Indexed structured-settlement annuity qualified under Section 130

Plain-English summary

A structured-settlement assignment company proposed buying an indexed annuity from a related life insurer to fund periodic payments for a physically injured claimant. The contract guarantees a minimum payment and may increase—but never decrease—the eventual payment amount during a deferral period under an objective formula tied to positive S&P 500 performance and limited by a cap. Once the deferral period ends, the payment amount becomes permanent; the claimant cannot accelerate, defer, increase, or decrease it. The IRS ruled that the payment amounts and times are fixed and determinable under Section 130(c)(2)(A), notwithstanding the formula-based potential increases. It also ruled that the contract does not fail to be a qualified funding asset under Section 130(d) solely because of those increases. The ruling did not determine whether the claimant's damages were excludable under Section 104(a)(2).

Ruling snapshot

• Question: Are the indexed annuity payments fixed and determinable for a qualified assignment, and can the contract be a qualified funding asset despite formula-based increases?
• Outcome: approved
• Key authorities: IRC §§ 104(a)(2), 130(a), 130(c), 130(d)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202416002
 Release Date: 4/19/2024
 Index Number: 130.00-00, 130.01-00,                            Person To Contact:

               130.02-00                                        ---------------------------, ID No. ---------------
                                                                -----------------
                                                                Telephone Number:
 ------------------------------                                 --------------------
 --------------------------                                     Refer Reply To:
 ------------------------------------------------------------   CC:ITA:B05
 ----------------                                               PLR-109799-23
 -----------------------                                        Date:
 -------------------------------------                          November 01, 2023




TY:

Legend

Carrier                                      =        ---------------------------------------------------------------
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                                                      --------------------------
Assignment Company                           =        ---------------------------------------------------------------
                                             ----------------
                                             --------------------------
Parent Company                               =        ---------------------------------------------------------------
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State X                                      =        ----------------
State Y                                      =        -------------
Claimant                                     =        -------------------------------------------------
Date A                                       =        ---------------------------
$a                                           =        -------------
Fee                                          =        -------
x percent                                    =        --------------
Date B                                       =        -------------------
Date C                                       =        ----------------

Dear -----------------:

This is in response to your request for two private letter rulings submitted on behalf of
Carrier and Assignment Company by your authorized representative on Date B, as
PLR-109799-23                                2

supplemented by a submission on Date C. The ruling requests involve the federal
income tax treatment of an indexed annuity contract (the "Contract") that will be issued
in connection with a structured settlement transaction involving Carrier and Assignment
Company (the "Proposed Transaction"). Specifically, you have requesting rulings that
(1) the periodic payments that will be made under the Contract are "fixed and
determinable as to amount and time of payment" within the meaning of § 130(c)(2)(A) of
the Internal Revenue Code (“Code”), even though the dollar amount of the payments
may increase (but never decrease) from an initially-determined amount based on an
objective formula that references a well-known market index, and (2) the Contract will
not fail to be a "qualified funding asset" within the meaning of § 130(d) solely by reason
of the potential increase in the periodic payments as described herein.

FACTS

Carrier is a stock life insurance company organized and operated under the laws of the
State X. Carrier is licensed to engage in the life insurance business in the state in
which Claimant resides. Carrier qualifies as a life insurance company under § 816(a) of
the Code.

Assignment Company is a corporation domiciled in State X. Assignment Company
conducts a business of assuming liabilities from third-party defendants to make periodic
payments to third-party claimants pursuant to structured settlement agreements
between such parties involving claims for personal injury or sickness.

Carrier and Assignment Company are subsidiaries of Parent Company, which is a
holding company organized and operated under the laws of State X. Parent Company
files a consolidated federal income tax return with various subsidiaries, including
Assignment Company and Carrier.

Assignment Company assumes liabilities from third-party defendants to make periodic
payments to third-party claimants pursuant to structured settlement agreements
between such parties. In connection with that business, Assignment Company
purchases annuity contracts from Carrier as "qualified funding assets" to support
Assignment Company's obligations to make periodic payments to third-party claimants.
Carrier, Assignment Company and Parent Company are hereinafter referred to as “the
Companies.”

