[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.848-1]

[Page 757-760]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.848-1  Definitions and special provisions.

    (a) Scope and effective date. The definitions and special provisions 
in this section apply solely for purposes of determining specified 
policy acquisition expenses under section 848 of the Internal Revenue 
Code, this section, and Sec. Sec. 1.848-2 and 1.848-3. Unless otherwise 
specified, the rules of this section are effective for the taxable years 
of an insurance company beginning after November 14, 1991.
    (b) Specified insurance contract--(1) In general. A ``specified 
insurance contract'' is any life insurance contract, annuity contract, 
noncancellable or guaranteed renewable accident and health insurance 
contract, or combination contract. A reinsurance agreement that 
reinsures the risks under a specified insurance contract is treated in 
the same manner as the reinsured contract.
    (2) Exceptions--(i) In general. A ``specified insurance contract'' 
does not include any pension plan contract (as defined in section 
818(a)), flight insurance or similar contract, or qualified foreign 
contract (as defined in section 807(e)(4)).
    (ii) Reinsurance of qualified foreign contracts. The exception for 
qualified foreign contracts does not apply to reinsurance agreements 
that reinsure qualified foreign contracts.
    (c) Life insurance contract. A ``life insurance contract'' is any 
contract--
    (1) Issued after December 31, 1984, that qualifies as a life 
insurance contract under section 7702(a) (including an endowment 
contract as defined in 7702(h)); or
    (2) Issued prior to January 1, 1985, if the premiums on the contract 
are reported as life insurance premiums on the insurance company's 
annual statement (or could be reported as life insurance premiums if the 
company were required to file the annual statement for life and accident 
and health companies).
    (d) Annuity contract. An ``annuity contract'' is any contract (other 
than a life insurance contract as defined in paragraph (c) of this 
section) if amounts received under the contract are subject to the rules 
in section 72(b) or section 72(e) (determined without regard to section 
72(u)). The term ``annuity contract'' also includes a contract that is a 
qualified funding asset under section 130(d).
    (e) Noncancellable accident and health insurance contract. The term 
``noncancellable accident and health insurance contract'' has the same 
meaning for purposes of section 848 as the term has for purposes of 
section 816(b).
    (f) Guaranteed renewable accident and health insurance contract. The 
term ``guaranteed renewable accident and health insurance contract'' has 
the same meaning for purposes of section 848 as the term has for 
purposes of section 816(e).
    (g) Combination contract--(1) Definition. A ``combination contract'' 
is a contract (other than a contract described in section 848(e)(3)) 
that provides two or more types of insurance coverage, at least one of 
which if offered separately would be a life insurance contract, an 
annuity contract, or a noncancellable or guaranteed renewable accident 
and health insurance contract.
    (2) Treatment of premiums on a combination contract--(i) In general. 
If the premium allocable to each type of insurance coverage is 
separately stated on the insurance company's annual statement (or could 
be separately stated if the insurance company were required to file the 
annual statement for life and accident and health companies), the 
premium allocable to each type of insurance coverage in a combination 
contract is subject to the capitalization rate, if any, that would apply 
if that coverage was provided in a separate contract. If the premium 
allocable to each type of insurance coverage in a combination contract 
is not separately stated, the entire premium is subject to the highest 
capitalization percentage applicable to any of the coverages provided.

[[Page 758]]

    (ii) De minimis premiums. For purposes of this paragraph (g)(2)--
    (A) A de minimis premium is not required to be separately stated;
    (B) In determining the highest capitalization percentage applicable 
to a combination contract, the coverage to which a de minimis premium is 
allocable is disregarded;
    (C) If the separate statement requirement of this paragraph (g)(2) 
is satisfied, a de minimis premium is treated in accordance with its 
characterization on the insurance company's annual statement; and
    (D) Whether a premium for an insurance coverage is de minimis is 
determined by comparing that premium with the aggregate of the premiums 
for the combination contract. A premium that is not more than 2 percent 
of the premium for the entire contract is considered de minimis. Whether 
a premium that is more than 2 percent is de minimis is determined based 
on all the facts and circumstances.
    (3) Example. The principles of this paragraph (g) are illustrated by 
the following example.

    Example. A life insurance company (L1) issues a contract to an 
employer (X) which provides cancellable accident and health insurance 
coverage and group term life insurance coverage to X's employees. L1 
charges a premium of $1,000 for the contract, $950 of which is 
attributable to the cancellable accident and health insurance coverage 
and $50 of which is attributable to the group term life insurance 
coverage. On its annual statement, L1 reports the premiums attributable 
to the accident and health insurance coverage separately from the 
premiums attributable to the group term life insurance coverage. The 
contract issued by L1 is a combination contract as defined in paragraph 
(g)(1) of this section. Pursuant to paragraph (g)(2)(i) of this section, 
only the premiums attributable to the group term life insurance coverage 
($50) are subject to the provisions of section 848. The premiums 
attributable to the cancellable accident and health insurance coverage 
($950) are not subject to the provisions of section 848.

