SECTION 26. INSURANCE

COMPANIES (§§ 807, 816, 832, 833).

01 Safe harbor method of accounting for premium acquisition expenses

(1) Description of change . Rev. Proc. 2002-46, 2002-2 C. B. 105, sets forth a safe harbor method of accounting for premium acquisition expenses of certain non-life insurance companies. Under this method, an insurance company is permitted to treat as premium acquisition expenses incurred for the taxable year an amount equal to the sum of (a) the amount of premium acquisition expenses paid during the taxable year; (b) the difference between the unpaid premium acquisition expenses shown on the company’s annual statement for the taxable year and the unpaid premium acquisition expenses shown on the company’s annual statement for the preceding taxable year; and (c) the difference between the amount of the insurance company’s pro forma premium acquisition expenses at the end of the taxable year and the company’s pro forma premium acquisition expenses at the end of the preceding taxable year. The amount taken into account as a net increase in the pro forma premium acquisition expenses, however, cannot exceed the insurance company’s unearned premium reserve offset amount for that year. A special rule applies to premium acquisition expenses with respect to certain contracts with installment premiums. See Rev. Proc. 2002-46.

(2) Applicability . The automatic change in this section 26. 01 applies to any insurance company that is subject to tax under § 831(a) and determines its premiums earned for insurance contracts during the taxable year under § 832(b)(4) in accordance with the provisions of § 1. 832-4. The automatic change does not apply to an existing Blue Cross or Blue Shield organization or any other organization to which § 833 applies.

(3) Certain eligibility rules inappli- cable . The eligibility rules in sections 5. 01(1)(d) and (f) of Rev. Proc. 2015-13, 2015-5 I. R. B. 419, do not apply to this change.

(4) Designated automatic accounting method change number . The designated

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at the close of the year of change attributable to those contracts is computed on the old basis and the amount of the item at the opening of the succeeding taxable year attributable to those contracts is computed on the new basis . The amount of such item attributable to contracts issued during the year of change and thereafter must be computed on the new basis . See § 1 .807-4(c)(1) .

(ii) Nonlife insurance companies . If a nonlife insurance company changes its basis of computing an item referred to in § 807(c)(1) (life insurance reserves (as defined in § 816(b)) during a taxable year (year of change), then for purposes of applying § 832(b)(4), (A) for the year of change, life insurance reserves at the end of the year of change with respect to contracts issued before the year of change are computed on the old basis and (B) for the year following the year of change, life insurance reserves at the end of the preceding taxable year with respect to contracts issued before the year of change are computed on the new basis . Life insurance reserves attributable to contracts issued during the year of change and thereafter must be computed on the new basis . See § 1 .807-4(c)(2) .

(iii) Requirement to file Form 3115 . A taxpayer that changes its basis of computing any item referred to in § 807(c) is subject to the procedures that apply to obtain the automatic consent of the Commissioner to change a method of accounting . Under these procedures, (A) the taxpayer must file Form 3115 as provided in this section 26 .04, (B) the taxpayer will receive audit protection for taxable years prior to the year of change as provided in section 8 of Rev . Proc . 2015-13, 2015-5 I .R .B . 419, in connection with the change, and (C) the § 481(a) adjustment period generally will be one taxable year (year of change) for a negative § 481(a) adjustment and four taxable years (year of change and next three taxable years) for a positive § 481(a) adjustment in accordance with section 7 .03(1) of Rev . Proc . 2015-13 . (iv) Examples . The following examples each illustrate the rules of sections 26 .04(2)(a)(i) and (ii) of this revenue procedure in two situations: (A) a change in basis in computing life insurance reserves (reserves) for contracts issued prior to the year of change that results in an increase in the reserves at the end of the year of change (negative § 481(a) adjustment) and

automatic accounting method change number for a change under this section 26 .01 is “67 .” (5) Contact information . For further information regarding a change under this section, contact Rebecca L . Baxter at (202) 317-6995 (not a toll-free number) .

.02 Certain changes in method of accounting for organizations to which § 833 applies .

(1) Description of change . This change applies to an existing Blue Cross or Blue Shield organization within the meaning of § 833(c)(2), or an organization described in § 833(c)(3), that is required to change its method of accounting for unearned premiums by reason of failing to meet the Medical Loss Ratio (MLR) requirements of § 833(c)(5), or by reason of meeting the MLR requirements of § 833(c)(5) after failing to meet those requirements in a prior year . See Notice 2011-4, 2011-2 I .R .B . 282 .

(2) Certain eligibility rules inappli- cable . The eligibility rules in sections 5 .01(1)(d) and (f) of Rev . Proc . 2015-13, 2015-5 I .R .B . 419, do not apply to this change .