As explained below, before a Contract is issued the Claimant must select the duration of
the Index Term, the duration of the Deferral Period, and the duration of the Payout
Period, all of which also will be reflected in the terms of the Settlement Agreement so
that it will align with the terms of the Contract as issued. The Claimant is a resident of
State Y. Claimant was involved in an automobile accident when the defendant hit
Claimant's vehicle. Claimant sustained severe injuries to her back and nerves. The
defendant admitted liability, so summary judgment will be granted, and a trial is pending
to address only the final amount of damages for Claimant's physical injuries.
PLR-109799-23                                         3


Claimant anticipates applying approximately $a of her eventual damage award to the
structured settlement as part of the proposed transaction in this ruling request.
Claimant anticipates selecting a one-year Index Term (as explained below), a 5-year
Deferral Period (as explained below), and a 25-year Payout Period (as explained
below). Claimant has indicated that these selections will allow for the payout to
commence near the start of her retirement age and, in the meantime, will give her
access to positive returns of the S&P 500 Index while protecting her from downside
market risk during the Deferral Period. Claimant has indicated that these selections will
meet her needs.

Accordingly, Claimant and the defendant will enter into a structured settlement
agreement ("Settlement Agreement"). The Settlement Agreement will obligate the
defendant to make periodic payments to Claimant. The periodic payments will be
excludable from Claimant's gross income pursuant to § 104(a)(1) or (2) of the Code.
The Settlement Agreement will provide that the periodic payments must be determined
as described in the Contract, discussed below.

Pursuant to the Settlement Agreement, the defendant will assign its payment liabilities
thereunder to Assignment Company and will pay Assignment Company a lump sum for
accepting the assignment. Assignment Company will deduct Fee from the lump sum
and retain that fee as compensation for providing services in the transaction.
Assignment Company will use 100% of the remaining portion of the lump sum
(hereinafter, the "Net Single Premium") to purchase a single premium indexed
structured settlement annuity certificate that is issued under a group annuity contract 1
(“the Contract”) from Carrier as a qualified funding asset.

The group annuity contract will set forth the general terms under which Assignment
Company can purchase annuities from Carrier with respect to different claimants in the
course of Assignment Company's structured settlement business. For each such
annuity that Assignment Company purchases under the group contract, Carrier will
issue a "certificate" to Assignment Company that sets forth the details relating to that
annuity and that particular claimant. The Contract that is the subject of this request for

1
  Group annuity contracts often are used in circumstances where an entity plans to purchase multiple
annuities with respect to different annuitants. The group contract is issued to the entity and sets forth the
general terms under which the entity can purchase such annuities. For each annuity that the entity
purchases under the group contract with respect to a different annuitant, the annuity provider issues a
certificate that sets for the specific terms that apply to that annuity, such as the name, age, and gender of
the annuitant, the duration of the payments, the dollar amount of the payments and when they will be
paid, the details of any amounts that may be payable upon the annuitant’s death, and other rights and
obligations of the parties. Using a group annuity and certificates in these circumstances, rather than the
entity purchasing a separate individual annuity contract with respect to each annuitant, streamlines the
process of purchasing multiple annuities over time and covering different annuitants, but does not
otherwise affect the rights of any of the parties once a certificate is issued. Also, for federal income tax
purposes each annuity certificate issued in this manner is treated as a separate annuity contract.
PLR-109799-23                                 4

rulings will be such a certificate and will set forth the details of the payments to be made
to support Assignment Company's payment obligations with respect to the Settlement
Agreement involving Claimant. In other words, the "Contract" consists of the group
annuity and the particular certificate thereunder relating to the Claimant.

The Contract will provide for periodic payments in fixed, scheduled dollar amounts that
will commence on a specified future date, such as 10 years from the date the Contract
is funded (the "First Payment Date"), with the possibility that the amount of those
payments may increase (but not decrease) before the First Payment Date. The
potential increase in the dollar amount of the payments will be based on an objective
formula that reflects the positive performance (if any) of the S&P 500 Index during the
period of time between the date the Contract is issued (the "Contract Date") and the end
of the period for which payments are deferred (the "Deferral Period").

