The Week Washington Reopened One Tax Deferral Rulebook and Promised to Tidy Another

For most of 2026 the loudest story about private placement life insurance was a hostile one: a Senate bill in April, a Wall Street Journal headline in August about a "Roth IRA on steroids." Then, in the last three days of September, two documents came out of Washington that nobody put on a front page. Neither mentions PPLI. Read together, they show a government tightening its grip on one set of tax-deferral strategies while planning to make the rules for life insurance easier to administer. That is not a promise of protection, and this article does not read it as one. It is a direction of travel, and it is worth knowing.

On September 28 the IRS published Notice 2026-62, a warning to certain "tax-aware" investment funds, some of which compete with a life insurance policy for the same client. It says future guidance may identify those strategies as "listed transactions" and may apply "retroactively." On September 29 the Treasury Department published its 2026-2027 Priority Guidance Plan, the annual list of what it intends to write, and under the heading "Deregulation and Burden Reduction" added something new: a project to update the procedures an insurer uses to fix a policy that has tripped one of the tests that make it life insurance for tax purposes. The procedures in force today date from June 2008, and this is the first time since then that an update has appeared on the plan.

The item reads, in full: "Guidance to update the procedures for the correction of inadvertent failures to comply with §§101(f), 817(h), 7702, and 7702A." Those four sections are the whole rulebook for a private placement policy. Section 7702 defines a life insurance contract. Section 7702A decides whether a policy is a modified endowment contract. Section 817(h) requires the separate account behind a variable policy to be diversified. Section 101(f) is the older test for flexible premium contracts issued before 1985.

There is a third document, and it points the other way: on September 30, Tax Notes reported that IRS compliance staff had privately recommended a new reporting requirement for private separate accounts and the possible revocation of two favourable rulings. Neither recommendation appears in the official plan, which says nothing about why. And on November 3, voters decide who will hold the gavel of the Senate Finance Committee, where the April bill has sat since the day it was introduced. This article takes the four dates one at a time, with the text in front of us rather than the headlines.

What Treasury actually listed on September 29

The Priority Guidance Plan is the annual statement of which regulations, rulings and procedures the Treasury Office of Tax Policy and the IRS intend to work on. It carries no deadlines; the cover letter says so. Starting this year the plan year runs with the federal fiscal year, from October 1, 2026 to September 30, 2027, and the plan is updated during the year as projects are published or added. Being listed means the project is a stated priority for staff time. It does not mean guidance is imminent, and some listed projects roll over for years.

Two items touch variable life insurance directly. Item 7, quoted above, is the new one. We checked it against the 2025-2026 plan, published on September 30, 2025 with 105 projects, and the 2023-2024 plan: neither carried a correction-procedures item, and we found none in the plans between 2008 and now. Item 25 is a carry-over: "Regulations under §817 to facilitate the use of exchange-traded funds as investment options under variable contracts." It was item 22 last year, and it implements section 203 of the SECURE 2.0 Act of December 2022.

Neither item names the revenue procedures it would replace, and neither mentions private placement policies. But the people who track this corner of the Code knew it was coming. On May 29, Bloomberg Tax reported that Megan McGuire, an attorney in the IRS Office of Chief Counsel, told the Federal Bar Association's insurance tax seminar that the IRS was considering updates to its closing agreement guidance for failed life insurance contracts, and named Revenue Procedure 2008-40 and Revenue Procedure 2008-39 as the ones under review. Four months later the project was on the official list.

Why the 2008 procedures need rewriting

In June 2008 the IRS released a set of five revenue procedures that, taken together, told insurers how to confess and cure a failed contract. Revenue Procedure 2008-39 covers inadvertent modified endowment contracts. Revenue Procedure 2008-40 covers contracts that failed the section 7702 definition of life insurance or the section 101(f) test. Revenue Procedure 2008-41 covers separate accounts that failed the section 817(h) diversification test, replacing a procedure from 1992. Revenue Procedure 2008-42 gives an automatic waiver for certain reasonable errors under section 7702(f)(8): no ruling request and no closing agreement, though the insurer still files a waiver statement with the IRS, attaches a statement to its tax return, and refunds the excess premium with interest or raises the death benefit. Revenue Procedure 2008-38 deals with a narrower problem involving qualified additional benefits.

