On Oct. 31, 2019, the IRS published final regulations under new section 6050Y of the Internal Revenue Code (the “Code”), which was added by the Tax Cuts and Jobs Act (TCJA) (Pub.Law 115–97). Section 6050Y requires reporting of certain life insurance policy sales and death benefits paid after Dec. 31, 2017. The final regulations are not significantly different than the proposed regulations published earlier this year (see our prior alert), but do grant transitional relief of an additional 120 days after the date of publication (that is, until March 1, 2020) to comply.
Any company that holds, sells, or acquires interests in life insurance policies, including those investing in partnerships with an interest in insurance contracts, will likely be impacted by these rules. It is therefore critical to evaluate your holdings now and to implement a process for tracking and identifying reportable policy sales so that you are prepared to file new forms 1099-LS, Reportable Life Insurance Sale and 1099-SB, Seller’s Investment in Life Insurance Contract, which were also introduced by the IRS for compliance with these rules. The final section 6050Y regulations will mean new tax filing obligations, additional risk, and modified systems for many going forward.
In general, section 101(a)(1) excludes from income tax amounts received under life insurance contracts paid by reason of the death of the insured. However, if a policy is sold or transferred for valuable consideration (aka, life settlement transaction), the transfer-for-value rules tax part of the death benefits, unless an exception applies. The TCJA closed a potential loophole and provides that no exceptions apply to a reportable policy sale, and ensures that the buyer’s purchase information and the seller’s basis in the contract are reported to the IRS for income tax purposes.
Section 6050Y requires any person that acquires a life insurance contract or any interest in a life insurance contract in a reportable policy sale during any taxable year to report certain information regarding the transaction, including information about each recipient of payments in the reportable policy sale. Section 101(a)(3) defines a “reportable policy sale” as an acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer's interest in such life insurance contract. For purposes of these rules, acquirers of life insurance contracts include U.S. and non-U.S. investors who acquire interests in life insurance contracts in a reportable sale, either directly or indirectly, through investment trusts, partnerships or other investments. (See Reg. section 1.6050Y-1(a)(1)).
The regulations specify that issuers and acquirers of life insurance contracts have a duty to report information on reportable policy sales and acquisitions to the IRS and to other parties to the applicable transactions. The regulations broadly define an issuer of a life insurance contract as any person that bears any part of the risk with respect to the life insurance contract, including the person collecting premiums and paying death benefits. (See Reg. section 1.6050Y-1(a)). Thus, for reporting purposes, an issuer would include the original issuer of the insurance contract, reinsurers, and designees. If there are multiple “issuers,” the regulations specify that an issuer is deemed to have met its obligations if just one of the applicable issuers or designees makes a timely report. (See Reg. section 1.6050Y-3(b)).
What new returns are required and who must file them?
New forms for complying with section 6050Y’s reporting requirements have been published, including Internal Revenue Service (IRS) Form 1099-LS, Reportable Life Insurance Sale, and IRS Form 1099-SB, Seller's Investment in Life Insurance Contract. In order to manage potential risk associated with these forms, acquirers and issuers of reportable policies as well as those holding an interest in partnerships that invest in such policies, should take steps now to understand their reporting and filing obligations. Additionally, they may need to update tax filing calendars, to modify their systems, and to develop processes and controls for tracking, capturing, and timely reporting data on sales and acquisitions of reportable policies. Below is an overview of the forms and requirements for each:
- Must be filed by the acquirer of a life insurance policy (including a life insurance contract) or any interest in a life insurance company to report reportable policy sales. The form is required if you are the acquirer of a life insurance contract, or hold any interest in a life insurance contract, in a reportable policy sale.
- For purposes of Form 1099-LS, an “acquirer” is any person who acquires a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale.
- Key information reportable on Form 1099-LS includes the date of the sale, the policy number, the policy issuer’s name, the acquirer’s name, address and TIN and the payment recipients’ name, address, and TIN. It is important to begin tracking this information now and modifying your systems to ensure that you can file accurate and complete returns as required going forward.
- Must be filed by the issuer of a life insurance contract (also known as a life insurance policy) to report the seller’s investment in the contract and its surrender amount with respect to a life insurance contract transferred in a "reportable policy sale" or transferred to a foreign person.
- Typically, this form is required to be filed by issuers, which is any life insurance company that bears the risk with respect to a life insurance contract.
- Issuers must file a form if either of the following occurs:
- Upon the receipt of s a statement from an acquirer in a reportable policy sale described in under section 6050Y(a), such as a copy of a Form 1099-LS, Reportable Life Insurance Sale, reporting the transfer of the life insurance contract, or an interest therein, in a reportable policy sale; or
- Upon receipt of a notice of a transfer of the life insurance contract to a foreign person. Notice of a transfer to a foreign person means any notice received by an issuer indicating a transfer of a life insurance contract, including information provided for nontax purposes such as a change of address notice for purposes of sending statements or for other purposes, or information relating to loans, premiums, or death benefits with respect to the contract.
- For purposes of the 1099-SB filing, reportable data includes the name, address, and TIN of the policy issuer and seller, the policy number, the surrender amount, and the investment in the contract.
While transition relief for filing forms 1099-SB and 1099-LS applies now that the final regulations have been published, taxpayers are not relieved of their past reporting responsibilities and will need to identify reportable life insurance policy sales and reportable death benefits paid after Jan. 1, 2018 and report all such transactions. We await further guidance and hope for additional relief on due dates.
What steps should I take now to manage risk associated with these forms?
Companies with Form 1099-LS or 1099-SB reporting obligations should develop desktop procedures and implement processes now to ensure that they are ready to comply with the new reporting requirements and can file accurate and complete returns timely. Suggested action items include:
- Evaluate your structure and flag entities that may be considered issuers or that potentially hold a direct or indirect interest in a reportable policy through a partnership;
- Review your product master and assign codes to reportable policies to trigger reporting;
- Develop a process for tracking and logging statements from acquirers and notices from issuers of transfers to foreign persons;
- Perform an internal assessment to identify gaps in your existing processes that might impact your ability to comply with section 605Y reporting requirements
- Raise awareness and train key stakeholders in impacted business areas about new reporting requirements and additional data that must be reported in order to file accurate and complete returns at year-end;
- Update your tax compliance calendar to include Forms 1099-LS or 1099-SB with controls developed for monitoring compliance with reporting and withholding obligations;
- Life insurance agreements, including reinsurance and intermediary and broker agreements will need to incorporate this new reporting requirement and specify which party is responsible for submitting forms to the IRS.