(3) Accelerated § 481(a) adjustment period in certain situations . In addition to the circumstances set forth in section 7 .03(4) of Rev . Proc . 2015-13, the § 481 adjustment period provided in section 7 .03 of Rev . Proc . 2015-13 will be accelerated in the event a taxpayer with a remaining balance of a § 481(a) adjustment that arose by reason of a change in method of accounting described in this section 26.02 is required to effect another change in method of accounting described in this section 26 .02 . Thus, for example, a taxpayer that fails to satisfy the requirements of § 833(c)(5) and as a result has a positive § 481(a) adjustment, is required to accelerate the remaining balance, if any, of that adjustment in a subsequent taxable year in which the taxpayer meets the requirements of § 833(c)(5) .

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 26 .02 is “155 .” (5) Contact information . For further information regarding this section, contact Rebecca L . Baxter at (202) 317-6995 (not a toll-free number) .

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(B) a change in basis in computing reserves for contracts issued prior to the year of change that results

Reserve amounts.

in a decrease in the reserves at the end of the year of change (positive § 481(a) adjustment). The following

table summarizes the reserve amounts for contracts issued before the year of change.

year. The remaining $2 of the § 481(a) adjustment is recognized as a $1 increase in premiums earned in each of the two remaining years of the § 481(a) adjustment period.

(b) Section 481(a) adjustment (i) Computation of § 481(a) adjust- ment at end of year . In general, a change in basis of computing any item referred to in § 807(c) requires an adjustment under § 481(a). The § 481(a) adjustment is computed as of the end of the year of change and is only with respect to contracts issued before the year of change. See § 1. 8074(b)(1). (ii) Number of § 481(a) adjustments . Multiple changes during the same taxable year in methods, assumptions, or factors, each of which alone would constitute a change in basis of computing any item referred to in § 807(c), are considered a single change in basis, and the effects of such multiple changes are netted and treated as a single net negative § 481(a) adjustment or net positive § 481(a) adjustment. A separate § 481(a) adjustment must be determined for each item referred to in § 807(c) and each such § 481(a) adjustment must be taken into account separately.

(iii) Loss of company status . If for any taxable year a taxpayer that was an insurance company for the year of change is no longer an insurance company, then the taxpayer must take into account in the preceding taxable year (that is, the last taxable year it was an insurance company) the balance of any § 481(a) adjustment. A taxpayer that was an insurance company for the year of change does not accelerate the balance of any § 481(a) adjustment merely because it changes from a life insurance company to a nonlife insurance company or because it changes from a

A. Example 1 . The taxpayer is a life insurance company. Under section 26. 04(2)(a)(i) of this revenue procedure, reserves for contracts issued before the year of change are reported under the old basis at the close of the year of change and under the new basis at the beginning of the year following the year of change; reserves for contracts issued during the year of change and thereafter are computed under the new basis. The remainder of this example describes only the deductions and income inclusions relating to reserves for contracts issued before the year of change.

Deduction for a net increase in reserves for the year of change . In both the negative and positive § 481(a) adjustment situations, the company must take $105 of reserves into account (on the old basis) at the end of the year of change, resulting in a $5 increase in reserves ($105-$100) and a corresponding deduction for a net increase in reserves for the year of change.

Negative § 481(a) adjustment situation . As described in section 26. 04(2)(a)(iii) of this revenue procedure, the negative § 481(a) adjustment of $4 ($109-$105) is taken into account in the year of change, such that the company recognizes a deduction for an increase in reserves under § 807(f) of $4 in the year of change. This results in total deductions in the year of change of $9 ($5+$4).

At the beginning of the following year, the company must take $109 of reserves into account (new basis) and the deduction for the net increase in reserves for that year is $3 ($112-$109).

Positive § 481(a) adjustment situation . As described in section 26. 04(2)(a)(iii) of this revenue procedure, the positive § 481(a) adjustment of $4 ($101-$105) is taken into account over four taxable years, such that the company recognizes additional income from a decrease in reserves under § 807(f) of $1 (1/4th of the § 481(a) adjustment) in the year of change. This results in a net reduction in taxable income in the year of change of $4 ($5-$1).

At the beginning of the following year, the company takes $101 of reserves into account (new basis), and the deduction for the net increase in reserves for that year is $3 ($104-$101). The company also recognizes another 1/4th of the § 481(a) adjustment, resulting in a $1 increase in income due to a decrease in reserves under § 807(f) and a net reduction in taxable income of $2 ($3-$1) in that year. The remaining $2 of the § 481(a) adjustment is recognized as a $1 increase in income due to a decrease in reserves

under § 807(f) in each of the two remaining years of the § 481(a) adjustment period.