The closing agreement procedures share one architecture: the issuer applies, pays a "toll charge" meant to approximate the tax the policyholder would have owed on the earnings that escaped, and fixes the contract. The timing differs. Under 2008-39 and 2008-40 the correction is due within 90 days of the agreement; under 2008-41 the account must be brought back into compliance within a reasonable time after the failure is discovered, and the payment is due 60 days after the IRS signs. For eighteen years practitioners have lived with three problems in that design, all of them visible in the text.

The first is the toll charge arithmetic. The amount is not calculated on what the policy actually earned. Revenue Procedure 2008-39 sets out proxy earnings rates: for a general account contract, half the Moody's Aaa yield and half the Baa yield; for a variable contract, 10 percent of that general account rate plus 90 percent of a separate account rate built from 75 percent of the S&P 500 total return less 1.5 points and 25 percent of the "Merrill Lynch U.S. Corporate Master Index" less 1.0 point, with a further 1.1 points taken off. That index has carried a different name since Bank of America absorbed Merrill Lynch. The tax rate applied to the proxy earnings, which the procedure calls the "applicable percentage," is 15, 28 or 36 percent depending on the death benefit, a bracket schedule that predates the 2017 tax law.

The second is cost and scale. The user fee for a closing agreement under the 2026 schedule in Revenue Procedure 2026-1 is $43,700, against $11,500 when the procedures were written. Revenue Procedure 2008-41 caps the alternative diversification toll at the lesser of $5 million or 5 percent of the account's assets, which sounds generous until a look-through fund loses its status: the actuaries who dissected the procedure in 2009 calculated that such a failure could expose roughly 45 percent of the account, so the cap "always" binds and the alternative is no alternative. The IRS has never published how many of these agreements it signs in a year.

The third is that the world the procedures describe no longer exists. Since the Consolidated Appropriations Act of December 2020, section 7702(f)(11) ties the minimum interest rate used in the definition of life insurance to an "insurance interest rate" that depends on the NAIC valuation rate and a 60-month average of the federal mid-term rate, fixed by a contract's issue year and reset only in adjustment years the statute defines. The IRS publishes the average each January; Table 7 of Revenue Ruling 2026-2 gives 3.19 percent for the 60 months to December 31, 2025, rounded to 3 percent. The American Academy of Actuaries released calculators in February 2026 so that actuaries can work through the statute and project when the rate may change. None of that machinery existed when the 2008 procedures were written, and not one of them says how a contract issued under one rate and corrected under another should be tested.

For a private placement policy, the two tests that matter most are 817(h), tested at the end of every calendar quarter with a 30-day grace period, and the premium limits under 7702 and 7702A. Both failures are the insurer's to correct, and both go through these procedures. A rewrite that modernised the proxy rates, allowed self-correction for the smallest failures, and addressed post-2020 retesting would be the most practical piece of life insurance guidance in a decade. The plan commits to none of those specifics. It commits to the project. Our guide to sections 7702, 817(h) and the MEC tests explains what each test requires today.

Insurance-dedicated ETFs: the rule that missed its September date

Item 25 has a longer history and a missed deadline. Under Treasury Regulation 1.817-5(f), a separate account may "look through" a fund to its underlying holdings for the diversification test only if every beneficial interest in that fund is held by insurance company separate accounts or a short list of other permitted holders. An exchange-traded fund cannot meet that condition, because authorized participants and market makers must hold shares to keep the ETF trading. Section 203 of the SECURE 2.0 Act told Treasury to amend the regulation so that those two classes of holder do not break look-through for an "insurance-dedicated" ETF, provided they are contractually or legally barred from selling the shares to anyone else.

The project appears in the government's regulatory agenda as RIN 1545-BR46, with Ms. McGuire as the contact. The 2026 Unified Agenda, published in August, projected a notice of proposed rulemaking for September 2026. That was a target, not a legal deadline, and the agenda entry says there is none; it has not arrived. The Priority Guidance Plan lists the project without a publication note, which in the plan's convention means unreleased.

Why it matters to a private placement policy is cost and menu. The private placement market built its own answer to the look-through problem long ago: the insurance-dedicated fund, a private vehicle owned only by insurers' separate accounts. SALI, the largest IDF platform, counted 62 such funds in 2015 and 216 in 2025, with assets growing from just under $4 billion to more than $40 billion over the same decade, according to SALI Fund Management data as of March 31, 2026 published in an Investments & Wealth Review article by Golub Capital this year. An insurance-dedicated ETF would give carriers a liquid, low-fee sleeve alongside those private funds. Law firms that analysed the statute in 2023 doubted that market makers could operate under the resale restriction at all. The proposed regulation is where that doubt gets answered.

