The United States Treasury recently instituted a Temporary Guarantee Program For Money Market Funds to provide cash from the Exchange Stabilization Funds to money markets that are regulated by the Securities Exchange Commission (SEC). In short, the temporary guarantee program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. The guarantee will be triggered if a participating fund's net asset value falls below $0.995 (i.e. "breaking the buck")
There has been some concern that participation in the program might raise tax problems for money market funds that are within variable annuity or variable life insurance contracts. IRS Notice 2008-92 alleviates those concerns where issuers had investments that may have been at risk of default during the current credit crunch.
The concern centered on the provisions of IRC 817(h) which provides that a variable life insurance or annuity contract that is based on a segregated asset account is not treated as a life insurance or annuity contract for any period (and any subsequent period) for which the investments of the account are not “adequately diversified.” Failure to meet the diversification requirements will result in the owners of the contracts being taxed directly on the inside build-up under the contract, which otherwise would be deferred or eliminated.
With respect to diversification, each agency or instrumentality is treated as a separate issuer. The test may be satisfied for variable life contracts by investing in a security issued by the United States Treasury. This does not however apply where variable annuities are concerned.
Notice 2008-92 informs practitioners that the Treasury Department and the IRS WILL NOT assert that participation in the Program by an Insurance-Dedicated Money Market Fund causes a violation of the diversification requirements in the case of a segregated asset account that invests in the Insurance-Dedicated Money Market Fund. In addition, the Treasury Department and the IRS WILL NOT assert that such a fund’s participation in the Program causes the holder of a variable contract supported by a segregated asset account that invests in the fund to be treated as an owner of the fund.
Click here for the full text of IRS Notice 2008-92
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