B. Example 2 . The taxpayer is a nonlife insurance company. Under section 26. 04(2)(a)(ii) of this revenue procedure, reserves at the end of the year of change with respect to contracts issued before the year of change are computed under the old basis for the year of change and under the new basis for the taxable year following the year of change; reserves for contracts issued during the year of change and thereafter are computed under the new basis. The remainder of this example only relates to reserves for contracts issued before the year of change.

Effect on premiums earned in year of change . In both the negative and positive § 481(a) adjustment situations, the company must add to the result obtained under § 832(b)(4)(A) the $100 of reserves on outstanding business at the end of the preceding taxable year and then deduct the $105 of reserves (computed under the old basis) on outstanding business at the end of the year of change.

Negative § 481(a) adjustment situation . As described in section 26. 04(2)(a)(iii) of this revenue procedure, the negative § 481(a) adjustment of $4 ($109-$105) is taken into account in the year of change, such that the company recognizes an additional reduction in premiums earned of $4 in the year of change. This results in a total reduction in premiums earned of $9 ($5+$4).

In the taxable year after the year of change, the reserves on outstanding business at the end of the preceding year are $109 (computed on the new basis) and the net reduction in premiums earned is $3 ($109-$112).

Positive § 481(a) adjustment situation . As described in section 26. 04(2)(a)(iii) of this revenue procedure, the positive § 481(a) adjustment of $4 ($101-$105) is taken into account over four taxable years, such that the company recognizes an additional $1 (1/4th of the § 481(a) adjustment) increase in premiums earned in the year of change. This results in a net reduction in premiums earned in the year of change of $4 ($5-$1).

In the taxable year after the year of change, the reserves on outstanding business at the end of the preceding year are $101 (computed on the new basis) and the net reduction in premiums earned is $3 ($101-$104). The company also recognizes another 1/4th of the § 481(a) adjustment, resulting in an additional $1 increase in premiums earned and a net reduction in premiums earned of $2 ($3-$1) in that

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nonlife insurance company to a life insurance company. See § 1. 807-4(b)(2).

(c) No ruling protection for year of change or subsequent years . The consent granted under section 9 of Rev. Proc. 2015-13 for a change under this section 26. 04 is not a determination by the Commissioner that the new basis of computing any item referred to in § 807(c) is a permissible basis of computing such item and does not create any presumption that the new basis is a permissible basis of computing such item. The director may ascertain whether the new method of accounting is a permissible method of accounting. Thus, a taxpayer that changes its basis of computing any item referred to in § 807(c) under this section 26. 04 may be required to change or modify that basis of computing such item for the year of change or any subsequent year if it is determined by the Commissioner that the basis to which the taxpayer changed does not meet the requirements of federal income tax law.

(d) Information required to be fur- nished . A taxpayer that files a Form 3115 (Rev. December 2022) under this section 26. 04 is required to complete or provide only the following information on Form 3115: (i) The identification section of page 1

(above Part I); (ii) The signature section at the bottom of

page 1; (iii) Part I; (iv) Part II, lines 4, 5, 6a-d, 7a-b, 8a-d, 9,

11a-c, 12, 17, and 18; (v) The following information, in lieu of

completing Part II, line 14:

• The item in § 807(c) to which the change in basis relates,

• The type of contract to which the change relates,

• If a life insurance reserve, a description of the applicable tax reserve method (e. g., Commissioners’ Reserve Valuation Method or Commissioners’ Annuity Reserve Valuation Method),

• A description of the change in basis,

• A description of the reason for the change in basis, including (i) whether the change results from a change in the method prescribed by the National Associa

tion of Insurance Commissioners or from another change (such as a change in assumption for mortality, morbidity, or interest rate), regardless of whether the change is reflected on an annual statement and (ii) whether the change results from a prior incorrect application of federal income tax law and the nature of such incorrect application. (vi) Part IV. (The taxpayer may indicate

that the § 481(a) adjustment is an estimate or is to be determined. ) (e) Concurrent automatic changes . A taxpayer that makes multiple changes in basis under this section 26.04 may file a single Form 3115 that includes all the changes in basis for the year of change. Likewise, a single Form 3115 may be filed for all changes in basis for members of a group filing a consolidated return. The information required by section 26. 04(2) (d) of this revenue procedure is required for each separate change for each member of the group.

(f) Certain eligibility rule inapplicable . The eligibility rule in section 5. 01(1)(f) of Rev. Proc. 2015-13 does not apply to a change under this section 26. 04.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 26. 04 is “240. ” (4) Contact information . For further information regarding a change under this section, contact Dan Phillips at (202) 3176995 (not a toll-free number).