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IRS Provides Simplified Accounting Method Change Procedures for Life Insurance Companies

On August 6, 2019, the Internal Revenue Service (IRS) published Revenue Procedure 2019-34. Rev. Proc. 2019-34 provides simplified procedures for insurance companies to obtain automatic consent to change their method of accounting for life insurance reserves, reserves computed under section 807(c)(3), and specified policy acquisition expenses to comply with provisions enacted under tax reform.


The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, amended sections 807 and 848 of the Internal Revenue Code related to life insurance reserves, reserves under section 807(c)(3), and the capitalization of specified policy acquisition expenses. The TCJA amended Section 807(d) to provide a new method for computing the amount of life insurance reserves for taxable years beginning after December 31, 2017. Under the new method, the amount of the life insurance reserves for any contract are calculated as the greater of the net surrender value of such contract or 92.81% of the reserve for the contract computed as prescribed by the National Association of Insurance Commissioners (NAIC). A transitional rule exists for the first taxable year beginning in after December 31, 2017 (2018 calendar year for most taxpayers) under which the life insurance reserves at the end of the preceding taxable year (2017 for most taxpayers) is recalculated under the provisions of the TCJA. The difference between the reserves calculated under the prior method and under the TCJA, often referred to as the “TCJA Transition Adjustment”, is taken into account over an eight year period beginning with the first taxable year beginning after December 31, 2017 and the seven succeeding taxable years.

The TCJA amended section 807(c) to provide that the appropriate interest rate to discount the amounts under this section is the highest rate or rates permitted to be used to discount the obligations by the NAIC as of the date the reserve is determined. Section 807(c) refers to the amounts necessary to satisfy the obligations under insurance and annuity contracts, only if such contracts do not involve life, accident, or health contingencies. A TCJA Transition Adjustment is calculated as the difference between the discount as calculated at the end of the preceding tax year using the appropriate rate under the TCJA and the appropriate interest rate required prior to amendments of the TCJA.

The TCJA amended section 848 to extend the general amortization period for specified policy acquisition expenses from 120 months to 180 months and changed the percentage of net premiums that are determined to be specified policy acquisition expenses. A transition rule provides that specified policy acquisition expenses required to be capitalized in a taxable year beginning before January 1, 2018 will continue to be amortized over 120 months.

Revenue Procedure 2019-34

Rev. Proc. 2019-34 provides simplified procedures under section 446 for an insurance company to obtain the automatic consent to change its method of accounting in order to comply with the TCJA amendments to sections 807 and 848. Generally, a taxpayer must obtain the consent of the Commissioner before changing a method of accounting by filing Form 3115, Application for Change in Accounting Method. This revenue procedure provides that the requirement to file Form 3115 is waived for any taxpayer making a change in its method of accounting under Rev. Proc. 2019-34, with respect to the items previously discussed. The procedures only apply to changes made in the first taxable year beginning after December 31, 2017.

The applicable 481(a) adjustment period varies based on the type of accounting method change as follows:

  • Life insurance reserve method change: the section 481(a) adjustment is the sum of the TCJA Transition Adjustments and is reported ratably over eight taxable years beginning with the first taxable year beginning after December 31, 2017;
  • Section 807(c)(3) method change: the section 481(a) adjustment period is one taxable year (the year of change) for a negative (favorable) adjustment and four taxable years (the year of change plus three succeeding taxable years) for a positive (unfavorable) adjustment (the taxpayer may also elect to record a positive adjustment entirely in the year of change);
  • Capitalization of specified policy acquisition expenses method change: no section 481(a) adjustment is required nor permitted as this change in method is made using a cut-off method as the amendments to section 848 apply to net premiums for taxable years beginning after December 31, 2017.

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