May 2014


Proposed Revisions to the Risk-Based Capital Definition of Eligible Guarantee for Advanced Approaches Banks

On May 1, the OCC, FRB and FDIC issued a notice of proposed rulemaking (NPR) that would revise the advanced approaches risk-based capital rules by removing the requirement that only guarantees provided by certain counterparties are eligible for recognition as credit risk mitigants.

The NPR would modify the definition of “eligible guarantee” for purposes of the advanced approaches rules by removing the requirement that an eligible guarantee be provided by an “eligible guarantor” for all exposures other than securitization exposures.

The proposed rule does not affect the standardized approach risk-based capital rules, which retain the “eligible guarantor” definition.

The comment period for the proposed rule ends on June 13, 2014.



IRS Revenue Ruling 2014-15

On May 8, the IRS released Revenue Ruling 2014-15.  The revenue ruling provides guidance to employers funding their retiree health benefits through a wholly owned subsidiary.  The ruling describes the following arrangement:

  • A corporation provides certain health benefits to a large group of named retired employees and their dependents (but is not legally obligated to do so and may cancel the coverage at any time).
  • The corporation maintains a single-employer VEBA and makes a contribution to it to provide the health benefits.
  • The VEBA enters into a contract with an unrelated insurance company providing noncancellable accident and health coverage. The insurance company will issue quarterly reimbursements to the VEBA for medical claims that are incurred by the covered participants.
  • The insurance company then reinsures 100% of the liabilities to a wholly owned subsidiary of the corporation.

The ruling considers whether the arrangement described constitutes “insurance” for federal income tax purposes and concludes affirmatively.  The ruling finds that it is the participants’ (i.e., the retirees and their dependents) risk that is being indemnified (i.e., the risk of incurring medical expenses during retirement due to accident and health contingencies).  This finding is based on the fact that the employer and VEBA are under no obligation to continue providing the benefits.  Therefore, the wholly owned subsidiary is treated as an insurance company for tax purposes.

Please note that our recap of this item provides a high-level overview, but the actual Revenue Ruling should be reviewed closely for all applicable factual distinctions.



NAIC Separate Account Risk Working Group – Update

On May 7, the NAIC’s Separate Account Risk (E) Working Group (SARWG) released an updated exposure document with recommendations for non-variable separate account products (which include “hybrid” BOLI).

Principles that appear to be garnering support of the working group include (among others):

  • For assets to be considered insulated, the contract must contain provisions to that effect.
  • Insulated assets should derive only from funds contributed by customers (plus earnings and less any withdrawals/fees).  As such, to the extent funds are derived from additional guarantees from the carrier, they would not be considered insulated.
  • In order for such products to be sold by the carrier, a qualified actuary must provide initial and ongoing certification that the general account is being adequately compensated for any guarantees it is providing.

The actual exposure draft is available upon request and is currently posted to the working group’s website.  Comments on the recommendations are due by June 6.