On the Contract Date, Carrier will specify the dollar amount of the "Minimum
Guaranteed Annuity Payments" that are guaranteed to commence on the First Payment
Date. Carrier will determine the dollar amount of the Minimum Guaranteed Annuity
Payments by multiplying the Net Single Premium (described above) that Assignment
Company paid for the Contract by a "Payout Rate" specified in the Contract. The
Minimum Guaranteed Annuity Payments that will commence on the First Payment Date
will never decrease, but they may increase as a result of positive index performance
during the Deferral Period.

For this purpose, the Contract will provide an "Accumulation Amount" to which the
Assignment Company will credit compound interest throughout the Deferral Period. The
interest credits will be determined using a formula set forth in the Contract that reflects
the positive performance (if any) of the S&P 500 Index, subject to a specified cap. If the
index has a return of 0% or less for a specified period, no interest will be credited during
that period and the Accumulation Amount will remain unchanged. Thus, during the
Deferral Period, the Contract will provide the Claimant access to equity-based returns
while shielding the Claimant from any potential negative market performance. This
protected access to equity-based returns will give the Claimant a better chance of
maximizing their periodic payments while still protecting the Claimant from market risk.

At the end of the Deferral Period, Carrier will use the Accumulation Amount to re-
calculate the dollar amount of the periodic payments that will commence on the First
Payment Date. This will be done by multiplying the Accumulation Amount as of the end
of the Deferral Period (reflecting any interest credited during that period) by the Payout
Rate specified in the Contract. The effect of this calculation is that the periodic
payments will be higher than the originally-determined Minimum Guaranteed Annuity
Payments to the extent that any interest was credited to the Accumulation Amount
during the Deferral Period. In this sense, as each dollar amount of interest is credited to
the Accumulation Amount, it "locks in" a future increase in the periodic payments that
will commence on the First Payment Date.
PLR-109799-23                                         5

The steps for determining the Accumulation Amount during the Deferral Period are set
forth as follows. The initial Accumulation Amount will equal the Net Single Premium
(described above) that Assignment Company paid for the Contract. Carrier guarantees
that this initial Accumulation Amount will never decrease during the Deferral Period.
Carrier will credit compound interest to the Accumulation Amount during the Deferral
Period pursuant to a formula specified in the Contract. The formula will reference the
change in value of the S&P 500 Index (excluding any dividends) over a series of
specified "Index Terms." Index Terms are simply periods of time over which the return
of the S&P 500 Index will be measured, and any interest credits will be determined
based on those measurements.

As part of the Settlement Agreement the Claimant will choose an Index Term of one
year, two years, five years, or some other period of years that Carrier permits. The
Claimant's choice of the duration of the Index Term will be reflected in the Contract and
will not change once the Contract is issued. For example, if the Claimant chooses a
one-year Index Term, the performance of the S&P 500 Index will be measured every
year under the Contract, whereas if the Claimant chooses a two-year Index Term, the
performance will be measured every two years, and likewise for the other available
Index Term durations.

At the end of each Index Term, Carrier will credit interest to the Accumulation Amount
based on the positive performance, if any, of the S&P 500 Index during that Index Term,
subject to an upward limit known as the "Cap Rate." The Cap Rate may change from
Index Term to Index Term. Carrier will specify the Cap Rate at the beginning of each
Index Term. If the rate of return on the S&P 500 Index at the end of an Index Term is
0% or less, no interest will be credited to the Accumulation Amount for that Index Term.
If the rate of return on the index is positive but less than the Cap Rate, interest will be
credited at the same rate of return as the index. If the rate of return on the index equals
or exceeds the Cap Rate, interest will be credited at a rate equal to the Cap Rate.

