Section 72(s) and PARs
Recent post approval review (PAR) letters from both the legal and actuarial side have raised a number of issues related to 72(s). This is surprising since tax counsel certifications were originally proposed as a way to avoid NYSID attorneys wading into these waters.
Those companies that have received PARs know they often raise issues that were thought resolved long ago. One such example is the effect of spousal continuation of the annuity contract.
The NYSID has recently objected in a PAR to the characterization of post-continuation requests for withdrawals as surrenders. Rather the actuary stated that they are more appropriately treated as death benefit claims even after the election period has expired. The actuary's analysis seems to be that since the spousal beneficiary could have elected payment of the death benefit at one time, s/he should have access to the "death benefit" for all time, even as s/he "continues" the contract including possible additional premium payments, accumulation at interest and other contractual rights.
Not only does this new position run contrary to provisions in annuity contracts with spousal continuation approved over the last decade, it raises a whole set of additional issues, legal, actuarial and administrative for companies. Annuity contracts that are "continued" would probably have to be tracked differently because at least some (only up to the death benefit once available? what about interest or separate account performance on that death benefit? what about new contributions? what would be the implication of a partial withdrawal?) withdrawals would have to be surrender charge free. Over a long period and many of these contracts, how could this be done? Is this really what the IRS means by continuation?
This is one of many issues that you may have thought clearly established, but which could pop up on your company's next post approval review.