What the IRS said about tax-aware funds the day before

On September 28, the IRS released Notice 2026-62 and Revenue Ruling 2026-20 together. The ruling is narrow: where appreciated securities are contributed to a new ETF under section 351 "as part of a plan" that has the ETF redeem them in kind shortly afterwards, the IRS treats the whole arrangement as a taxable exchange. It does not touch an ordinary section 351 seeding of an ETF that intends to keep the assets. The notice goes wider. Its first part lists five uses of the regulated investment company redemption rule in section 852(b)(6) that Treasury and the IRS consider potentially abusive: ETF conversion transactions, partnership "exchange fund" variants, box spread funds, record date strategies that avoid dividend income, and avoidance of the RIC income test. Its second part, under the heading of "tax-aware" funds, adds three strategies built on other provisions: mixed-character identified straddles under section 1092, same-day elections on currency forwards under section 988, and selective terminations of notional principal contracts. The notice says future guidance may apply "prospectively only or retroactively," that the transactions may later be identified as transactions of interest or listed transactions, and that examiners may challenge them under existing law in the meantime. Comments are due October 28.

Read the notice for what is not in it. It never uses the words insurance, annuity, 817 or 7702. Several of the strategies it names are sold to the same families who consider a private placement policy, as ways to hold a concentrated or tax-inefficient portfolio without paying tax on it each year. The notice also says, in passing, that year-end loss sales are long-standing techniques consistent with the intent of Congress, so ordinary loss harvesting is not the target. The Joint Committee on Taxation once put the revenue at stake in the ETF redemption rule alone at $205 billion over a decade, and Bloomberg reported in August that one hedge fund's marketing deck claimed $100 million could generate more than $580 million of losses.

The contrast is one of footing, not of favour. The deferral inside a compliant policy rests on statute: sections 72(e), 7702 and 101(a), and the diversification regulation, with a Tax Court opinion from 2015 marking the boundary. The strategies in the notice rest on readings of section 852(b)(6) and of the straddle, currency and swap rules that the IRS now says it may reject, possibly with retroactive effect. Nobody at Treasury has drawn that comparison aloud, the two documents were almost certainly written by different offices, and neither says anything about enforcement against life insurance one way or the other. But a family office that spent 2026 weighing a tax-aware fund against a private placement policy received, in 48 hours, a clear statement about which set of rules the government is reopening and which it is proposing to tidy.

The internal IRS memo pulling the other way

The third signal came on September 30 and points in the opposite direction. Tax Notes reported, from internal IRS documents it obtained, that the agency had only two open cases related to PPLI after the Inflation Reduction Act funding increase, and that a compliance one-pager recommended two things: that Chief Counsel consider revoking private letter rulings 201502003 and 201436005, and that the IRS revive a 2001 Treasury proposal to require reporting of every contract whose cash value is invested in a private separate account. The article sits behind a paywall; those details are as Tax Notes and the outlets that summarised it reported them, and we have not seen the underlying documents. We covered the audit implications and the records a family should keep in our article of October 6. Here the question is narrower: what are those two rulings, and why would staff want them gone?

A private letter ruling binds the IRS only toward the taxpayer who asked for it, and both rulings say on their face that they may not be used or cited as precedent. What they show is how the IRS reasoned about two sets of facts, which is why practitioners read them and why staff would want them withdrawn. PLR 201436005, issued in May 2014, approved an insurance-dedicated series of a registered fund that ran alongside an identical retail fund: same objective, same adviser, same trades made at the same time. The IRS accepted it because policyholders received the holdings only well after each quarter end and had no arrangement with the adviser. The 2024 Senate Finance Committee staff report described that pattern, managers replicating their regular funds in "clone" form, as a feature of the market it wanted to shut down. The ruling shows the IRS accepting it, on those facts, a decade earlier.

