26 U.S.C. § 817 — Treatment of variable contracts

Page 1915 TITLE 26—INTERNAL REVENUE CODE § 817 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. SPECIAL ELECTION TO TREAT INDIVIDUAL NONCANCELLABLE ACCIDENT AND HEALTH CONTRACTS AS CANCELLABLE Pub. L. 98–369, div. A, title II, § 217(i), July 18, 1984, 98 Stat. 764, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095; Pub. L. 100–647, title I, § 1010(h)(1), Nov. 10, 1988, 102 Stat. 3455, provided that: ‘‘(1) IN GENERAL.—A mutual life insurance company may elect to treat all individual noncancellable (or guaranteed renewable) accident and health insurance contracts as though they were cancellable for purposes of section 816 of subchapter L of chapter 1 of the Inter- nal Revenue Code of 1986 [formerly I.R.C. 1954]. ‘‘(2) EFFECT OF ELECTION ON SUBSIDIARIES OF ELECTING PARENT.—For purposes of determining the amount of the small life insurance company deduction of any con- trolled group which includes a mutual company which made an election under paragraph (1), the taxable in- come of such electing company shall be taken into ac- count under [former] section 806(b)(2) of the Internal Revenue Code of 1986 (relating to phaseout of small life insurance company deduction). ‘‘(3) ELECTION.—An election under paragraph (1) shall apply to the company’s first taxable year beginning after December 31, 1983, and all taxable years there- after. ‘‘(4) TIME AND MANNER.—An election under paragraph (1) shall be made— ‘‘(A) on the return of the taxpayer for its first tax- able year beginning after December 31, 1983, and ‘‘(B) in such manner as the Secretary of the Treas- ury or his delegate may prescribe.’’ [Pub. L. 100–647, title I, § 1010(h)(2), (3), Nov. 10, 1988, 102 Stat. 3455, provided that: [‘‘(2) EFFECTIVE DATE.—The amendment made by this subsection [amending section 217(i) of Pub. L. 98–369, set out above] shall apply to taxable years beginning after December 31, 1986, and before January 1, 1992. [‘‘(3) REVENUE LOSS LIMITED.—The decrease in the amount of Federal revenue by reason of the amendment made by this subsection shall not exceed $300,000 per taxable year.’’] § 817. Treatment of variable contracts (a) Increases and decreases in reserves For purposes of subsections (a) and (b) of sec- tion 807, the sum of the items described in sec- tion 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— (1) by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the re- serves 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 (2) 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 re- spect to variable contracts shall be reduced to the extent that the amount of such items is in- creased for the taxable year by appreciation (or increased to the extent that the amount of such items is decreased for the taxable year by depre- ciation) not reflected in adjustments under the preceding sentence. (b) Adjustment to basis of assets held in seg- regated 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— (1) increased by the amount of any apprecia- tion in value, and (2) decreased by the amount of any deprecia- tion 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 con- tracts. (c) Separate accounting For purposes of this part, a life insurance com- pany which issues variable contracts shall sepa- rately account for the various income, exclu- sion, deduction, asset, reserve, and other liabil- ity items properly attributable to such variable contracts. For such items as are not accounted for directly, separate accounting shall be made— (1) in accordance with the method regularly employed by such company, if such method is reasonable, and (2) in all other cases, in accordance with reg- ulations prescribed by the Secretary. (d) Variable contract defined For purposes of this part, the term ‘‘variable contract’’ means a contract— (1) which provides for the allocation of all or part of the amounts received under the con- tract to an account which, pursuant to State law or regulation, is segregated from the gen- eral asset accounts of the company, (2) which— (A) provides for the payment of annuities, (B) is a life insurance contract, or (C) provides for funding of insurance on re- tired lives as described in section 807(c)(6), and (3) under which— (A) in the case of an annuity contract, the amounts paid in, or the amount paid out, re- flect the investment return and the market value of the segregated asset account, (B) in the case of a life insurance contract, the amount of the death benefit (or the pe- riod of coverage) is adjusted on the basis of the investment return and the market value of the segregated asset account, or (C) in the case of funds held under a con- tract described in paragraph (2)(C), the amounts paid in, or the amounts paid out, reflect the investment return and the mar- ket value of the segregated asset account. If a contract ceases to reflect current invest- ment return and current market value, such contract shall not be considered as meeting the requirements of paragraph (3) after such ces- sation. Paragraph (3) shall be applied without regard to whether there is a guarantee, and obli- Page 1916 TITLE 26—INTERNAL REVENUE CODE § 817 gations under such guarantee which exceed obli- gations under the contract without regard to such guarantee shall be accounted for as part of the company’s general account. (e) Pension plan contracts treated as paying an- nuity A pension plan contract which is not a life, ac- cident, or health, property, casualty, or liability insurance contract shall be treated as a contract which provides for the payments of annuities for purposes of subsection (d). (f) Other special rules (1) Life insurance reserves For purposes of subsection (b)(1)(A) of sec- tion 816, the reflection of the investment re- turn and the market value of the segregated asset account shall be considered an assumed rate of interest. (2) Additional separate computations Under regulations prescribed by the Sec- retary, such additional separate computations shall be made, with respect to the items sepa- rately accounted for in accordance with sub- section (c), as may be necessary to carry out the purposes of this section and this part. (g) 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— (1) recognized mortality tables, and (2)(A) the investment experience of a seg- regated asset account, or (B) 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. (h) Treatment of certain nondiversified contracts (1) In general For purposes of subchapter L, section 72 (re- lating to annuities), and section 7702(a) (relat- ing to definition of life insurance contract), a variable contract (other than a pension plan contract) which is otherwise described in this section and which is based on a segregated asset account shall not be treated as an annu- ity, endowment, or life insurance contract for any period (and any subsequent period) for which the investments made by such account are not, in accordance with regulations pre- scribed by the Secretary, adequately diversi- fied. (2) 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— (A) it meets the requirements of section 851(b)(3), and (B) no more than 55 percent of the value of the total assets of the account are assets de- scribed in section 851(b)(3)(A)(i). (3) Special rule for investments in United States obligations To the extent that any segregated asset ac- count with respect to a variable life insurance contract is invested in securities issued by the United States Treasury, the investments made by such account shall be treated as adequately diversified for purposes of paragraph (1). (4) 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— (A) insurance companies (or affiliated companies) in their general account or in segregated asset accounts, or (B) fund managers (or affiliated compa- nies) 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 com- pany or trust. (5) Independent investment advisors permitted Nothing in this subsection shall be con- strued as prohibiting the use of independent investment advisors. (6) Government securities funds In determining whether a segregated asset account is adequately diversified for purposes of paragraph (1), each United States Govern- ment agency or instrumentality shall be treated as a separate issuer. (Added Pub. L. 98–369, div. A, title II, § 211(a), July 18, 1984, 98 Stat. 750; amended Pub. L. 99–514, title XVIII, § 1821(m), (t)(1), Oct. 22, 1986, 100 Stat. 2841, 2844; Pub. L. 100–647, title VI, § 6080(a), Nov. 10, 1988, 102 Stat. 3710; Pub. L. 104–188, title I, § 1611(a), Aug. 20, 1996, 110 Stat. 1845; Pub. L. 105–34, title XII, § 1271(b)(8), Aug. 5, 1997, 111 Stat. 1037; Pub. L. 108–218, title II, § 205(b)(5), Apr. 10, 2004, 118 Stat. 610.) Editorial Notes PRIOR PROVISIONS A prior section 817, added Pub. L. 86–69, § 2(a), June 25, 1959, 73 Stat. 132; amended Pub. L. 94–455, title XIV, § 1402(b)(1)(M), (2), title XIX, §§ 1901(a)(100), 1951(b)(11)(A), Oct. 4, 1976, 90 Stat. 1732, 1781, 1839, re- lated to rules regarding certain gains and losses, prior to the general revision of this part by Pub. L. 98–369, § 211(a). Another prior section 817, act Aug. 16, 1954, ch. 736, § 817, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, re- lated to denial of double deductions, prior to the gen- eral revision of this part by Pub. L. 86–69, § 2(a). AMENDMENTS 2004—Subsec. (c). Pub. L. 108–218, in introductory pro- visions, struck out ‘‘(other than section 809)’’ after ‘‘For purposes of this part’’. 1997—Subsec. (h)(2)(A). Pub. L. 105–34, § 1271(b)(8)(A), substituted ‘‘851(b)(3)’’ for ‘‘851(b)(4)’’. Subsec. (h)(2)(B). Pub. L. 105–34, § 1271(b)(8)(B), sub- stituted ‘‘851(b)(3)(A)(i)’’ for ‘‘851(b)(4)(A)(i)’’. 1996—Subsec. (d)(2)(C). Pub. L. 104–188, § 1611(a)(1), added subpar. (C). Subsec. (d)(3)(C). Pub. L. 104–188, § 1611(a)(2), added subpar. (C). 1988—Subsec. (h)(6). Pub. L. 100–647 added par. (6). 