A new federal tax ruling could change the way some life insurers account for "qualified additional benefits" and force some to make $50,000 in extra tax payments.[@@]
The Internal Revenue Service has published a ruling, Revenue Ruling 2005-6, that deals with the implications of Internal Revenue Code section 7702(c)(3)(B)(i), which deals with treatment mortality charge revenue, and section 7702(c)(3)(B)(ii), which deals with treatment of expense charge revenue, on taxation of revenue from qualified additional benefits, such as extra insurance riders sold along with life insurance policies.
Insurers should use the expense charge rule when calculating taxes for revenue from from qualified additional benefits, Melissa Luxner, an IRS financial institutions specialist, writes in the revenue ruling 2005-6.
Insurers that have accounted for QAB revenue incorrectly but withheld the correct amount of taxes can update their compliance systems without contacting the IRS.
Insurers that have accounted for QAB revenue incorrectly in ways that have cut policyholders' tax bills may have to make payments ranging from $1,500 for companies with fewer than 20 or fewer affected contracts to $50,000 for companies with more than 10,000 affected contracts.
The insurer payments will be "in lieu of an amount based on the tax and interest that would have been owed by the policyholders if they were treated as receiving the income on the contract," Luxner writes in the revenue ruling.
