INTEREST RATE USED IN COMPUTING TAX RESERVES FOR LIFE INSURANCE COMPANIES MAY NOT BE LESS THAN APPLICABLE FEDERAL RATE.

SEC. 10241. INTEREST RATE USED IN COMPUTING TAX RESERVES FOR LIFE INSURANCE COMPANIES MAY NOT BE LESS THAN APPLICABLE FEDERAL RATE. (a) In General.— Subparagraph (B) of section 807(d)(2) (relating to method of computing reserves for purposes of determining income) is amended to read as follows: “(B) the greater of— “(i) the applicable Federal interest rate, or “(ii) the prevailing State assumed interest rate, and”. (b) Applicable Federal Interest Rate.— (1) In general.— Paragraph (4) of section 807(d) (defining State assumed interest rate) is amended to read as follows: “(4) Applicable federal interest rate; prevailing state assumed interest rate.— For purposes of this subsection— “(A) Applicable federal interest rate — “(i) In general.— Except as provided in clause (ii), the term ‘applicable Federal interest rate’ means the annual rate determined by the Secretary under section 846(c)(2) for the calendar year in which the contract was issued. “(ii) Election to recompute federal interest rate every 5 years.— “(I) In general.— In computing the amount of the reserve with respect to any contract to which an election under this clause applies for periods during any recomputation period, the applicable Federal interest rate shall be the annual rate determined by the Secretary under section 846(c)(2) for the 1st year of such period. No change in the applicable Federal interest rate shall be made under the preceding sentence unless such change would equal or exceed 14 of 1 percentage point. “(II) Recomputation period.— For purposes of subclause (I), the term ‘recomputation period’ means, with respect to any contract, the 5 calendar year period beginning with the 5th calendar year beginning after the calendar year in which the contract was issued (and each subsequent 5 calendar year period). “(III) Election.— An election under this clause shall apply to all contracts issued during the calendar year for which the election was made or during any subsequent calendar year unless such election is revoked with the consent of the Secretary. 101 STAT. 1330–420 “(IV) Spread not available.— Subsection (f) shall not apply to any adjustment required under this clause. “(B) Prevailing state assumed interest rate.— “(i) In general.— The term ‘prevailing State assumed interest rate’ means, with respect to any contract, the highest assumed interest rate permitted to be used in computing life insurance reserves for insurance contracts or annuity contracts (as the case may be) under the insurance laws of at least 26 States. For purposes of the preceding sentence, the effect of nonforfeiture laws of a State on interest rates for reserves shall not be taken into account. “(ii) When rate determined.— The prevailing State assumed interest rate with respect to any contract shall be determined as of the beginning of the calendar year in which the contract was issued.’ (2) Technical amendments.— (A) The third to the last sentence of section 807(c) is amended by striking out “the higher of and all that follows and inserting in lieu thereof “whichever of the following rates is the highest as of the time such obligation first did not involve life, accident, or health contingencies: the applicable Federal interest rate under subsection (d)(2)(B)(i), the prevailing State assumed interest rate under subsection (d)(2)(B)(ii), or the rate of interest assumed by the company in determining the guaranteed benefit.” (B) Paragraph (2) of section 812(b) is amended— (i) by striking out “at the prevailing State assumed rate or, where such rate is not used, another appropriate rate” and inserting in lieu thereof “at the greater of the prevailing State assumed rate or the applicable Federal interest rate”, and (ii) by adding at the end thereof the following new sentence: “In any case where the prevailing State assumed rate is not used, another appropriate rate shall be treated as the prevailing State assumed rate for purposes of subparagraph (A).” (c) Effective Date.— The amendments made by this section shall apply to contracts issued in taxable years beginning after December 31, 1987.