IRS releases simplified method change for insurers' reserves

Aug 12, 2019
Aug 12, 2019
0 min. read

On Aug. 5, 2019, the IRS issued Revenue Procedure 2019-34, providing guidance on method changes made to comply with sections 807 and 848. Taxpayers accounting for reserves under sections 807 and 848 may use simplified methods for automatic changes as provided under Rev. Proc. 2019-34.

Rev. Proc. 2019-34 offers method changes for three changes resulting from Pub. L. No. 115-97 (commonly referred to as the Tax Cuts and Jobs Act, or TCJA):

  1. Life insurance reserve method changes
  2. Section 807(c)(3) method changes
  3. Capitalization of specified policy acquisition expenses method changes

Audit protection does not apply for life insurance reserve method changes, but applies for the other two changes described in Rev. Proc. 2019-34. Taxpayers may change their methods of accounting under the revenue procedure without filing a Form 3115. As described below, the process and time for recognizing the adjustments to income or expense are different for each of the three changes.


TCJA amended sections 807 and 848, changing the way insurers account for reserves.

TCJA changed the method of computation for life insurance reserves under section 807(d) for tax years beginning after Dec. 31, 2017. Transition rules provided that for the first taxable year, beginning after Dec. 31, 2017, the reserve for any contract at the end of the preceding taxable year is determined as though the new rules had applied in the preceding year. TCJA provided another transition relief rule requiring an insurance company to take into account the difference between the amount of life insurance reserves using the new TCJA rules, and the amount of the reserves using the method prior to TCJA. That difference is the “TCJA Transition Adjustment.” The TCJA Transition Adjustment is determined on a contract-by-contract basis, with a positive adjustment if the amount of the reserve calculated under the pre-TCJA method exceeds the amount of the post-TCJA rules, and negative adjustment if post-TCJA exceeds pre-TCJA. The TCJA Transition Adjustment must be taken into account ratably over each of the eight taxable years following that preceding taxable year under sections 803(a)(2) or 832(b)(1)(C), as applicable, if income, and under sections 805(a)(2) or 832(c)(4), as applicable, if a deduction.

Section 807(c) describes items that life insurance companies are required to account for on a reserve basis, and amounts discounted at a particular rate of interest necessary to satisfy the obligations under insurance and annuity contracts for certain obligations, to the extent less than the net surrender value of the contract. For tax years beginning after Dec. 31, 2017, TCJA amended section 807(c) to set the appropriate rate of interest to discount the amounts in section 807(c)(3) at the highest rate(s) permitted by the National Association of Insurance Commissioners as of the date the reserve is determined.

Section 848 generally requires specified policy acquisition expenses to be capitalized and amortized over a defined period, with such expenses calculated as a certain percentage of net premiums on specified insurance contracts for the taxable year. For tax years beginning after Dec. 31, 2017, TCJA changed the general amortization period 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 Jan. 1, 2018, will continue to be amortized ratably over the 120 month period.

Changing methods to comply with the new rules

Rev. Proc. 2019-34 specifies that changes to comply with the new rules in sections 807 and 848, introduced by TCJA, implicate the timing of inclusions of items into income or expense, and thus represent changes of methods of accounting.

Rev. Proc. 2019-34 provides simplified procedures an insurance company may follow to obtain consent to change its methods of: (i) computing life insurance reserves to comply with amendments to section 807, (ii) computing amounts under section 807(c)(3) to comply with amendments to section 807, and (iii) capitalizing and amortizing specified policy acquisition expenses to comply with amendments to section 848.

For all three types of method changes, Rev. Proc. 2019-34 limits its scope to insurance companies making the changes to comply with TCJA in their first taxable year beginning after Dec. 31, 2017.

Rev. Proc. 2019-34 waives the limitations in section 5 of Rev. Proc. 2015-13, so insurance companies may use the procedures of Rev. Proc. 2019-34, even if the insurance company is in the final year of the trade or business, or is engaged in a liquidation or reorganization transaction to which section 381 applies.

The implementation of the new methods varies by type of change. For life insurance reserve method changes, the section 481(a) adjustment is the sum of the TCJA Transition Adjustments and is recognized over eight taxable years. For a section 807(c)(3) method change, the section 481(a) adjustment is the difference between the amounts calculated under section 807(c) using pre-TCJA and post-TCJA appropriate rates of interest. The section 481(a) adjustment for such changes is recognized over one year or four years for negative or positive adjustments, respectively. Alternatively, such taxpayers may take a positive section 481(a) adjustment into account entirely in the year of change. Capitalization of specified policy acquisition expenses method changes must be made on a cut-off method.

Taxpayers need not file Form 3115, but must comply with the rules of Rev. Proc. 2019-34 and 2015-13, as applicable.


Insurance companies now have guidance and simplified methods to implement changes required by TCJA. The good news is the changes can be made without the expense of preparing and filing Form 3115. However, it is critical for taxpayers to follow the rules set forth in Rev. Proc. 2019-34, which vary depending on which change is being implemented.

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