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

by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the reserves 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 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). increased by the amount of any appreciation in value, and decreased by the amount of any depreciation in value, in accordance with the method regularly employed by such company, if such method is reasonable, and in all other cases, in accordance with regulations prescribed by the Secretary. which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company, provides for the payment of annuities, is a life insurance contract, or provides for funding of insurance on retired lives as described in section 807(c)(6), and in the case of an annuity contract, the amounts paid in, or the amount paid out, reflect the investment return and the market value of the segregated asset account, in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of the segregated asset account, or in the case of funds held under a contract described in paragraph (2)(C), the amounts paid in, or the amounts paid out, reflect the investment return and the market value of the segregated asset account. A pension plan contract which is not a life, accident, 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). For purposes of subsection (b)(1)(A) of section 816, the reflection of the investment return and the market value of the segregated asset account shall be considered an assumed rate of interest. Under regulations prescribed by the Secretary, such additional separate computations shall be made, with respect to the items separately accounted for in accordance with subsection (c), as may be necessary to carry out the purposes of this section and this part. recognized mortality tables, and the investment experience of a segregated asset account, or the company-wide investment experience of the company. For purposes of subchapter L, section 72 (relating to annuities), and section 7702(a) (relating 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 annuity, 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 prescribed by the Secretary, adequately diversified. it meets the requirements of section 851(b)(3), and no more than 55 percent of the value of the total assets of the account are assets described in section 851(b)(3)(A)(i). To the extent that any segregated asset account 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). insurance companies (or affiliated companies) in their general account or in segregated asset accounts, or fund managers (or affiliated companies) in connection with the creation or management of the regulated investment company or trust, Nothing in this subsection shall be construed as prohibiting the use of independent investment advisors. In determining whether a segregated asset account is adequately diversified for purposes of paragraph (1), each United States Government agency or instrumentality shall be treated as a separate issuer. to contracts issued after December 31, 1986 , and to contracts issued before January 1, 1987 , if such contract was treated as a variable contract on the taxpayer’s return.” such contract provides for the payment of an immediate annuity (as defined in section 72(u)(4) of the 1986 Code), such contract was outstanding on September 12, 1986 , and 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.” 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 Secretary’s delegate) shall amend the regulation issued by the Department of the Treasury relating to ‘Income Tax; Diversification Requirements for Variable Annuity, Endowment, and Life Insurance Contracts’, 54 Fed. Reg. 8728 ( March 2, 1989 ), and make any necessary corresponding amendments to other regulations, in order to facilitate the use of exchange-traded funds as investment 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. The Secretary 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-traded fund shall not be prevented by reason of beneficial interests in such a fund being held by 1 or more authorized participants or market makers. that is registered with the Securities and Exchange Commission as an open-end investment company or a unit investment trust; the shares of which can be purchased or redeemed directly from the fund only by an authorized participant; and 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. 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 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). 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. 78 o (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 financial institution is contractually or legally precluded from selling or buying such shares to or from persons who are not authorized participants or otherwise described in Treas. Reg. section 1.817–5(f) (2) and (3). This section shall apply to segregated asset account investments made on or after the date which is 7 years after the date of the enactment of this Act.”