PLR 201502003, issued in October 2014, is the more striking one. A family limited partnership owned two variable universal life policies issued by a foreign insurer that had elected under section 953(d) to be taxed as a domestic company. The policies funded an insurance-dedicated fund with five sub-accounts, each run by a manager with sole discretion. Members of the family were, at the same time, seeding a public fund run by the same sponsor. The IRS ruled that the insurer, not the partnership, owned the fund's assets for tax purposes. Twelve years later, the bill waiting in the Finance Committee would reach the same structure from a different angle: proposed section 7702C(b)(3) treats any contract "issued outside of the United States" and held by a United States person as an applicable private placement contract if its benefits track the value of assets outside the insurer's general account, whether or not the account meets the bill's other tests. Whether a 953(d) insurer's contract counts as issued outside the United States for that purpose is a question the bill's text leaves open; the only place it says "without regard to" section 953(d) is in its FATCA amendment.

Neither recommendation appears in the Priority Guidance Plan published the day before the Tax Notes story. A reporting requirement for private separate accounts would be guidance, and it is not on the list. The plan does not explain its omissions, so the absence proves only that the project was not a stated priority for this plan year. The plan can be amended at any time, and a reporting rule could also arrive by legislation rather than guidance. What a family can take from it is narrower: the records that would satisfy such a requirement are the same records that satisfy an examiner today.

Three bills, one gavel: what November 3 decides

The legislative file has not moved since spring. Senator Ron Wyden introduced S. 4279, the Protecting Proper Life Insurance from Abuse Act, on April 13, 2026. As of this writing the official record shows one action, referral to the Committee on Finance, no cosponsors, no hearing, no House companion and no revenue estimate from the Joint Committee on Taxation. The Finance Committee's hearings in September and October were confined to nominations. Senator Wyden's public statements since September have concerned Big Four accounting firms and Malta pension structures, Meta's research credits, and a bipartisan taxpayer service bill that passed the Senate unanimously on September 30. On PPLI, silence. What the bill would do is set out in our analysis of S. 4279, which we will update if the text changes.

Two companion bills sit with it. S. 4287, the Getting Rid of Abusive Trust Schemes Act, introduced by Senators Wyden and Angus King on April 14, would impose a fifteen-year minimum term on grantor retained annuity trusts and a minimum remainder value. S. 4490, the Fair Trusts for Fiscal Responsibility Act, introduced by Senator Patty Murray with Senator Wyden on May 12, would levy an annual withholding of 1 to 3 percent on trusts holding more than $50 million, creditable against future estate tax. Both are referred and unmoved. On the other side of the aisle, Majority Leader John Thune's Death Tax Repeal Act, S. 587, has 45 cosponsors and has also gone nowhere since February 2025.

So the question for November 3 is not whether any of these passes. A bill needs the House and a presidential signature, and nothing in the public record suggests either for any of the five; the PPLI bill has not attracted a single cosponsor in six months, in a chamber where its sponsor's party holds 47 seats. The question is who controls the committee's agenda. Under the Finance Committee's rules for this Congress, the chairman calls hearings after consultation with the ranking member, a single member constitutes a quorum to take testimony, and a subpoena requires either the ranking member's agreement or a majority vote. The 2022 investigation that produced the February 2024 staff report, with document requests to seven carriers and nine-day deadlines, was run from the chair. The December 2024 discussion draft was released from the chair. Since January 2025 Senator Wyden has been ranking member, and S. 4279 has sat.

The Senate stands at 53 Republicans, 45 Democrats and two independents who caucus with the Democrats. Thirty-five seats are on the ballot. Democrats need a net gain of four to take the majority outright; at 50-50 the Republican vice president breaks the tie. The Cook Political Report on October 20 rated seven races as toss-ups: Alaska, Iowa, Kansas, Maine, Michigan, Ohio and Texas. Sabato's Crystal Ball on October 14 listed five, all Republican-held. The public forecasting models disagree on the odds and we report them as the models' numbers, not ours: Nate Silver's model was reported at roughly three in four for Democratic control in mid-October, The Economist's at about 60 percent in early October, and the prediction markets Kalshi and Polymarket at about two in three on October 22. Tax lawyers at Miller & Chevalier wrote in March that if control changes, Senator Wyden "would retake the gavel as Chairman." The new Congress convenes on January 3, 2027.

Between the election and January sits the lame-duck session, which begins November 9 with a government funding deadline on December 11. Senator Thune has said a budget reconciliation bill may be the only vehicle available in November, and the resolutions on the table contain no tax provisions. No published account of the year-end agenda mentions life insurance or trusts as revenue raisers. That can change in a single markup, which is why the people who draft these provisions keep lists.

