The document summarizes key changes in the final FATCA regulations that impact insurance companies. Four changes stand out: 1) A new de minimis rule excludes insurance contracts with cash values under $50,000 from being considered financial accounts; 2) Insurance definitions were simplified; 3) Changes to the definition of cash value insurance contracts add exemptions to reduce contracts treated as financial accounts; 4) Insurance companies paying death benefits are no longer required to obtain beneficiary documentation unless they know the beneficiary is a US person. These changes reduce the number of insurance products and customers impacted by FATCA requirements.

1. February 2013
FATCA insurance alert
Final FATCA regulations
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In the final FATCA regulations, the US Treasury and the Internal Revenue Service (IRS)
adopted a significant number of changes that impact insurance companies. Many of
these comeintoeffect on1 January 2014. Of the changes, four stand out as having the
greatest impact across all segmentsofthe insurance industry:
• A new de minimis rule to exclude from the definition of a financial account any
insurance contract, other than an annuity, with cash value of less than US$50,000 at
all times during the year
• Insurance-related definitions were simplified to replace most references to US
tax law with plain language descriptions and, where appropriate, references to
local law treatment
• Changes to the definition of cash value insurance contracts to add additional
exemptions to reduce the number of insurance contracts treated as financial accounts
• Insurance companies paying death benefits are no longer required to obtain
documentation on a beneficiary (other than the owner), unless the insurance company
has actual knowledge or reason to know that the beneficiary is a US person

2. Background These four changes, along
On 17 January 2013, the US Treasury and the IRS with a number of other
released the long-awaited final regulations under the
Foreign Account Tax Compliance Act (FATCA), changes, are summarized
provisions of Sections 1471–1474 (also referred to as
the “chapter 4” provisions) of the Hiring Incentives to in the following discussion:
Restore Employment (HIRE) Act (P.L. 111-147). (See
Tax alert 2010-467.) The final regulations reflect
comments received from a number of financial Key changes
institutions, including insurance companies, trade
organizations, foreign governments and other Changes in scope
stakeholders, regarding the proposed regulations, With some notable exceptions, the FATCA regulations have been
which were published in the Federal Register on modified to introduce new de minimis thresholds and narrow the
15 February 2012. The final regulations are in excess types of insurance contracts and business activities of insurance
of 540 pages and incorporate many of the provisions companies that are in scope, all of which will reduce the number
reflected in the intergovernmental agreements of companies, accounts and customers impacted by FATCA.
(IGAs) that have been signed by the US and foreign
Certain insurance and annuity accounts are no longer
governments on FATCA compliance. (See Tax alerts
considered financial accounts subject to FATCA due diligence,
2010-1164, 2011-662, 2011-1185, 2012-310 and
reporting and withholding:
Insurance alert CK0507.)
• Cash value insurance contracts with a value of less than
The final regulations attempt to limit the institutions,
US$50,000 at any time during the calendar year. As a result,
obligations and accounts subject to FATCA to more
most property and casualty, disability, accident and health,
specifically target high-risk financial accounts
and other non-cash value insurance that contains contractual
and address practical operational considerations.
features, such as return of premium, should fall outside the
To address the many comments they received, the
definition of a financial account. This de minimis threshold
Treasury and the IRS established three avenues for
should also cause many cash value insurance products in
addressing the principal concerns regarding costs
emerging markets and offerings in lower cash value insurance
and burdens associated with implementing FATCA
lines of business to be out of scope.
and the legal impediments to compliance in a number
of jurisdictions: • Indemnity reinsurance agreements are now specifically
excluded from the definition of a financial account under FATCA.
• Adopted a risk-based approach to implementing
the statute to address policy considerations • Certain immediate annuities that monetize retirement or
effectively and eliminate unnecessary burdens pension accounts using non-investment linked, non-transferable
immediate life annuities are no longer considered financial
• Collaborated with foreign governments to develop
accounts subject to FATCA.
IGAs that remove legal impediments
• Term life insurance contracts with increasing premiums are
• Developed administrative approaches to simplify
no longer financial accounts if coverage ends before age 90,
the process for registering and entering into an
premiums do not decrease over time and there is no cash value
agreement with the IRS to minimize costs associated
payable without terminating the contract. It appears this new
with compliance
definition should resolve the issue regarding non-forfeiture
This alert provides an executive summary of key benefits on level premium term life insurance contracts.
provisions in the final regulations that apply The definition of retirement and pension accounts has been
specifically to insurance companies. The final modified so that more foreign plans and products are eligible for the
regulations contain numerous rules that have broad exclusion from FATCA, although the reporting requirements for
application to all financial institutions and many of pension plans have been broadened. In many cases, retirement
these provisions are discussed in Tax Alert 2013-165. and pension accounts will be excluded via Annex II of IGAs.
In the coming weeks, we will publish alerts to provide
more in-depth explanation of the broader rules Insurance companies that have elected to be treated as a US
applicable to all financial institutions, with specific insurance company for federal income tax purposes under
focus on the rules directed at insurance companies Section 953(d), are considered foreign financial institutions
and their products. (FFIs) unless they are licensed to do business in the US. Since
most Section 953(d) companies are not licensed in the US, this
2