For example, assume that the Index Term is one year and that Carrier specifies a Cap
Rate of 8% for that Index Term. At the end of the Index Term: (i) If the S&P 500 Index
incurred a 10% loss during the prior year, no interest will be credited and the
Accumulation Amount will remain unchanged; (ii) If the index had a return of 4% during
the prior year, which is a positive return but less than the Cap Rate, interest will be
credited to the Accumulation Amount at a rate of 4% because that rate is less than the
Cap Rate; or (iii) If the index had a return of 10% during the prior year, which is a
positive return that is greater than the Cap Rate, interest will be credited to the
Accumulation Amount at the Cap Rate of 8%. At the end of each Index Term, a new
Index Term of the same duration will begin and the calculations described above will be
made again at the end of that Index Term. 2

2
  After the initial Index Term, each subsequent Index Term will be the same duration as the immediately
preceding Index Term, except if that duration would extend past the Deferral Period, the final Index Term
will be shortened to a one-year duration (or a series of one-year durations) that will coincide with the end
of the Deferral Period.
PLR-109799-23                                      6


Thus, in the example above involving an Index Term of one year, the calculations would
be made annually. If the Index Term were two years, five years, or some other duration
instead of one year, the same mechanics would apply, except that the determinations
would be made every two years, five years, etc.

The rate of interest to be credited to the Accumulation Amount at the end of each Index
Term will be multiplied by the Accumulation Amount that existed on the last day of the
immediately preceding Index Term. In other words, the formula reflects a compound
interest calculation; interest will be credited on all prior interest.

Following the Deferral Period is the “Payout Period,” which begins on the "First Payment
Date." During the Payout Period, the Contract will provide for periodic payments in
scheduled installments for the duration specified in the Contract and the Settlement
Agreement. Depending on the payment duration that the Claimant ultimately selects in
the Settlement Agreement, the duration could be the Claimant's entire life (a "life
annuity"), the joint lives of the Claimant and a joint annuitant (a "joint life annuity"), a
specified period of years (a "period certain"), or a life annuity or joint life annuity with a
period certain.

The periodic payments that will commence on the First Payment Date will be paid in
specified dollar amounts. The dollar amount of each periodic payment will at least
equal the Minimum Guaranteed Annuity Payment amounts that were determined when
the Contract was issued, as previously discussed. However, the dollar amount of each
periodic payment may be adjusted upward to the extent that any interest was credited to
the Accumulation Amount during the Deferral Period.

In that regard, the dollar amount of the periodic payments that will commence on the
First Payment Date will be determined by multiplying the final Accumulation Amount as
of the end of the Deferral Period by the Payout Rate specified in the Contract. The
Payout Rate will be set on the Contract Date and will not change for the duration of the
Contract. The Payout Rate will reflect commercially reasonable actuarial assumptions
with respect to interest, expense, mortality, and the payout duration. 3

As a result of this calculation, if the Accumulation Amount at the end of the Deferral
Period exceeds the Net Single Premium that Assignment Company paid for the
Contract, the dollar amount of the periodic payments will be higher than the Minimum
Guaranteed Annuity Payments that Carrier originally determined when the Contract was
issued. In this sense, each dollar of interest that is credited to the Accumulation


3
 The Payout Rate is calculated to produce an annual dollar amount of periodic payments. If the annuity
payments will be made more frequently than annually, the annual payment amount determined using the
Payout Rate will be divided by the number of payments to be made each year. Thus, if payments will be
made monthly, the annual payment amount determined using the Payout Rate will be divided by 12.
PLR-109799-23                                  7

Amount "locks in" an increase in the periodic payments that will commence on the First
Payment Date. Once the dollar amount of the payments is determined at the end of the
Deferral Period, the payment amounts will be permanently set and will not be subject to
any further adjustment for index performance.

The Contract provides for certain payments if the Claimant dies before all the periodic
payments under the Contract have been paid. If the Claimant dies during the Deferral
Period, a specified percentage (currently x percent) of the Accumulation Amount will be
paid to the Claimant's beneficiary(ies) in a lump sum. If the Claimant dies during the
Payout Period, the remaining periodic payments, if any, will continue as scheduled and
will be paid to the Claimant's beneficiary(ies). Alternatively, the Contract can be issued
with a feature that, if elected at time of settlement, provides a lump sum payment in lieu
of the remaining periodic payments. In such case, the lump sum will be equal to a
specified percentage (currently x percent) of the cost of a new annuity contract that
would provide the remaining scheduled periodic payments, computed using Carrier's
annuity rates in effect on or about the date of the lump sum payment for new annuity
contracts that are issued for the same or similar type of business as the Contract.

