future death benefits and quali- fied additional benefits. (3) Applicable accumulation test minimum rate For purposes of paragraph (2)(A), the term ‘‘applicable accumulation test minimum rate’’ means the lesser of— (A) an annual effective rate of 4 percent, or (B) the insurance interest rate (as defined in subsection (f)(11)) in effect at the time the contract is issued. (c) Guideline premium requirements For purposes of this section— (1) In general A contract meets the guideline premium re- quirements of this subsection if the sum of the premiums paid under such contract does not at any time exceed the guideline premium limitation as of such time. (2) Guideline premium limitation The term ‘‘guideline premium limitation’’ means, as of any date, the greater of— (A) the guideline single premium, or (B) the sum of the guideline level pre- miums to such date. (3) Guideline single premium (A) In general The term ‘‘guideline single premium’’ means the premium at issue with respect to future benefits under the contract. (B) Basis on which determination is made The determination under subparagraph (A) shall be based on— (i) reasonable mortality charges which meet the requirements prescribed in regu- lations to be promulgated by the Sec- retary or that do not exceed the mortality charges specified in the prevailing com- missioners’ standard tables as defined in subsection (f)(10), (ii) any reasonable charges (other than mortality charges) which (on the basis of the company’s experience, if any, with re- spect to similar contracts) are reasonably expected to be actually paid, and (iii) interest at the greater of the appli- cable guideline premium minimum rate or the rate or rates guaranteed on issuance of the contract. (C) When determination made Except as provided in subsection (f)(7), the determination under subparagraph (A) shall be made as of the time the contract is issued. (D) Special rules for subparagraph (B)(ii) (i) Charges not specified in the contract If any charge is not specified in the con- tract, the amount taken into account under subparagraph (B)(ii) for such charge shall be zero. (ii) New companies, etc. If any company does not have adequate experience for purposes of the determina- tion under subparagraph (B)(ii), to the ex- tent provided in regulations, such deter- mination shall be made on the basis of the industry-wide experience. (E) Applicable guideline premium minimum rate For purposes of subparagraph (B)(iii), the term ‘‘applicable guideline premium min- imum rate’’ means the applicable accumula- tion test minimum rate (as defined in sub- section (b)(3)) plus 2 percentage points. (4) Guideline level premium The term ‘‘guideline level premium’’ means the level annual amount, payable over a pe- riod not ending before the insured attains age 95, computed on the same basis as the guide- line single premium, except that paragraph (3)(B)(iii) shall be applied by substituting ‘‘the applicable accumulation test minimum rate’’ for ‘‘the applicable guideline premium min- imum rate’’. (d) Cash value corridor for purposes of sub- section (a)(2)(B) For purposes of this section— (1) In general A contract falls within the cash value cor- ridor of this subsection if the death benefit under the contract at any time is not less than the applicable percentage of the cash sur- render value. (2) Applicable percentage In the case of an insured with an attained age as of the beginning of the contract year of: The applicable percentage shall decrease by a ratable portion for each full year: More than: But not more than: From: To: 0 ................. 40 250 ............ 250 40 ................ 45 250 ............ 215 45 ................ 50 215 ............ 185 50 ................ 55 185 ............ 150 55 ................ 60 150 ............ 130 60 ................ 65 130 ............ 120 65 ................ 70 120 ............ 115 70 ................ 75 115 ............ 105 75 ................ 90 105 ............ 105 Page 4027 TITLE 26—INTERNAL REVENUE CODE § 7702 In the case of an insured with an attained age as of the beginning of the contract year of: The applicable percentage shall decrease by a ratable portion for each full year: More than: But not more than: From: To: 90 ................ 95 105 ............ 