    (h) Group life insurance contract--(1) In general. A life insurance 
contract (as defined in paragraph (c) of this section) is group life 
insurance contract if--
    (i) The contract is a group life insurance contract under the 
applicable law;
    (ii) The coverage is provided under a master contract issued to the 
group policyholder, which may be a trust, trustee, or agent;
    (iii) The premiums on the contract are reported either as group life 
insurance premiums or credit life insurance premiums on the insurance 
company's annual statement (or could be reported as group life insurance 
premiums or credit life insurance premiums if the company were required 
to file the annual statement for life and accident and health 
companies);
    (iv) The group affiliation requirement of paragraph (h)(2) of this 
section is satisfied;
    (v) The premiums on the contract are determined on a group basis 
within the meaning of paragraph (h)(3) of this section; and
    (vi) The proceeds of the contract are not payable to or for the 
benefit of the insured's employer, an organization or association to 
which the insured belongs, or other similar person. (See paragraph 
(h)(7) of this section for special rules that apply in determining if 
this requirement is satisfied.)
    (2) Group affiliation requirement--(i) In general. The group 
affiliation requirement of section 848(e)(2)(A) and this paragraph 
(h)(2) is satisfied only if all of the individuals eligible for coverage 
under the contract constitute a group described in paragraphs (h)(2) 
(ii) through (viii) of this section.
    (ii) Employee group. An employee group consists of all of the 
employees (including statutory employees within the meaning of section 
3121(d)(3) and individuals who are treated as employed by a single 
employer under section 414 (b), (c), or (m)), or any class or classes 
thereof within the meaning of paragraph (h)(2)(x) of this section, of an 
employer. For this purpose, the term ``employee'' includes--
    (A) A retired or former employee;
    (B) The sole proprietor, if the employer is a sole proprietorship;
    (C) A partner of the partnership, if the employer is a partnership;
    (D) A director of the corporation, if the employer is a corporation; 
and
    (E) An elected or appointed official of the public body, if the 
employer is a public body.
    (iii) Debtor group. A debtor group consists of all of the debtors, 
or any class or classes thereof within the meaning

[[Page 759]]

of paragraph (h)(2)(x) of this section, of a creditor. For this purpose, 
the term ``debtor'' includes a borrower of money or purchaser or lessee 
of goods, services, or property for which payment is arranged through a 
credit transaction.
    (iv) Labor union group. A labor union group consists of all of the 
members, or any class or classes thereof within the meaning of paragraph 
(h)(2)(x) of this section, of a labor union or similar employee 
organization.
    (v) Association group. An association group consists of all of the 
members, or any class or classes thereof within the meaning of paragraph 
(h)(2)(x) of this section, of an association that, at the time the 
master contract is issued--
    (A) Is organized and maintained for purposes other than obtaining 
insurance;
    (B) Has been in active existence for at least two years (including, 
in the case of a merged or successor association, the years of active 
existence of any predecessor association); and
    (C) Has at least 100 members.
    (vi) Credit union group. A credit union group consists of all of the 
members or borrowers, or any class or classes thereof within the meaning 
of paragraph (h)(2)(x) of this section, of a credit union.
    (vii) Multiple group. A multiple group consists of two or more 
groups from any single category described in paragraphs (h)(2) (ii) 
through (vi) of this section. A multiple group may not include two or 
more groups from different categories described in paragraph (h)(2) (ii) 
through (vi) of this section.
    (viii) Certain discretionary groups. Provided that the contract 
otherwise satisfies the requirements of paragraph (h)(1) of this 
section, a contract issued to one of the following discretionary groups 
is treated as satisfying the group affiliation requirement of this 
paragraph (h)(2)--
    (A) A contract issued to a group consisting of students of one or 
more universities or other educational institutions;
    (B) A contract issued to a group consisting of members or former 
members of the U.S. Armed Forces;
    (C) A contract issued to a group of individuas for the payment of 
future funeral expenses; and
    (D) A contract issued to any other discretionary group as specified 
by the Commissioner in subsequent guidance published in the Internal 
Revenue Bulletin. (See Sec. 601.601(d)(2)(ii)(b) of this chapter.)
    (ix) Employees treated as members. In determining whether the group 
affiliation requirement of paragraph (h)(2) of this section is 
satisfied, the employees of a labor union, credit union, or association 
may be treated as members of a labor union group, a credit union group, 
or an association group, respectively.
    (x) Class or classes of a group determined without regard to 
individual health characteristics--(A) In general. A class or classes of 
a group described in paragraphs (h)(2) (ii) through (viii) of this 
section may be determined using any reasonable characteristics (for 
example, amount of insurance, location, or occupation) other than 
individual health characteristics. The employees of a single employer 
covered under a policy issued to a multi-employer trust are considered a 
class of a group described in paragraph (h)(2)(ii) of this section.
    (B) Limitation of coverage based on certain work and age 
requirements permissible. A limitation of coverage under a group 
contract to persons who are actively at work or of a pre-retirement age 
(for example, age 65 or younger) is not treated as based on individual 
health characteristics.
    (3) Premiums determined on a group basis--(i) In general. Premiums 
for a contract are determined on a group basis for purposes of section 
848(e)(2)(B) and this paragraph (h) only if the premium charged by the 
insurance company for each member of the group (or any class thereof) is 
determined on the basis of the same rates for the corresponding amount 
of coverage (for example, per $1,000 of insurance) or on the basis of 
rates which differ only because of the gender, smoking habits, or age of 
the member.
    (ii) Exception for substandard premium rates for certain high risk 
insureds. Any difference in premium rates is disregarded for purposes of 
this paragraph