In support of its contractual liabilities under the Contract, Carrier expects to purchase,
hold, and sell various fixed income assets (such as Treasury securities) and derivatives
(such as options and swaps). Carrier generally intends to use the fixed income assets
to support all its obligations under the Contract, and particularly its contractual liabilities
involving the Minimum Guaranteed Annuity Payments under the Contract and the
periodic payments that are locked in at the end of the Deferral Period. Carrier generally
intends to use the derivatives it purchases to help support its contractual liabilities to
credit interest to the Accumulation Amount during the Deferral Period based on the
positive performance of the S&P 500 Index, subject to the Cap Rate. This investment
approach of using primarily fixed income assets combined with some strategic hedging
instruments is used almost universally by life insurance companies that issue annuity
contracts and other products that provide returns based on a referenced market index
while also guaranteeing the purchaser's principal.

This investment approach also dictates the Cap Rate that Carrier will declare at the
beginning of each Index Term during the Deferral Period. Prior to each Index Term,
Carrier will purchase certain types of derivatives that reference the S&P 500 Index to
hedge Carrier's obligations to credit interest during that Index Term based on the
positive performance of the index. The availability and cost of those derivatives at the
time that Carrier purchases them will factor into the Cap Rate that Carrier declares for
the Index Term. Very generally, the higher the cost of the derivatives that Carrier needs
to purchase to hedge its liabilities, the lower the Cap Rate, and vice versa. However,
the Cap Rate will never be lower than a guaranteed minimum rate required by state law.

Carrier will manage these investments in a way that attempts to at least equal the
Accumulation Amount under the Contract and all similar contracts that Carrier has
issued. Carrier's actual asset holdings, however, will not necessarily be the same as
PLR-109799-23                                8

the assets comprising the S&P 500 Index that is used in the formula from which the
Accumulation Amount derives.

Irrespective of the return that Carrier achieves through its actual investments, Carrier's
obligations with respect to the Contract are based entirely on the objective formula set
forth in the Contract. If Carrier's investments perform worse than the formula-based
returns it has guaranteed under the Contract, Carrier bears the burden of the loss and
must make it up by crediting additional amounts to the Contract from its surplus or other
investments. If Carrier's investments perform better than the formula-based returns it
has guaranteed under the Contract, Carrier will keep the excess. This is inherent in any
insurance business.

Carrier is subject to stringent regulatory standards under the law of State X, its
domiciliary state. Those insurance regulations are designed primarily to ensure that life
insurance companies like Carrier remain solvent and able to satisfy their claims
obligations, many of which are very long-term in nature. Pursuant to state regulation,
Carrier is required to maintain assets sufficient to satisfy stringent capital and surplus
requirements and to invest those assets in accordance with prescribed rules that further
protect the company's claims-paying ability. Carrier's obligations under the Contract will
be supported by its general asset account and overall claims-paying ability.

The Companies make the following representations with respect to §§ 130(c) and (d) in
addition to the facts discussed above:

        1. The Contract will be treated as an annuity contract under applicable state law.
        2. Assignment Company will assume a liability to make periodic payments as
         damages on account of personal injury or sickness (in a case involving
         physical injury or physical sickness) from a person who is a party to the
         Settlement Agreement.
        3. Claimant will be unable to accelerate, defer, increase, or decrease the
         periodic payments paid under the Contract or the Settlement Agreement.
        4. Assignment Company's obligation to Claimant will be no greater than the
         defendant's obligation under the Settlement Agreement.
        5. The periodic payments under the Settlement Agreement will be excludable
         from Claimant's gross income under § 104(a)(1) or (2) of the Code.
        6. The Contract will be issued by Carrier to fund the periodic payments to
         Claimant pursuant to an assignment of a liability to make periodic payments
         as damages on account of personal injury or sickness (in a case involving
         physical injury or physical sickness).
        7. The Settlement Agreement will provide that the dollar amount of each periodic
         payment must be determined as described in the Contract.
        8. Assignment Company will designate the Contract as being taken into account
         under § 130 of the Code with respect to the assignment of liability.
PLR-109799-23                                9

        9. Assignment Company will purchase the Contract from Carrier not more than
          60 days before or after the date of the assignment of liability to make periodic
          payments.