100. (e) Computational rules (1) In general For purposes of this section (other than sub- section (d))— (A) the death benefit (and any qualified ad- ditional benefit) shall be deemed not to in- crease, (B) the maturity date, including the date on which any benefit described in subpara- graph (C) is payable, shall be deemed to be no earlier than the day on which the insured attains age 95, and no later than the day on which the insured attains age 100, (C) the death benefits shall be deemed to be provided until the maturity date deter- mined by taking into account subparagraph (B), and (D) the amount of any endowment benefit (or sum of endowment benefits, including any cash surrender value on the maturity date determined by taking into account sub- paragraph (B)) shall be deemed not to exceed the least amount payable as a death benefit at any time under the contract. (2) Limited increases in death benefit per- mitted Notwithstanding paragraph (1)(A)— (A) for purposes of computing the guide- line level premium, an increase in the death benefit which is provided in the contract may be taken into account but only to the extent necessary to prevent a decrease in the excess of the death benefit over the cash surrender value of the contract, (B) for purposes of the cash value accumu- lation test, the increase described in sub- paragraph (A) may be taken into account if the contract will meet such test at all times assuming that the net level reserve (deter- mined as if level annual premiums were paid for the contract over a period not ending be- fore the insured attains age 95) is sub- stituted for the net single premium, and (C) for purposes of the cash value accumu- lation test, the death benefit increases may be taken into account if the contract— (i) has an initial death benefit of $5,000 or less and a maximum death benefit of $25,000 or less, (ii) provides for a fixed predetermined annual increase not to exceed 10 percent of the initial death benefit or 8 percent of the death benefit at the end of the preceding year, and (iii) was purchased to cover payment of burial expenses or in connection with pre- arranged funeral expenses. For purposes of subparagraph (C), the initial death benefit of a contract shall be determined by treating all contracts issued to the same contract owner as 1 contract. (f) Other definitions and special rules For purposes of this section— (1) Premiums paid (A) In general The term ‘‘premiums paid’’ means the pre- miums paid under the contract less amounts (other than amounts includible in gross in- come) to which section 72(e) applies and less any excess premiums with respect to which there is a distribution described in subpara- graph (B) or (E) of paragraph (7) and any other amounts received with respect to the contract which are specified in regulations. (B) Treatment of certain premiums returned to policyholder If, in order to comply with the require- ments of subsection (a)(2)(A), any portion of any premium paid during any contract year is returned by the insurance company (with interest) within 60 days after the end of a contract year, the amount so returned (ex- cluding interest) shall be deemed to reduce the sum of the premiums paid under the con- tract during such year. (C) Interest returned includible in gross in- come Notwithstanding the provisions of section 72(e), the amount of any interest returned as provided in subparagraph (B) shall be includ- ible in the gross income of the recipient. (2) Cash values (A) Cash surrender value The cash surrender value of any contract shall be its cash value determined without regard to any surrender charge, policy loan, or reasonable termination dividends. (B) Net surrender value The net surrender value of any contract shall be determined with regard to surrender charges but without regard to any policy loan. (3) Death benefit The term ‘‘death benefit’’ means the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefits). (4) Future benefits The term ‘‘future benefits’’ means death benefits and endowment benefits. (5) Qualified additional benefits (A) In general The term ‘‘qualified additional benefits’’ means any— (i) guaranteed insurability, (ii) accidental death or disability ben- efit, (iii) family term coverage, (iv) disability waiver benefit, or (v) other benefit prescribed under regula- tions. (B) Treatment of qualified additional bene- fits For purposes of this section, qualified ad- ditional benefits shall not be treated as fu- ture benefits under the contract, but the charges for such benefits shall be treated as future benefits. Page 4028 TITLE 26—INTERNAL REVENUE CODE § 7702 (C) Treatment of other additional benefits In the case of any additional benefit which is not a qualified additional benefit— (i) such benefit shall not be treated as a future benefit, and (ii) any charge for such benefit which is not prefunded shall not be treated as a pre- mium. (6) Premium payments not disqualifying