§ 807. Rules for certain reserves

• (a) If for any taxable year—
  • (1) the opening balance for the items described in subsection (c), exceeds
  • (2)
    • (A) the closing balance for such items, reduced by
    • (B) the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies,
• (b) If for any taxable year—
  • (1)
    • (A) the closing balance for the items described in subsection (c), reduced by
    • (B) the amount of the policyholders’ share of tax-exempt interest and the amount of the policyholder’s share of the increase for the taxable year in policy cash values (within the meaning of section 805(a)(4)(F)) of life insurance policies and annuity and endowment contracts to which section 264(f) applies, exceeds
  • (2) the opening balance for such items,
• (c) The items referred to in subsections (a) and (b) are as follows:
  • (1) The life insurance reserves (as defined in section 816(b)).
  • (2) The unearned premiums and unpaid losses included in total reserves under section 816(c)(2).
  • (3) The amounts (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if such obligations do not involve (at the time with respect to which the computation is made under this paragraph) life, accident, or health contingencies.
  • (4) Dividend accumulations, and other amounts, held at interest in connection with insurance and annuity contracts.
  • (5) Premiums received in advance, and liabilities for premium deposit funds.
  • (6) Reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof.
• (d)
  • (1)
    • (A) For purposes of this part (other than section 816), the amount of the life insurance reserves for any contract (other than a contract to which subparagraph (B) applies) shall be the greater of—
      • (i) the net surrender value of such contract, or
      • (ii) 92.81 percent of the reserve determined under paragraph (2).
    • (B) For purposes of this part (other than section 816), the amount of the life insurance reserves for a variable contract shall be equal to the sum of—
      • (i) the greater of—
        • (I) the net surrender value of such contract, or
        • (II) the portion of the reserve that is separately accounted for under section 817, plus
      • (ii) 92.81 percent of the excess (if any) of the reserve determined under paragraph (2) over the amount in clause (i).
    • (C) In no event shall the reserves determined under subparagraphs (A) or (B) for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining statutory reserves (as defined in paragraph (4)).
    • (D) In no event shall any amount or item be taken into account more than once in determining any reserve under this subchapter.
  • (2) The amount of the reserve determined under this paragraph with respect to any contract shall be determined by using the tax reserve method applicable to such contract.
  • (3) For purposes of this subsection—
    • (A) The term “tax reserve method” means—
      • (i) The CRVM in the case of a contract covered by the CRVM.
      • (ii) The CARVM in the case of a contract covered by the CARVM.
      • (iii) In the case of any noncancellable accident and health insurance contract, the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract as of the date the reserve is determined.
      • (iv) In the case of any contract not described in clause (i), (ii), or (iii)—
        • (I) the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract (as of the date the reserve is determined), or
        • (II) if no reserve method has been prescribed by the National Association of Insurance Commissioners which covers such contract, a reserve method which is consistent with the reserve method required under clause (i), (ii), or (iii) or under subclause (I) of this clause as of the date the reserve is determined for such contract (whichever is most appropriate).
    • (B) For purposes of this paragraph—
      • (i) The term “CRVM” means the Commissioners’ Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined.
      • (ii) The term “CARVM” means the Commissioners’ Annuities Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined.
    • (C) Nothing in any reserve method described under this paragraph shall permit any increase in the reserve because the net premium (computed on the basis of assumptions required under this subsection) exceeds the actual premiums or other consideration charged for the benefit.
  • (4) The term “statutory reserves” means the aggregate amount set forth in the annual statement with respect to items described in section 807(c). Such term shall not include any reserve attributable to a deferred and uncollected premium if the establishment of such reserve is not permitted under section 811(c).
• (e)
  • (1) For purposes of this section—
    • (A) The net surrender value of any contract shall be determined—
      • (i) with regard to any penalty or charge which would be imposed on surrender, but
      • (ii) without regard to any market value adjustment on surrender.
    • (B) In the case of a pension plan contract, the balance in the policyholder’s fund shall be treated as the net surrender value of such contract. For purposes of the preceding sentence, such balance shall be determined with regard to any penalty or forfeiture which would be imposed on surrender but without regard to any market value adjustment.
  • (2)
    • (A) For purposes of this part, the amount of the life insurance reserve for any qualified supplemental benefit shall be computed separately as though such benefit were under a separate contract.
    • (B) For purposes of this paragraph, the term “qualified supplemental benefit” means any supplemental benefit described in subparagraph (C) if—
      • (i) there is a separately identified premium or charge for such benefit, and
      • (ii) any net surrender value under the contract attributable to any other benefit is not available to fund such benefit.
    • (C) For purposes of this paragraph, the supplemental benefits described in this subparagraph are any—
      • (i) guaranteed insurability,
      • (ii) accidental death or disability benefit,
      • (iii) convertibility,
      • (iv) disability waiver benefit, or
      • (v) other benefit prescribed by regulations,
  • (3)
    • (A) In the case of any qualified foreign contract, the amount of the reserve shall be not less than the minimum reserve required by the laws, regulations, or administrative guidance of the regulatory authority of the foreign country referred to in subparagraph (B) (but not to exceed the net level reserves for such contract).
    • (B) For purposes of subparagraph (A), the term “qualified foreign contract” means any contract issued by a foreign life insurance branch (which has its principal place of business in a foreign country) of a domestic life insurance company if—
      • (i) such contract is issued on the life or health of a resident of such country,
      • (ii) such domestic life insurance company was required by such foreign country (as of the time it began operations in such country) to operate in such country through a branch, and
      • (iii) such foreign country is not contiguous to the United States.
  • (4) For purposes of this part—
    • (A) In the case of a life insurance contract issued before January 1, 1989 , under an existing plan of insurance, the life insurance reserve for any benefit to which this paragraph applies shall be computed separately under subsection (d)(1) from any other reserve under the contract.
    • (B) This paragraph applies to any term insurance or annuity benefit with respect to which the requirements of clauses (i) and (ii) of paragraph (3)(C) are met.
    • (C) For purposes of this paragraph, the term “existing plan of insurance” means, with respect to any contract, any plan of insurance which was filed by the company using such contract in one or more States before January 1, 1984 , and is on file in the appropriate State for such contract.
  • (5)
    • (A) The amount taken into account for purposes of subsections (a) and (b) as—
      • (i) the opening balance of the items referred to in subparagraph (B), and
      • (ii) the closing balance of such items,
    • (B) For purposes of this paragraph, the items referred to in this subparagraph are the items described in subsection (c) which consist of unearned premiums and premiums received in advance under insurance contracts not described in section 816(b)(1)(B).
  • (6) The Secretary shall require reporting (at such time and in such manner as the Secretary shall prescribe) with respect to the opening balance and closing balance of reserves and with respect to the method of computing reserves for purposes of determining income.
• (f)
  • (1) If the basis for determining any item referred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between—
    • (A) the amount of the item at the close of the taxable year, computed on the new basis, and
    • (B) the amount of the item at the close of the taxable year, computed on the old basis,
  • (2) Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if for any taxable year the taxpayer is not a life insurance company, the balance of any adjustments under this subsection shall be taken into account for the preceding taxable year.