IRS Clarifies Annuity Investment Diversification Requirements

August 21, 2007 ( - Federal tax officials on Tuesday issued Revenue Ruling 2007-58 to supplement their 2004 pronouncement on the arrangements to be accepted as a "qualified pension or retirement plan" for annuity investment diversification purposes.

According to the latest Internal Revenue Service (IRS) release, segregated asset accounts on which a variable annuity or life insurance contract is based must be adequately diversified for the variable contract to be treated as an annuity under § 72 of the U.S. Tax Code or as a life insurance contract under § 7702.

Tuesday’s IRS document said Section 817(h) (4) and § 1.817-5(f) indicate that in certain cases diversification may be satisfied under a “look-through” rule. One of the requirements for applying the look-through rule under § 1.817-5(f) (2) (i) is that all of the beneficial interests in a regulated investment company, partnership or trust be held by one or more insurance companies, according to the IRS.

To determine whether this requirement is satisfied, § 1.817-5(f) (3) (iii) provides that beneficial interests held by the trustee of a “qualified pension or retirement plan” are disregarded.

In addition to the nine arrangements identified in the 1994 IRS ruling to use as part of a § 1.817-5(f)(3)(iii) determination, the term “qualified pension or retirement plan” now includes five additional arrangements described in Tuesday’s release, according to the tax agency.

The new IRS pronouncement is  here .