Monthly LRA Update: July 2026

TAX DEVELOPMENTS

Treasury Issues Final Regulations Regarding Transfer for Value Rules Involving 1035 Exchanges

On July 9 the IRS and Treasury issued final regulations providing guidance on the application of the transfer for valuable consideration rules and associated information reporting requirements for reportable policy sales of interests in life insurance contracts to exchanges of life insurance contracts qualifying for nonrecognition of gain or loss. The final regulations also impact certain acquisitions of interests in life insurance contracts in transactions that qualify as corporate reorganizations.

The final regulations are largely consistent with the previously proposed regulations released in 2023. In particular, the final regulations confirm that policies that are issued in accordance with section 1035 exchanges are not treated as a transfer of an interest in a life insurance contract. The preamble to the final regulations also confirms that these rules do not alter or affect the applicability of state law (see excerpt below with emphasis added).

Regardless of whether a contract is issued in a section 1035 exchange, it must be described in section 7702(a) to be considered a life insurance contract under section 101. Section 7702(a) requires, among other things, that a contract be a “life insurance contract under the applicable law,” State or foreign law, as applicable. The 2023 proposed regulations under sections 101 and 6050Y address the consequences under sections 101 and 6050Y in cases in which a life insurance contract is issued in a section 1035 exchange. The 2023 proposed regulations do not affect the application of other Code sections, including, for instance, sections 1035 and 7702. The 2023 proposed regulations, consequently, do not affect the determination of whether a contract issued in a purported section 1035 exchange qualifies as a life insurance contract under section 7702(a) for purposes of the Code or whether an exchange of contracts qualifies as a section 1035 exchange. The same is true of the final regulations.

The IRS also noted that the final regulations do not alter conclusions set forth in Rev. Ruling 2011-9, which, among other things, establishes the position that a 1035 exchange of a contract covering a former employee triggers a pro rata interest expense disallowance under IRC Section 264(f).

The final regulations are immediately effective and, consistent with the 2023 proposal, have retroactive applicability to any transactions occurring after December 31, 2018.

De Minimis Exception for Ordinary Course Mergers and Acquisitions

The 2023 proposed regulations provided an exception from the definition of a “reportable policy sale” for direct acquisitions of interests in life insurance contracts from a C corporation by a C corporation if:

(1) the acquisition results from a transaction that qualifies as a reorganization under section 368(a);

(2) immediately before the acquisition,

(i) the interest is held by a C corporation that conducts an active trade or business within the meaning of § 1.367(a)-2(d)(2) and (3),

(ii) the C corporation does not engage in a trade or business of investing in interests in life insurance contracts, and (iii) no more than 5 percent of the gross value of the assets of the C corporation consists of life insurance contracts; and

(3) immediately after the acquisition,

(i) the acquiring C corporation does not engage in a trade or business of investing in interests in life insurance contracts, and

(ii) not more than 5 percent of the gross value of the assets of the C corporation consists of life insurance contracts.

A small number of commenters urged the IRS to expand the relief provided under this premise, including to forms of transactions not subject to section 368(a) and to entities other than C corporations, among others. The IRS ultimately chose not to expand the relief. However, the IRS and Treasury indicated that they would continue to consider the possibility of proposing a rule broader than the one set forth in the 2023 proposed regulations.

JUDICIAL DEVELOPMENTS

Court Provides Preliminary Approval of Class Action Settlement in NQDC Plan Termination Case

On July 2 a proposed class action settlement in the matter of Hoak v. Plan Administrator of Plans of NCR Corp. received preliminary approval in Georgia’s Northern District court. The controversy stemmed from NCR’s decision to pay out lump sum benefits to participants of five terminated NQDC plans. Plaintiffs alleged that the action was a breach of contract given that the plans provided that termination was permitted as long as “no such action … adversely affect[ed]” the “accrued benefits” of “any” participant.

NCR tried to contend that the lump sum pay outs were actuarially equivalent to the accrued benefits. However, the plan documents did not set forth any such provision to compute actuarially equivalent benefits.

Groom Law Group published a report on this development including some important lessons for employers offering these types of plans. Key lessons include:

• A caution that purely complying with 409A plan termination rules is not sufficient to prevent litigation – NQDC plans are treated as unilateral contracts and any ambiguities are interpreted against the drafter (i.e., the sponsor);
• Employers should take care to remain within the four corners of the plan document for ordinary plan terminations and should be especially careful in making decisions following a Change in Control;
• It is permissible to offer lump sums that participants and beneficiaries can accept on a voluntary basis; however, a plan sponsor cannot control who accepts or rejects such an offer.

Case Citation: 1:15cv3983, Hoak Et Al V. Ledford Et Al (GA-N.D.)