3. provision will treat them as a foreign insurance company for cancelation or withdrawal or that can be borrowed under or with
FATCA reporting purposes, even though they file a US income tax regard to the contract. Cash value is a key factor in determining
return. However, Section 953(d) companies, along with other if an insurance contract is to be treated as a cash value insurance
FFIs, may elect to report FATCA information in a manner similar contract under FATCA. The exclusions from cash value were
to a US withholding agent using IRS Form 1099-R. modified to specifically exclude a death benefit payable under a life
insurance contract, a refund of previously paid premiums due to
Life insurance contracts purchased by a transferee for value
termination of the contract and a return of an advance premium or
will be treated as financial accounts subject to FATCA.
premium deposit when the premium is payable at least annually if
A “local FFI” exemption is now available to insurance the amount held does not exceed the next annual premium payable
companies. The deemed-compliant rules have been expanded under the contract. However, policyholder dividends for term life
to allow insurers to qualify as local FFIs and FFIs with only insurance contracts are no longer excluded.
low-value accounts. There are significant restrictions on the use
These changes should go a long way in helping insurance
of this deemed-compliant status, including a requirement that all
companies exclude a number of insurance contracts (other than
members of the expanded affiliate group do not have a place of
annuity contracts), which are otherwise considered cash value
business outside of a single country (other than administrative
products, from treatment as a financial account. Under the
activities). It is not likely this will be of use to large insurance
proposed regulation rules, in many cases, these contracts met
groups, but it may provide limited market advantage to small,
the “technical definition” of cash value and were considered
local or web-based competitors. However, these entities will still
financial accounts. This modification is welcome.
be required to perform a number of FATCA activities.
The depository account definition has been refined to include
Changes in definitions certain typesof accounts offered by life insurance companies such as
a guaranteed investment contract or similar agreements to pay
FATCA definitions impacting insurance companies have been or credit interest on amounts held with the company. Under the
simplified and clarified, making the regulations easier to proposed regulations, any amount held at interest by
understand. That being said, the definitions still leave room a life insurance company was considered a depository account.
for interpretation and judgment, and may prove difficult to In addition, a new exception is provided to remove advance
implement consistently for global organizations. premiums or premium deposit funds from the definition of a
The definitions of “life insurance contracts,” “annuity contracts” depository account. These changes should help to reduce the
and “insurance companies” have been simplified and are now number of accounts held by life insurance companies that may
based on plain-language definitions with references to local law, be classified as a depository account and, thus, reduce the
when appropriate, instead of by reference to US tax law. This number of financial accounts.
should ease the understanding of FATCA for those with less The various rules relating to the aggregation of financial accounts in
understanding of US tax laws. Chapter 4 have now been coordinated to provide that, when
New definitions are provided for “group annuity contract,” “group aggregation is required, it applies to all financial accounts held
insurance contract,” “immediate annuity,” “deferred annuity,” by the FFI and any other member of the expanded affiliated
“investment-linked annuity contract,” “investment-linked group. However, this is only to the extent that computerized
insurance contract,” “life annuity contract” and, in some cases, systems link the accounts by reference to a data element such as
clarify the treatment of these contracts as financial accounts. a client number, EIN or foreign tax identifying number, and allow
the account balances to be aggregated. It is helpful that the same
The cash value definition is modified to mean any amount that is standard is now applied whenever aggregation is required to help
payable under a contract to a person upon surrender, termination, ease the administrative burden of applying these rules.
FATCA insurance alert 3