1986—Subsec. (d). Pub. L. 99–514, § 1821(t)(1), inserted at end ‘‘Paragraph (3) shall be applied without regard to whether there is a guarantee, and obligations under such guarantee which exceed obligations under the con- Page 1917 TITLE 26—INTERNAL REVENUE CODE § 817 tract without regard to such guarantee shall be ac- counted for as part of the company’s general account.’’ Subsec. (h)(1). Pub. L. 99–514, § 1821(m)(2), struck out last sentence which read as follows: ‘‘For purposes of this paragraph and paragraph (2), beneficial interests in a regulated investment company or in a trust shall not be treated as 1 investment if all of the beneficial inter- ests in such company or trust are held by 1 or more seg- regated asset accounts of 1 or more insurance compa- nies.’’ Subsec. (h)(3) to (5). Pub. L. 99–514, § 1821(m)(1), added pars. (3) and (4), redesignated former par. (4) as (5), and struck out former par. (3) which read as follows: ‘‘In the case of a segregated asset account with respect to variable life insurance contracts, paragraph (1) shall not apply in the case of securities issued by the United States Treasury which are owned by a regulated invest- ment company or by a trust all the beneficial interests in which are held by 1 or more segregated asset ac- counts of the company issuing the contract.’’ Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–218 applicable to taxable years beginning after Dec. 31, 2004, see section 205(c) of Pub. L. 108–218, set out as a note under section 807 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title XII, § 1271(c), Aug. 5, 1997, 111 Stat. 1037, provided that: ‘‘The amendments made by this section [amending this section and sections 851 and 1092 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Aug. 5, 1997].’’ EFFECTIVE DATE OF 1996 AMENDMENT Pub. L. 104–188, title I, § 1611(b), Aug. 20, 1996, 110 Stat. 1846, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 1995.’’ EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title VI, § 6080(b), Nov. 10, 1988, 102 Stat. 3710, provided that: ‘‘The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1987.’’ EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title XVIII, § 1821(t)(2), Oct. 22, 1986, 100 Stat. 2844, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall apply— ‘‘(A) to contracts issued after December 31, 1986, and ‘‘(B) to contracts issued before January 1, 1987, if such contract was treated as a variable contract on the taxpayer’s return.’’ Amendment by section 1821(m) of Pub. L. 99–514 effec- tive, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1983, see section 215 of Pub. L. 98–369, set out as a note under section 801 of this title. DELAY IN EFFECTIVE DATE FOR DIVERSIFICATION RE- QUIREMENTS WITH RESPECT TO ACCOUNTS FOR CER- TAIN IMMEDIATE ANNUITIES Pub. L. 100–647, title I, § 1010(i), Nov. 10, 1988, 102 Stat. 3455, provided that: ‘‘Section 817(h) of the 1986 Code shall not apply until January 1, 1989, with respect to a variable contract (as defined in section 817(d) of the 1986 Code) if— ‘‘(1) such contract provides for the payment of an immediate annuity (as defined in section 72(u)(4) of the 1986 Code), ‘‘(2) such contract was outstanding on September 12, 1986, and ‘‘(3) the segregated asset account on which such contract is based was, on September 12, 1986, wholly invested in deposits insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation.’’ INSURANCE-DEDICATED EXCHANGE-TRADED FUNDS Pub. L. 117–328, div. T, title II, § 203, Dec. 29, 2022, 136 Stat. 5333, provided that: ‘‘(a) IN GENERAL.—Not later than the date which is 7 years after the date of the enactment of this Act [Dec. 29, 2022], the Secretary of the Treasury (or the Sec- retary’s delegate) shall amend the regulation issued by the Department of the Treasury relating to ‘Income Tax; Diversification Requirements for Variable Annu- ity, Endowment, and Life Insurance Contracts’, 54 Fed. Reg. 8728 (March 2, 1989), and make any necessary cor- responding amendments to other regulations, in order to facilitate the use of exchange-traded funds as invest- ment options under variable contracts within the meaning of section 817(d) of the Internal Revenue Code of 1986, in accordance with subsections (b) and (c) of this section. ‘‘(b) DESIGNATE CERTAIN AUTHORIZED PARTICIPANTS AND MARKET MAKERS AS ELIGIBLE INVESTORS.—The Sec- retary 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-trad- ed fund shall not be prevented by reason of beneficial interests in such a fund being held by 1 or more author- ized participants or market makers. ‘‘(c) 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: ‘‘(1) EXCHANGE-TRADED FUND.—The term ‘exchange- traded fund’ means a regulated investment company, partnership, or trust— ‘‘(A) that is registered with the Securities and Exchange Commission as an open-end investment company or a unit investment trust; ‘‘(B) the shares of which can be purchased or re- deemed directly from the fund only by an author- ized participant; and ‘‘(C) 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. ‘‘(2) AUTHORIZED PARTICIPANT.