REQUESTED RULINGS

The Companies request rulings that (1) the periodic payments that will be made under
the Contract are "fixed and determinable as to amount and time of payment" within the
meaning of § 130(c)(2)(A) of the Code, even though the dollar amount of the payments
may increase (but never decrease) from the initially-determined Minimum Guaranteed
Annuity Payments based on an objective formula that references a well-known market
index; and (2) the Contract will not fail to be a "qualified funding asset" within the
meaning of § 130(d) solely by reason of the potential increase in the periodic payments.

LAW AND ANALYSIS

Section 104(a)(2) of the Code generally excludes from gross income the amount of any
damages received (whether by suit or agreement and whether as lump sums or as
periodic payments) on account of a personal physical injury or physical sickness.

Section 130(a) of the Code provides that the any amount an assignee receives for
agreeing to a qualified assignment is not included in gross income to the extent that
such amount does not exceed the aggregate cost of any qualified funding assets.

Section 130(c) of the Code defines a “qualified assignment” as any assignment of
liability to make periodic payments as damages (whether by suit or agreement) on
account of personal injury or sickness (in a case involving physical injury or sickness)
provided that, among other conditions: such periodic payments are fixed and
determinable as to the time and amount of payment.

Section 130(d) of the Code provides the requirements an annuity must meet to qualify
as a “qualified funding asset,” including the requirements that (1) such annuity contract
or obligation is used by the assignee to fund periodic payments under any qualified
assignment; (2) the periods of the payments under the annuity contract or obligation are
reasonably related to the periodic payments under the qualified assignment; and (3) the
amount of any such payment under the contract or obligation does not exceed the
periodic payment to which it relates.

Periodic payments can be fixed and determinable as to the amount and time of payment
even if the payments are calculated pursuant to a formula based on the performance of
an index and/or a mutual fund portfolio designed to achieve long term growth of capital
and moderate current income. Under the facts of this case, the amount and time of the
periodic payments as determined in accordance with the methodology set forth in the
Contract and surrounding facts depends on the performance of the S&P 500 Index,
which is an objective basis for computing the amount of the periodic payments.
PLR-109799-23                                  10

We therefore conclude that for purposes § 130(c)(2)(A), the periodic payments are
“fixed and determinable” as to the amount and time of payment.

Accordingly, the Contract will not fail to be a "qualified funding asset" within the meaning
of § 130(d) solely by reason of the potential increase in the periodic payments.

RULINGS

Accordingly, based strictly on the information submitted and the representations made,
our office concludes:

    1. The periodic payments that Claimant will receive under the Contract are fixed
      and determinable as to amount and time of payment within the meaning of
      § 130(c)(2)(A) even though they are calculated pursuant to which the dollar
      amounts of the payments may increase (but never decrease) from an initially-
      determined amount based on an objective formula that references the S&P 500
      Index. In addition, the other requirements of § 130(c) of the Code have also
      been met.
    2. The Contract will not fail to be a "qualified funding asset" within the meaning of
      § 130(d) solely by reason of the potential increase in the periodic payments.


CAVEATS:

Except as expressly provided in rulings 1 and 2 above, no opinion is expressed or
implied concerning the tax consequences of any aspect of any transaction or item
discussed or referenced in this letter. Specifically, no ruling on the taxability of the
damages awarded to Claimant has been requested, and therefore no ruling is being
issued, under § 104(a)(2) or any other provision of the Code to Claimant in this rulings
letter. This ruling is directed only to the Companies requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by the Companies and accompanied by a penalty of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

This ruling is directed only to the taxpayer requesting it (the Companies). Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-109799-23                                             11

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                                               Sincerely,



                                                               Kyle C. Griffin
                                                               Senior Counsel, Branch 5
                                                               Office of Associate Chief Counsel
                                                               (Income Tax & Accounting)



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