con- tract The payment of a premium which would re- sult in the sum of the premiums paid exceed- ing the guideline premium limitation shall be disregarded for purposes of subsection (a)(2) if the amount of such premium does not exceed the amount necessary to prevent the termi- nation of the contract on or before the end of the contract year (but only if the contract will have no cash surrender value at the end of such extension period). (7) Adjustments (A) In general If there is a change in the benefits under (or in other terms of) the contract which was not reflected in any previous determination or adjustment made under this section, there shall be proper adjustments in future determinations made under this section. (B) Rule for certain changes during first 15 years If— (i) a change described in subparagraph (A) reduces benefits under the contract, (ii) the change occurs during the 15-year period beginning on the issue date of the contract, and (iii) a cash distribution is made to the policyholder as a result of such change, section 72 (other than subsection (e)(5) thereof) shall apply to such cash distribu- tion to the extent it does not exceed the re- capture ceiling determined under subpara- graph (C) or (D) (whichever applies). (C) Recapture ceiling where change occurs during first 5 years If the change referred to in subparagraph (B)(ii) occurs during the 5-year period begin- ning on the issue date of the contract, the recapture ceiling is— (i) in the case of a contract to which sub- section (a)(1) applies, the excess of— (I) the cash surrender value of the con- tract, immediately before the reduction, over (II) the net single premium (deter- mined under subsection (b)), imme- diately after the reduction, or (ii) in the case of a contract to which subsection (a)(2) applies, the greater of— (I) the excess of the aggregate pre- miums paid under the contract, imme- diately before the reduction, over the guideline premium limitation for the contract (determined under subsection (c)(2), taking into account the adjust- ment described in subparagraph (A)), or (II) the excess of the cash surrender value of the contract, immediately be- fore the reduction, over the cash value corridor of subsection (d) (determined immediately after the reduction). (D) Recapture ceiling where change occurs after 5th year and before 16th year If the change referred to in subparagraph (B) occurs after the 5-year period referred to under subparagraph (C), the recapture ceil- ing is the excess of the cash surrender value of the contract, immediately before the re- duction, over the cash value corridor of sub- section (d) (determined immediately after the reduction and whether or not subsection (d) applies to the contract). (E) Treatment of certain distributions made in anticipation of benefit reductions Under regulations prescribed by the Sec- retary, subparagraph (B) shall apply also to any distribution made in anticipation of a reduction in benefits under the contract. For purposes of the preceding sentence, appro- priate adjustments shall be made in the pro- visions of subparagraphs (C) and (D); and any distribution which reduces the cash sur- render value of a contract and which is made within 2 years before a reduction in benefits under the contract shall be treated as made in anticipation of such reduction. (8) Correction of errors If the taxpayer establishes to the satisfac- tion of the Secretary that— (A) the requirements described in sub- section (a) for any contract year were not satisfied due to reasonable error, and (B) reasonable steps are being taken to remedy the error, the Secretary may waive the failure to satisfy such requirements. (9) Special rule for variable life insurance con- tracts In the case of any contract which is a vari- able contract (as defined in section 817), the determination of whether such contract meets the requirements of subsection (a) shall be made whenever the death benefits under such contract change but not less frequently than once during each 12-month period. (10) Prevailing commissioners’ standard tables For purposes of subsection (c)(3)(B)(i), the term ‘‘prevailing commissioners’ standard ta- bles’’ means the most recent commissioners’ standard tables prescribed by the National As- sociation of Insurance Commissioners which are permitted to be used in computing re- serves for that type of contract under the in- surance laws of at least 26 States when the contract was issued. If the prevailing commis- sioners’ standard tables as of the beginning of any calendar year (hereinafter in this para- graph referred to as the ‘‘year