[[Page 760]]

(h)(3) if the difference is charged for an individual who was accepted 
for coverage at a substandard rate prior to January 1, 1993.
    (iii) Flexible premium contracts. In the case of a group universal 
life insurance contract, the identical premium requirement is satisfied 
if the premium rates used by the insurance company in determining the 
periodic mortality charges applied to the policy account value of any 
member insured by the contract differ from those of other members 
(within the same class) only because of the gender, smoking habits, or 
age of the member.
    (iv) Determination of actual age. For purposes of this paragraph 
(h)(3), determinations of actual age may be made using any reasonable 
method, provided that this method is applied consistently for all 
members of the group.
    (4) Underwriting practices used by company. [Reserved]
    (5) Disqualification of group--(i) In general. Except as otherwise 
provided in this paragraph (h)(5), if the requirements of paragraphs 
(h)(1), (2), and (3) of this section are not satisfied with respect to 
one or more members of the group, or of a class within a group (within 
the meaning of paragraph (h)(2)(x) of this section), the premiums for 
the entire group (or class) are treated as individual life insurance 
premiums.
    (ii) Exception for de minimis failures. If the requirements of 
paragraphs (h) (1), (2), or (3) of this section are not satisfied with 
respect to one or more members of the group (or class), but the sum of 
the premiums charged by the insurance company for those individuals is 
no more than 5 percent of the aggregate premiums for the group (or 
class), only the premiums charged for those individuals are treated as 
premiums for an individual life insurance contract.
    (6) Supplemental life insurance coverage. For purposes of 
determining whether the requirement in paragraph (h)(3)(i) of this 
section is satisfied, any supplemental life insurance coverage 
(including optional coverage for members of the group, their spouses, or 
their dependent children) is (or is treated as) a separate contract. In 
determining whether the group affiliation requirement of paragraph 
(h)(2) of this section is satisfied for the supplemental coverage, a 
member's spouse and dependent children are treated as members of the 
group if they are eligible for coverage.
    (7) Special rules relating to the payment of proceeds. The following 
rules apply for purposes of section 848(e)(2) and paragraph (h)(1)(vi) 
of this section.
    (i) Contracts issued to a welfare benefit fund. If a contract issued 
to a welfare benefit fund (as defined in section 419) provides for 
payment of proceeds to the welfare benefit fund, the proceeds of the 
contract are not considered payable to or for the benefit of the 
insured's employer, an organization or association to which the insured 
belongs, or other similar person, provided the proceeds are paid as 
benefits to the employee or the employee's beneficiary.
    (ii) Credit life insurance contracts. If a credit life insurance 
contract provides for payment of proceeds to the insured's creditor, the 
proceeds of the contract are not treated as payable to or for the 
benefit of the insured's employer, an organization or association to 
which the insured belongs, or other similar person, provided the 
proceeds are applied against an outstanding indebtedness of the insured.
    (iii) ``Organization or association'' limited to the sponsor of the 
contract or the group policyholder. The term ``organization or 
association'' means the organization or association that is either the 
sponsor of the contract or the group policyholder.
    (i) General deductions. The term ``general deductions'' is defined 
in section 848(c)(2). An insurance company determines its general 
deductions for the taxable year without regard to amounts capitalized or 
amortized under section 848(a). The amount of a company's general 
deductions is also determined without regard to the rules of Sec. 
1.848-2(f), which apply only for purposes of determining net 
consideration for reinsurance agreements.

[T.D. 8456, 57 FR 61819, Dec. 29, 1992; 58 FR 9245, Feb. 19, 1993]

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