Dates to put in the diary

October 28: comments close on Notice 2026-62. Anyone with a view on whether exchange funds or box spread funds deserve listed transaction status has five days.

November 2: the quarterly Form 720 for the section 4371 excise tax on premiums paid to a foreign insurer during the third quarter. The printed due date is October 31, which this year falls on a Saturday, and the instructions allow filing on the next business day. The June 2026 instructions keep the 1 percent rate on life premiums and note that the tax on foreign reinsurance premiums no longer applies.

November 3: the election. November 9: the lame-duck session opens. December 11: federal funding expires.

January 2027: the IRS publishes its January revenue ruling with the applicable federal rates, which by the plan's appendix includes the 60-month average for section 7702(f)(11). It is one input to the minimum rate for contracts issued in 2027, alongside the NAIC valuation rate, and it changes the rate for existing contracts only in the adjustment years the statute sets.

Later in the plan year, if the plan holds: a notice of proposed rulemaking on insurance-dedicated ETFs, and a first draft of the new correction procedures. Neither has a date and the plan promises none. Both will be read closely by every carrier that writes private placement business, because a cheaper, clearer way to fix an honest mistake is worth more to a well-run policy than any headline.

For a family with a policy in force, none of this changes what the policy must do this quarter. The diversification test still runs on December 31, the premium schedule still has to stay inside the seven-pay limit if that was the design, and the investment manager still has to be the one making investment decisions. Those rules have outlasted every proposal to replace them since 1984. What the two September documents show is a government reopening one set of deferral rules and proposing to tidy another. They commit it to nothing about private placement policies, for or against. Eleven days from now we will know the political weather. The statute will be the same either way.

This article is general information only and is not tax or legal advice.

Sources

Department of the Treasury and Internal Revenue Service, 2026-2027 Priority Guidance Plan, September 29, 2026
2025-2026 Priority Guidance Plan, September 30, 2025
Bloomberg Tax, "IRS Considers Changes to Failed Life Insurance Contract Guidance," May 29, 2026
Revenue Procedure 2008-39, Revenue Procedure 2008-40, Revenue Procedure 2008-41 and Revenue Procedure 2008-42
Society of Actuaries, Taxing Times supplement on the 2008 correction procedures, February 2009
Revenue Procedure 2026-1, Appendix A (user fees)
26 U.S.C. section 7702, section 817 and Treasury Regulation 1.817-5
Revenue Ruling 2026-2
American Academy of Actuaries, section 7702 rate calculators, February 2026
Office of Information and Regulatory Affairs, RIN 1545-BR46, Insurance-Dedicated Exchange Traded Funds, 2026 Unified Agenda
K&L Gates on SECURE 2.0 section 203, July 25, 2023
Richard D. Jacobson, Golub Capital, "A Compelling Opportunity for Tax-Efficient Growth," Investments & Wealth Review No. 2, 2026, Figure 1 and endnote 1 (SALI Fund Management data as of March 31, 2026)
Notice 2026-62 and Revenue Ruling 2026-20, September 28, 2026
Financial Advisor, on the Joint Committee on Taxation estimate for section 852(b)(6)
Bloomberg, via TaxProf Blog, August 5, 2026
Tax Notes, "IRS Documents Indicate Low Scrutiny of Life Insurance Vehicles," September 30, 2026 (paywalled; described from published excerpts and secondary coverage)
PLR 201436005 and PLR 201502003
Senate Finance Committee staff report on private placement life insurance, February 2024
S. 4279, S. 4287, S. 4490 and S. 587, status as of October 23, 2026
Rules of Procedure of the Senate Committee on Finance, 119th Congress
Senate Finance Committee hearings and ranking member news
Cook Political Report, Senate race ratings, October 20, 2026
Sabato's Crystal Ball, Senate ratings, October 14, 2026
Newsweek on the Silver Bulletin forecast, October 2026
Vote-Scope, comparison of Senate forecasts and prediction markets, October 22, 2026
Miller & Chevalier, "November Could Reshape Taxwriting Committees," March 9, 2026 and "Looking Forward to November Reconciliation," September 21, 2026
Instructions for Form 720, revised June 2026