of change’’) are different from the prevailing commissioners’ standard tables as of the beginning of the pre- ceding calendar year, the issuer may use the prevailing commissioners’ standard tables as of the beginning of the preceding calendar year with respect to any contract issued after the change and before the close of the 3-year Page 4029 TITLE 26—INTERNAL REVENUE CODE § 7702 1 So in original. Probably should be ‘‘begins’’. period beginning on the first day of the year of change. (11) Insurance interest rate For purposes of this section— (A) In general The term ‘‘insurance interest rate’’ means, with respect to any contract issued in any calendar year, the lesser of— (i) the section 7702 valuation interest rate for such calendar year (or, if such cal- endar year is not an adjustment year, the most recent adjustment year), or (ii) the section 7702 applicable Federal interest rate for such calendar year (or, if such calendar year is not an adjustment year, the most recent adjustment year). (B) Section 7702 valuation interest rate The term ‘‘section 7702 valuation interest rate’’ means, with respect to any adjustment year, the prescribed U.S. valuation interest rate for life insurance with guaranteed dura- tions of more than 20 years (as defined in the National Association of Insurance Commis- sioners’ Standard Valuation Law) as effec- tive in the calendar year immediately pre- ceding such adjustment year. (C) Section 7702 applicable Federal interest rate The term ‘‘section 7702 applicable Federal interest rate’’ means, with respect to any adjustment year, the average (rounded to the nearest whole percentage point) of the applicable Federal mid-term rates (as de- fined in section 1274(d) but based on annual compounding) effective as of the beginning of each of the calendar months in the most recent 60-month period ending before the second calendar year prior to such adjust- ment year. (D) Adjustment year The term ‘‘adjustment year’’ means the calendar year following any calendar year that includes the effective date of a change in the prescribed U.S. valuation interest rate for life insurance with guaranteed dura- tions of more than 20 years (as defined in the National Association of Insurance Commis- sioners’ Standard Valuation Law). (E) Transition rule Notwithstanding subparagraph (A), the in- surance interest rate shall be 2 percent in the case of any contract which is issued dur- ing the period that— (i) begins on January 1, 2021, and (ii) ends immediately before the begin- ning of the first adjustment year that beings 1 after December 31, 2021. (g) Treatment of contracts which do not meet subsection (a) test (1) Income inclusion (A) In general If at any time any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), the income on the contract for any taxable year of the pol- icyholder shall be treated as ordinary in- come received or accrued by the policy- holder during such year. (B) Income on the contract For purposes of this paragraph, the term ‘‘income on the contract’’ means, with re- spect to any taxable year of the policy- holder, the excess of— (i) the sum of— (I) the increase in the net surrender value of the contract during the taxable year, and (II) the cost of life insurance protec- tion provided under the contract during the taxable year, over (ii) the premiums paid (as defined in sub- section (f)(1)) under the contract during the taxable year. (C) Contracts which cease to meet definition If, during any taxable year of the policy- holder, a contract which is a life insurance contract under the applicable law ceases to meet the definition of life insurance con- tract under subsection (a), the income on the contract for all prior taxable years shall be treated as received or accrued during the taxable year in which such cessation occurs. (D) Cost of life insurance protection For purposes of this paragraph, the cost of life insurance protection provided under the contract shall be the lesser of— (i) the cost of individual insurance on the life of the insured as determined on the basis of uniform premiums (computed on the basis of 5-year age brackets) pre- scribed by the Secretary by regulations, or (ii) the mortality charge (if any) stated in the contract. (2) Treatment of amount paid on death of in- sured If any contract which is a life insurance con- tract under the applicable law does not meet the definition of life insurance contract under subsection (a), the excess of the amount paid by the reason of the death of the insured over the net surrender value of the contract shall be deemed to be paid under a life insurance