4. Aggregation is also required for accounts that a relationship
manager knows are directly or indirectly owned or controlled by
the same person or that the relationship manager has associated
with each other by an indicator, or for other business purposes.
Further, if the company chooses to treat the accounts of an account
holder as one obligation (i.e., as consolidated obligations) in order
to share information between them or to permit the treatment of
new accounts of pre-existing account holders as pre- existing
accounts, these accounts must also be aggregated. See also, the
discussion of the treatment of new accounts of pre- existing
account holders on p5.
The investment entity definition was broadened to include
asset managers and investment advisors. The broadening of
the definition of investment entities means that asset managers
and any entity that invests funds for customers will be FFIs. Other
provisions in the final regulations allow asset managers that
manage funds of various sorts to be “sponsoring entities” and to
register with the IRS to take on the participating foreign financial
institutions (PFFIs) responsibilities for these funds. The funds are
then sponsored entities. This approach is consistent with how asset
management companies actually operate and could reduce their
compliance burden.
The grandfathered life insurance and annuity contracts
definition for purposes of exclusion from FATCA withholding
has been broadened to include all life insurance contracts (and
payment on those contracts) payable no later than the death
of the insured and existing immediate annuity contracts that
are payable for a certain period or the life of the annuitant.
This provision applies to contracts outstanding prior to
1 January 2014 and should allow for the grandfathering of
most life insurance and immediate annuities.
4

5. Account holder due diligence and reporting of The definition of who is the holder of a financial account is
financial accounts expanded, requiring documentation of additional individuals
The final regulations provide greater clarity on the obligations in some cases. Insurance or annuity contracts treated as
and required documentation for account holder due diligence, financial accounts are considered held by each person who
while reducing due diligence for certain types of accounts and can access the contract value (loan, withdrawal or surrender)
updating FATCA documentation and reporting deadlines. or change the beneficiary. If no person can access the contract
value or change a beneficiary, then the account is treated as
Documentation of life insurance beneficiaries is reduced. held by both the person named in the contract as the owner
An individual beneficiary receiving a benefit under a cash and each beneficiary. When the obligation to pay an amount
value life insurance contract, other than the owner, is presumed under the contract becomes fixed, each person entitled to
to be a foreign person unless US indicia are present, or the payment is treated as a holder of the account.
company knows or has other reason to know the individual
is a US person. Thus, most beneficiaries will not require due
diligence or documentation. This new provision applies only Election to report in manner similar to US life
to policies issued by FFIs. Under the proposed regulations, a insurance companies
beneficiary receiving death benefits is an account holder of FFIs may elect to report their insurance and annuity contracts in a
a financial account. However, due to this presumption, the FFI manner similar to the reporting that US life insurance companies
is not required to document the beneficiary unless it knows or follow for domestic contracts. This election may allow some life
has reason to know that the beneficiary is a US person. insurance companies to use systems and procedures already in
place at US-affiliated companies and centralize some of the
Certain group life insurance and group annuity contracts will
compliance process.
not require documentation until the payment to individual
participants. Group accounts will be treated as non-US Treating new accounts as pre-existing accounts allows for limited
accounts until the date on which an amount is payable to an additional documentation. “Consolidated accounts” is a new option
employee or certificate holder or beneficiary, if the insurer that FFIs can elect to apply for treating new contracts related to
obtains a certification from an employer that no employee or existing customers as pre-existing contracts. In order to qualify,
certificate holder is a US person. The group must cover 25 the contracts must meet certain aggregation and reason- to-know
or more employees or certificate holders, all contract values rules with regard to the new contract and any pre-existing
contracts.
must be payable to employees or certificate holders and the
employees or certificate holders must be entitled to name The valuation date for insurance and annuity contracts is the
beneficiaries for the death benefits payable and the aggregate year-end or most recent anniversary date, depending upon how
amount payable to any employee or certificate holder or the company reports information to its account holders. For
beneficiary cannot exceed US$1m. immediate annuities without a minimum benefit and the value
of which is not reported to the account holders, the value to
Grandfathering of policies is extended to 1 January 2014
be reported is the net present value, with adjustments using
and grandfathered accounts below a de minimis threshold
assumptions to be provided by the IRS.
will not require documentation. An FFI is not required to
perform identification and documentation procedures for cash Form 8966 FATCA is the new form the IRS will release for FFIs
value insurance or annuity contracts with a cash value less to report information regarding their financial accounts.
than US$250,000 and which was in effect as of
1 January 2014 (pre-existing contracts) for individual or entity
accounts. The exception for each contract will cease at the end
of any subsequent calendar year in which the account balance
or value exceeds US$1m. Certain aggregation rules may apply
in determining the balance or value.
FATCA insurance alert 5

