§808 Policyholder dividends deduction

Summary

Insurers may deduct from their taxable income the policyholder dividends they pay or set aside in a tax year. A "policyholder dividend" means any dividend or similar payment to a policyholder for being a policyholder. It includes amounts that are not fixed in the contract but depend on the company's results or management choice, "excess interest" (extra interest paid to a policyholder above the prevailing State assumed rate), "premium adjustments" (reductions in the contract premium that otherwise would have been paid), and "experience‑rated refunds" (refunds or credits based on the contract’s or group’s experience). Dividends that raise cash surrender value or cut required premiums are counted as policyholder dividends. If a company changes business practices so that dividends are accelerated into an earlier year, the deduction for that year must be reduced by the part of the accelerated deduction that does not exceed the "1984 fresh-start adjustment for policyholder dividends." The "year of change" is the taxable year when the change takes effect. The "accelerated policyholder dividends deduction" is the amount that would have been deductible later under the old practices but is deductible sooner because of the change. The "1984 fresh-start adjustment" means amounts held as reserves for dividends as of December 31, 1983, except dividends that accrued before January 1, 1984, reduced to account for previously nondeductible dividends (as determined under section 809(f) as in effect the day before the Tax Reform Act of 1984). These rules apply separately by line of business, do not apply to a mere change in dividend amounts, do not apply to policies issued after December 31, 1983 (except certain exchanges treated as issued before January 1, 1984), and do not apply to group welfare‑benefit policies under section 419(e)(2). The "prevailing State assumed interest rate" is the highest interest rate allowed for reserve calculations under the insurance laws of at least 26 States, determined at the start of the calendar year the contract was issued (ignoring nonforfeiture law effects).