contract for purposes of section 101 and sub- title B. (3) Contract continues to be treated as insur- ance contract If any contract which is a life insurance con- tract under the applicable law does not meet the definition of life insurance contract under subsection (a), such contract shall, notwith- standing such failure, be treated as an insur- ance contract for purposes of this title. (h) Endowment contracts receive same treat- ment (1) In general References in subsections (a) and (g) to a life insurance contract shall be treated as includ- ing references to a contract which is an en- dowment contract under the applicable law. Page 4030 TITLE 26—INTERNAL REVENUE CODE § 7702 (2) Definition of endowment contract For purposes of this title (other than para- graph (1)), the term ‘‘endowment contract’’ means a contract which is an endowment con- tract under the applicable law and which meets the requirements of subsection (a). (i) Transitional rule for certain 20-pay contracts (1) In general In the case of a qualified 20-pay contract, this section shall be applied by substituting ‘‘3 percent’’ for ‘‘4 percent’’ in subsection (b)(2). (2) Qualified 20-pay contract For purposes of paragraph (1), the term ‘‘qualified 20-pay contract’’ means any con- tract which— (A) requires at least 20 nondecreasing an- nual premium payments, and (B) is issued pursuant to an existing plan of insurance. (3) Existing plan of insurance For purposes of this subsection, the term ‘‘existing plan of insurance’’ means, with re- spect to any contract, any plan of insurance which was filed by the company issuing such contract in 1 or more States before September 28, 1983, and is on file in the appropriate State for such contract. (j) Certain church self-funded death benefit plans treated as life insurance (1) In general In determining whether any plan or arrange- ment described in paragraph (2) is a life insur- ance contract, the requirement of subsection (a) that the contract be a life insurance con- tract under applicable law shall not apply. (2) Description For purposes of this subsection, a plan or ar- rangement is described in this paragraph if— (A) such plan or arrangement provides for the payment of benefits by reason of the death of the individuals covered under such plan or arrangement, and (B) such plan or arrangement is provided by a church for the benefit of its employees and their beneficiaries, directly or through an organization described in section 414(e)(3)(A) or an organization described in section 414(e)(3)(B)(ii). (3) Definitions For purposes of this subsection— (A) Church The term ‘‘church’’ means a church or a convention or association of churches. (B) Employee The term ‘‘employee’’ includes an em- ployee described in section 414(e)(3)(B). (k) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section. (Added Pub. L. 98–369, div. A, title II, § 221(a), July 18, 1984, 98 Stat. 767; amended Pub. L. 99–514, title XVIII, § 1825(a)–(c), Oct. 22, 1986, 100 Stat. 2846–2848; Pub. L. 100–647, title V, § 5011(a), (b), title VI, § 6078(a), Nov. 10, 1988, 102 Stat. 3660, 3661, 3709; Pub. L. 115–97, title I, § 13517(a)(4), Dec. 22, 2017, 131 Stat. 2146; Pub. L. 116–260, div. EE, title II, § 205(a)–(d), Dec. 27, 2020, 134 Stat. 3058.) Editorial Notes AMENDMENTS 2020—Subsec. (b)(2)(A). Pub. L. 116–260, § 205(a)(1), sub- stituted ‘‘the applicable accumulation test minimum rate’’ for ‘‘an annual effective rate of 4 percent’’. Subsec. (b)(3). Pub. L. 116–260, § 205(a)(2), added par. (3). Subsec. (c)(3)(B)(iii). Pub. L. 116–260, § 205(b)(1), sub- stituted ‘‘the applicable guideline premium minimum rate’’ for ‘‘an annual effective rate of 6 percent’’. Subsec. (c)(3)(E). Pub. L. 116–260, § 205(b)(2), added sub- par. (E). Subsec. (c)(4). Pub. L. 116–260, § 205(c), substituted ‘‘the applicable accumulation test minimum rate’’ for ‘‘4 percent’’ and ‘‘the applicable guideline premium minimum rate’’ for ‘‘6 percent’’. Subsec. (f)(11). Pub. L. 116–260, § 205(d), added par. (11). 2017—Subsec. (c)(3)(B)(i). Pub. L. 115–97, § 13517(a)(4)(A), added cl. (i) and struck out former cl. (i) which read as follows: ‘‘reasonable mortality charges which meet the requirements (if any) prescribed in reg- ulations and which (except as provided in regulations) do not exceed the mortality charges specified in the prevailing commissioners’ standard tables (as defined in section 807(d)(5)) as of the time the contract is issued,’’. Subsec. (f)(10). Pub. L. 115–97, § 13517(a)(4)(B), added par. (10). 