—The term ‘author- ized participant’ means a financial institution that is a member or participant of a clearing agency reg- istered under section 17A(b) of the Securities Ex- change 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— ‘‘(A) 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 ‘‘(B) 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). ‘‘(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 fi- Page 1918 TITLE 26—INTERNAL REVENUE CODE § 817A nancial institution is contractually or legally pre- cluded from selling or buying such shares to or from persons who are not authorized participants or other- wise described in Treas. Reg. section 1.817–5(f) (2) and (3). ‘‘(d) 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 enact- ment of this Act.’’ 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. § 817A. Special rules for modified guaranteed contracts (a) Computation of reserves In the case of a modified guaranteed contract, clause (ii) of section 807(e)(1)(A) shall not apply. (b) Segregated assets under modified guaranteed contracts marked to market (1) In general In the case of any life insurance company, for purposes of this subtitle— (A) Any gain or loss with respect to a seg- regated asset shall be treated as ordinary in- come or loss, as the case may be. (B) If any segregated asset is held by such company as of the close of any taxable year— (i) such company shall recognize gain or loss as if such asset were sold for its fair market value on the last business day of such taxable year, and (ii) any such gain or loss shall be taken into account for such taxable year. Proper adjustment shall be made in the amount of any gain or loss subsequently re- alized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the applica- tion of this subparagraph at times other than the times provided in this subpara- graph. (2) Segregated asset For purposes of paragraph (1), the term ‘‘seg- regated asset’’ means any asset held as part of a segregated account referred to in subsection (d)(1) under a modified guaranteed contract. (c) Special rule in computing life insurance re- serves For purposes of applying section 816(b)(1)(A) to any modified guaranteed contract, an assumed rate of interest shall include a rate of interest determined, from time to time, with reference to a market rate of interest. (d) Modified guaranteed contract defined For purposes of this section, the term ‘‘modi- fied guaranteed contract’’ means a contract not described in section 817— (1) all or part of the amounts received under which are allocated to an account which, pur- suant to State law or regulation, is segregated from the general asset accounts of the com- pany and is valued from time to time with ref- erence to market values, (2) which— (A) provides for the payment of annuities, (B) is a life insurance contract, or (C) is a pension plan contract which is not a life, accident, or health, property, cas- ualty, or liability contract, (3) for which reserves are valued at market for annual statement purposes, and (4) which provides for a net surrender value or a policyholder’s fund (as defined in section 807(e)(1)). If only a portion of a contract is not described in section 817, such portion shall be treated for purposes of this section as a separate contract. (e) Regulations The Secretary may prescribe regulations— (1) to provide for the treatment of market value adjustments under sections 72, 7702, 7702A, and 807(e)(1)(B), (2) to determine the interest rates applicable under sections 807(c)(3) and 807(d)(2)(B) with respect to a modified guaranteed contract an- nually, in a manner appropriate for modified guaranteed contracts and, to the extent appro- priate for such a contract, to modify or waive the applicability of section 811(d), (3) to provide rules to limit ordinary gain or loss treatment to assets constituting reserves for modified guaranteed contracts (and not other assets) of the company, (4) to provide appropriate treatment of transfers of assets to and from the segregated account, and (5) as may be necessary or appropriate to carry out the purposes of this section. (Added Pub. L. 104–188, title I, § 1612(a), Aug. 20, 1996, 110 Stat. 1846; amended Pub. L. 115–97, title I, § 13518(b), Dec. 22, 2017, 131 Stat. 2148.) Editorial Notes AMENDMENTS 2017—Subsec. (e)(2). Pub. L. 115–97 substituted ‘‘and 807(d)(2)(B)’’ for ‘‘, 807(d)(2)(B), and 812’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13518(c) of Pub. L. 115–97, set out as a note under section 812 of this title. EFFECTIVE DATE Pub. L. 104–188, title I, § 1612(c), Aug. 20, 1996, 110 Stat. 1847, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [enacting this section] shall apply to taxable years beginning after December 31, 1995. ‘‘(2) TREATMENT OF NET ADJUSTMENTS.—Except as pro- vided in paragraph (3), in the case of any taxpayer re- quired by the amendments made by this section to change its calculation of reserves to take into account market value adjustments and to mark segregated as- sets to market for any taxable year— ‘‘(A) such changes shall be treated as a change in method of accounting initiated by the taxpayer,