6. Withholding and withholdable payments? identified as withholdable payments. (Treasury noted in the
Key aspects of withholding have been deferred, and in preamble that it did not find the application of Section 4371
conjunction with IGA agreements, fewer transactions are excise tax a compelling argument to exclude premium
expected to be subject to withholding. Withholding for cash payments from FATCA.) This means that many US insurance
value life insurance and annuities has been simplified to treat all companies that do not issue cash value insurance or annuity
payments as withholdable, regardless of their US tax treatment. contracts that are treated as financial accounts are likely still to
The scope of withholdable payments has been refined have some obligations to apply the withholdable payment
to include insurance and reinsurance premium payments rules to transactions with foreign counterparties, brokers
and the definition of non-financial payments, which are and reinsurers.
excluded from the withholdable payment.
Gross proceeds withholding has been deferred to 2017.
Gross proceeds from the sale of securities that produce interest
or dividends are treated as withholdable payments; however,
the requirement for withholding has now been delayed until
at least 2017.
Any distribution (including redemption) made to an account
holder with respect to a cash value life insurance or annuity
contract must be reported as a withholdable payment,
regardless of its US tax treatment. In other words, death benefit
payments, policyholder dividends, etc., must be treated as
withholdable payments even though they may not be taxable
income to the recipient.
The grandfathered obligations definition has been expanded
to include life insurance contracts in effect on 1 January 2014,
which are payable no later than upon death of the insurance,
including endowment benefits and immediate annuities for
life. These modifications should exempt a large percentage
of existing life insurance and immediate annuities currently
in force from future withholding under FATCA; however, the
contracts are still subject to the identification and reporting
requirements highlighted above. Moreover, a premium paid
with respect to a grandfathered obligation is treated as
a payment made under a grandfathered obligation and is
therefore grandfathered.
The withholdable payments definition has been refined to
identify what are excluded non-financial payments and what are
included payments. It is thought that “included payments”
must have a US source to be considered withholdable, but
this is not completely clear from the final regulations. Insurance
premiums and reinsurance premiums on all contracts and
amounts paid under cash value insurance and annuity
contracts (presumably if otherwise US source) are specifically
6

7. Implications and final
observations
The final FATCA regulations contain many important
and helpful changes that should allow insurance
companies to simplify their documentation and
implementation processes; however, even with these
changes, the FATCA rules are complex and there are
still many unanswered questions. FATCA will impact the
information gathered from clients and distribution
channels and require changes to client onboarding and
monitoring processes in all geographies. As companies
move forward with their compliance efforts, care should
be taken to understand and comprehend fully the
numerous provisions of the final regulations and
how they impact specific insurance products and
insurance companies. The results are not always
intuitive or logical.
“The complexity will carry over to the insurance
company’s communications plan to employees, agents
and brokers to train them on the administrative and
systems changes required by FATCA and the impact to
policyholders.” This complexity is now more real than
ever. While we now have the final regulations, the
complex and time-consuming tasks of implementing
the necessary changes, mitigating the impact on
customers and complying with FATCA in a practical
and efficient manner are still ahead. The FATCA
statute and the new final regulations are complex and
will require ongoing analysis to understand and
mitigate the impacts on customers, business activities
and operational costs.
We will be issuing additional guidance in the coming
weeks to provide a more in-depth discussion of these
new provisions, as well as analysis of the operational
implications of these changes on the insurance industry.
In the meantime, we encourage you to reach out to
your Ernst & Young advisor for further information.
FATCA insurance alert 7

8. Ernst & Young
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