1988—Subsec. (c)(3)(B)(i), (ii). Pub. L. 100–647, § 5011(a), added cls. (i) and (ii) and struck out former cls. (i) and (ii) which read as follows: ‘‘(i) the mortality charges specified in the contract (or, if none is specified, the mortality charges used in determining the statutory reserves for such contract), ‘‘(ii) any charges (not taken into account under clause (i)) specified in the contract (the amount of any charge not so specified shall be treated as zero), and’’. Subsec. (c)(3)(D). Pub. L. 100–647, § 5011(b), added sub- par. (D). Subsecs. (j), (k). Pub. L. 100–647, § 6078(a), added sub- sec. (j) and redesignated former subsec. (j) as (k). 1986—Subsec. (b)(2)(C). Pub. L. 99–514, § 1825(a)(2), sub- stituted ‘‘subparagraphs (A) and (D)’’ for ‘‘subpara- graphs (A) and (C)’’. Subsec. (e)(1). Pub. L. 99–514, § 1825(a)(3), inserted ‘‘(other than subsection (d))’’ after ‘‘section’’. Subsec. (e)(1)(B). Pub. L. 99–514, § 1825(a)(1)(A), sub- stituted ‘‘shall be deemed to be no earlier than’’ for ‘‘shall be no earlier than’’. Subsec. (e)(1)(C). Pub. L. 99–514, § 1821(a)(1)(C), added subpar. (C). Former subpar. (C) redesignated (D). Subsec. (e)(1)(D). Pub. L. 99–514, § 1821(a)(1)(C), (D), re- designated subpar. (C) as (D) and substituted ‘‘the ma- turity date determined by taking into account subpara- graph (B)’’ for ‘‘the maturity date described in subpara- graph (B)’’. Subsec. (e)(2)(C). Pub. L. 99–514, § 1825(a)(4), added sub- par. (C). Subsec. (f)(1)(A). Pub. L. 99–514, § 1825(b)(2), sub- stituted ‘‘less any excess premiums with respect to which there is a distribution described in subparagraph (B) or (E) of paragraph (7) and any other amounts re- ceived’’ for ‘‘less any other amounts received’’. Subsec. (f)(7). Pub. L. 99–514, § 1825(b)(1), amended par. (7) generally. Prior to amendment, par. (7)(A), in gen- eral, read as follows: ‘‘In the event of a change in the future benefits or any qualified additional benefit (or in any other terms) under the contract which was not re- flected in any previous determination made under this section, under regulations prescribed by the Secretary, there shall be proper adjustments in future determina- tions made under this section.’’, and par. (7)(B), certain changes treated as exchange, read as follows: ‘‘In the Page 4031 TITLE 26—INTERNAL REVENUE CODE § 7702 case of any change which reduces the future benefits under the contract, such change shall be treated as an exchange of the contract for another contract.’’ Subsec. (g)(1)(B)(ii). Pub. L. 99–514, § 1825(c), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: ‘‘the amount of premiums paid under the con- tract during the taxable year reduced by any policy- holder dividends received during such taxable year.’’ Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2020 AMENDMENT Pub. L. 116–260, div. EE, title II, § 205(e), Dec. 27, 2020, 134 Stat. 3059, provided that: ‘‘The amendments made by this section [amending this section] shall apply to contracts issued after December 31, 2020.’’ EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, with transition rule and transition relief, see section 13517(c) of Pub. L. 115–97, set out as a note under section 807 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title V, § 5011(d), Nov. 10, 1988, 102 Stat. 3661, provided that: ‘‘The amendments made by this section [amending this section] shall apply to con- tracts entered into on or after October 21, 1988.’’ Pub. L. 100–647, title VI, § 6078(b), Nov. 10, 1988, 102 Stat. 3709, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall take effect as if included in the amendment made by section 221(a) of the Tax Reform Act of 1984 [Pub. L. 98–369, which en- acted this section].’’ EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title XVIII, § 1825(a)(4), Oct. 22, 1986, 100 Stat. 2846, as amended by Pub. L. 100–647, title I, § 1018(j), Nov. 10, 1988, 102 Stat. 3583, provided that the amendment made by that section is effective with re- spect to contracts entered into after Oct. 22, 1986. Amendment by section 1825(a)(1)–(3), (b), (c) of Pub. L. 99–514 effective, except as otherwise provided, as if in- cluded in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment re- lates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title. EFFECTIVE DATE Pub. L. 98–369, div. A, title II, § 221(d), July 18, 1984, 98 Stat. 772, as amended by Pub. L. 99–514, § 2, title XVIII, §§ 1825(e), 1899A(69), Oct. 22, 1986, 100 Stat. 2095, 2848, 2962, provided that: ‘‘(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section [enacting this section and amending section 101 of this title and provisions set out as a note under section 101 of this title] shall apply to contracts issued after De- cember 31, 1984, in taxable years ending after such date. ‘‘(2) SPECIAL RULE FOR CERTAIN CONTRACTS ISSUED AFTER JUNE 30, 1984.— ‘‘(A) GENERAL RULE.—Except as otherwise provided in this paragraph, the amendments made by this sec- tion shall apply also to any contract issued after June 30, 1984, which provides an increasing death ben- efit and has premium funding more rapid than 10-year level premium payments. ‘‘(B) EXCEPTION FOR CERTAIN CONTRACTS.—Subpara- graph (A) shall not apply to any contract if— ‘‘(i) such contract (whether or not a flexible pre- mium contract) would meet the requirements of section 101(f) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], ‘‘(ii) such contract is not a flexible premium life insurance contract (within the meaning of section 101(f) of such Code) and would meet the require- ments of section 7702 of such Code determined by— ‘‘(I) substituting ‘3 percent’ for ‘4 percent’ in section 7702(b)(2) of such Code, and ‘‘(II) treating subparagraph (B) of section 7702(e)(1) of such Code as if it read as follows: ‘the maturity date shall be the latest maturity date permitted under the contract, but not less than 20 years after the date of issue or (if earlier) age 95’, or ‘‘(iii) under such contract— ‘‘(I) the premiums (including any policy fees) will be adjusted from time-to-time to reflect the level amount necessary (but not less than zero) at the time of such adjustment to provide a level death benefit assuming interest crediting and an annual effective interest rate of not less than 3 percent, or ‘‘(II) at the option of the insured, in lieu of an adjustment under subclause (I) there will be a comparable adjustment in the amount of the death benefit. ‘‘(C) CERTAIN CONTRACTS ISSUED BEFORE OCTOBER 1, 1984.— ‘‘(i) IN GENERAL.—Subparagraph (A) shall be ap- plied by substituting ‘September 30, 1984’ for ‘June 30, 1984’ in the case of a contract— ‘‘(I) which would meet the requirements of sec- tion 7702 of such Code if ‘3 percent’ were sub- stituted for ‘4 percent’ in section 7702(b)(2) of such Code, and the rate or rates guaranteed on issuance of the contract were determined without regard to any mortality charges and any initial excess interest guarantees, and ‘‘(II) the cash surrender value of which does not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract. ‘‘(ii) DEFINITIONS.—For purposes of clause (i)— ‘‘(I) IN GENERAL.—Except as provided in sub- clause (II), terms used in clause (i) shall have the same meanings as when used in section 7702 of such Code. ‘‘(II) NET SINGLE PREMIUM.—The term ‘net sin- gle premium’ shall be determined by substituting ‘3 percent’ for ‘4 percent’ in section 7702(b)(2) of such Code, by using the 1958 standard ordinary mortality and morbidity tables of the National Association of Insurance Commissioners, and by assuming a level death benefit. ‘‘(3) TRANSITIONAL RULE FOR CERTAIN EXISTING PLANS OF INSURANCE.—A plan of insurance on file in 1 or more States before September 28, 1983, shall be treated for purposes of section 7702(i)(3) of such Code as a plan of insurance on file in 1 or more States before September 28, 1983, without regard to whether such plan of insur- ance is modified after September 28, 1983, to permit the crediting of excess interest or similar amounts annu- ally and not monthly under contracts issued pursuant to such plan of insurance. ‘‘(4) EXTENSION OF FLEXIBLE PREMIUM CONTRACT PROVI- SIONS.—The amendments made by subsection (b) [amending section 101 of this title and provisions set out as a note under section 101 of this title] shall take effect on January 1, 1984. ‘‘(5) SPECIAL RULE FOR MASTER CONTRACT.—For pur- poses of this subsection, in the case of a master con- tract, the date taken into account with respect to any insured shall be the first date on which such insured is covered under such contract.’’ INTERIM RULES; REGULATIONS; STANDARDS BEFORE REGULATIONS TAKE EFFECT Pub. L. 100–647, title V, § 5011(c), Nov. 10, 1988, 102 Stat. 3661, provided that the Secretary of the Treasury would issue regulations under subsec. (c)(3)(B)(i) of this section and provided for a standard for contracts issues before the effective date of those regulations. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 Page 4032 TITLE 26—INTERNAL REVENUE CODE § 7702A and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. TREATMENT OF FLEXIBLE PREMIUM CONTRACTS ISSUED DURING 1984 WHICH MEET NEW REQUIREMENTS Pub. L. 98–369, div. A, title II, § 221(b)(3), as added by Pub. L. 99–514, title XVIII, § 1825(d), Oct. 22, 1986, 100 Stat. 2848, provided that: ‘‘Any flexible premium con- tract issued during 1984 which meets the requirements of section 7702 of the Internal Revenue Code of 1954 [now 1986] (as added by this section) shall be treated as meeting the requirements of section 101(f) of such Code.’’ § 7702A. Modified endowment contract defined (a) General rule For purposes of section 72, the term ‘‘modified endowment contract’’ means any contract meet- ing the requirements of section 7702— (1) which— (A) is entered into on or after June 21, 1988, and (B) fails to meet the 7-pay test of sub- section (b), or (2) which is received in exchange for a con- tract described in paragraph (1) or this para- graph. (b) 7-pay test For purposes of subsection (a), a contract fails to meet the 7-pay test of this subsection if the accumulated amount paid under the contract at any time during the 1st 7 contract years exceeds the sum of the net level premiums which would have been paid on or before such time if the con- tract provided for paid-up future benefits after the payment of 7 level annual premiums. (c) Computational rules (1) In general Except as provided in this subsection, the determination under subsection (b) of the 7 level annual premiums shall be made— (A) as of the time the contract is issued, and (B) by applying the rules of section 7702(b)(2) and of section 7702(e) (other than paragraph (2)(C) thereof), except that the death benefit provided for the 1st contract year shall be deemed to be provided until the maturity date without regard to any sched- uled reduction after the 1st 7 contract years. (2) Reduction in benefits during 1st 7 years (A) In general If there is a reduction in benefits under the contract within the 1st 7 contract years, this section shall be applied as if the contract had originally been issued at the reduced benefit level. (B) Reductions attributable to nonpayment of premiums Any reduction in benefits attributable to the nonpayment of premiums due under the contract shall not be taken into account under subparagraph (A) if the benefits are reinstated within 90 days after the reduction in such benefits. (3) Treatment of material changes (A) In general If there is a material change in the bene- fits under (or in other terms of) the contract which was not reflected in any previous de- termination under this section, for purposes of this section— (i) such contract shall be treated as a new contract entered into on the day on which such material change takes effect, and (ii) appropriate adjustments shall be made in determining whether such con- tract meets the 7-pay test of subsection (b) to take into account the cash surrender value under the contract. (B) Treatment of certain benefit increases For purposes of subparagraph (A), the term ‘‘material change’’ includes any increase in the death benefit under the contract or any increase in, or addition of, a qualified addi- tional benefit under the contract. Such term shall not include— (i) any increase which is attributable to the payment of premiums necessary to fund the lowest level of the death benefit and qualified additional benefits payable in the 1st 7 contract years (determined after taking into account death benefit in- creases described in subparagraph (A) or (B) of section 7702(e)(2)) or to crediting of interest or other earnings (including pol- icyholder dividends) in respect of such pre- miums, and (ii) to the extent provided in regulations, any cost-of-living increase based on an es- tablished broad-based index if such in- crease is funded ratably over the remain- ing period during which premiums are re- quired to be paid under the contract. (4) Special rule for contracts with death bene- fits of $10,000 or less In the case of a contract— (A) which provides an initial death benefit of $10,000 or less, and (B) which requires at least 7 nondecreasing annual premium payments, each of the 7 level annual premiums deter- mined under subsection (b) (without regard to this paragraph) shall be increased by $75. For purposes of this paragraph, the contract in- volved and all contracts previously issued to the same policyholder by the same company shall be treated as one contract. (5) Regulatory authority for certain collection expenses The Secretary may by regulations prescribe rules for taking into account expenses solely attributable to the collection of premiums paid more frequently than annually. (6) Treatment of certain contracts with more than one insured If— (A) a contract provides a death benefit which is payable only upon the death of 1 in- sured following (or occurring simultaneously with) the death of another insured, and