PPLI in 2026: What the IRS Correction Agenda Means for Your Policy

A private placement life insurance policy can stay in force for decades. During that time premiums arrive on different dates, investment managers change and the family's plans for taking money out evolve. The tax calculations have to follow those changes. A mistake in the records or the administration can affect an arrangement that otherwise appears to be working exactly as intended.

That is why a short entry in the Treasury Department and IRS's latest guidance plan deserves the attention of PPLI owners. Published on September 29, the 2026-2027 Priority Guidance Plan includes a project to update the procedures for correcting inadvertent failures under sections 101(f), 817(h), 7702 and 7702A. Those provisions govern insurance qualification, investment diversification and modified endowment contract status. 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 entry announces a review. It does not publish a new correction procedure, waive an existing failure or set a completion date. For a family office reviewing a policy this November, its immediate value is to focus attention on how the insurer would detect and handle a problem under the procedures already available. This article sets out what Treasury listed, how the 2008 procedures work and where they fall short, and what an owner can usefully ask and keep on file now.

The policy has several tax tests to pass

A statement that a policy is "tax compliant" needs some explanation. Different rules test different parts of the arrangement, and the consequences of failing them are not interchangeable.

Question	What the answer establishes
Does the contract satisfy section 7702?	Whether it qualifies as life insurance for federal income tax purposes.
Does the supporting account meet section 817(h)?	Whether the applicable investment diversification requirements are satisfied.
Is the contract a MEC under section 7702A?	Which tax rules apply to lifetime distributions, including loans.
Does the owner exercise investment control?	Whether the supporting investments may be attributed to the owner for income tax purposes.

The first three questions turn on contract terms, calculations and account records. The fourth also requires a close look at conduct. An agreement giving a manager discretion is useful evidence, but the communications and decisions made after it is signed matter as well. Revenue Ruling 2003-91 shows how the IRS evaluated one arrangement in which policyholders chose among insurer-provided investment options without directing the underlying investments. Its result depends on the facts it describes.

Our guide to sections 7702, 817(h) and the MEC tests explains what each test requires. In a review of an existing contract, the useful next step is to match each test to the person responsible for it and the evidence retained.

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.

Under the heading "Deregulation and Burden Reduction," item 7 reads, in full: "Guidance to update the procedures for the correction of inadvertent failures to comply with §§101(f), 817(h), 7702, and 7702A." 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.

What the 2008 procedures cover

In June 2008 the IRS released a set of revenue procedures that, taken together, told insurers how to report and cure a failed contract. Each addresses a distinct kind of failure, and a modern review should identify the one that actually applies rather than treating every section in the plan as equally relevant.

Revenue Procedure 2008-39 provides an issuer-led route for certain inadvertent, non-egregious failures of the MEC rules. MEC status does not, by itself, mean that a contract has stopped being life insurance. It can nevertheless change the treatment of withdrawals and loans, which matters a great deal to an owner expecting to use the policy during life. Revenue Procedure 2008-40 covers contracts that failed the section 7702 definition of life insurance or the older section 101(f) test, which generally concerns flexible premium contracts issued before 1985.

For inadvertent diversification failures, Revenue Procedure 2008-41 sets out a process involving the issuer and the IRS, replacing a procedure from 1992. Revenue Procedure 2008-42 gives an automatic waiver for a limited class of 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. "Automatic" has a defined scope here. It does not mean that any administrative error can be corrected informally. 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.

A family should ask which route the insurer believes is available, what has to be established and what evidence will show that the process is complete. An assurance that the matter is being handled leaves too much unanswered when the owner's own tax reporting may depend on the outcome.

Why the 2008 procedures need rewriting

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 none 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.

Restoring an allocation may leave an earlier period unresolved

A diversification question requires the account's history. The general concentration limits are only part of Treasury Regulation 1.817-5. Its timing rules, market-fluctuation provisions, account definitions and look-through conditions can all affect the conclusion.

Suppose a manager flags that a position now exceeds a general concentration limit. That observation alone does not establish a tax failure. The review needs the relevant testing dates, earlier values, later acquisitions and any applicable exception. An urgent sale based only on the latest percentage could create avoidable trading costs.

Where an actual failure has occurred, putting the portfolio back within limits and obtaining relief for the affected period are separate tasks. The regulation provides conditional relief for inadvertent failures; a later rebalance does not by itself document that relief. The insurer's response should distinguish the investment action, the legal analysis and the status of any required submission.

Three files that deserve different responses

Consider three hypothetical issues arising during an annual policy review. In the first, a premium appears in the administration system on a different date from the bank record. The starting point is reconciliation: the actual payment, the applicable test and any resulting overage. An incorrect entry and an actual excess payment are different findings.

In the second, an underlying fund changes its investor eligibility or stops providing the information needed for look-through testing. The insurer needs to establish the relevant facts and dates, determine the account's exposure and decide whether a failure occurred. An "insurance-dedicated" label in an old presentation cannot supply missing current evidence.

In the third, emails show the owner recommending particular investments to a manager. That raises a tax-ownership question, and it should not be put into the same correction file as a premium-processing error. The correction project named in the IRS plan does not establish a general cure for investor-control problems.

These examples are deliberately incomplete. Real conclusions require the contract and the records. Their purpose is to show why the first description of an incident can determine whether the right people become involved.

The financial exposure needs its own discussion

For the owner, a correction has several possible costs: professional work, the insurer's submission, adjustments to the contract, reporting changes and uncertainty while the issue remains open. Who bears those costs should be checked in the policy and the relevant service agreements. The fact that an issuer leads a procedure does not answer every question about who ultimately pays.

A family should also ask how the insurer would communicate with its trustee and tax advisers if a correction affected information previously supplied. This matters most where several people depend on the same carrier confirmation to prepare different returns or approve a withdrawal.

The economic review should include the owner's intended use of the policy. An issue affecting lifetime access may matter more to a family relying on future withdrawals than to one holding the contract mainly for the death benefit. Neither purpose removes the need to establish the correct tax treatment.

What belongs in the family office's file

A useful annual confirmation identifies the contract and period covered, the tests performed and any qualifications to the conclusion. Alongside it, the family office should keep the premium ledger, material benefit changes, distribution history and the investment reports supporting the account review.

When an incident occurs, the record should show the discovery date, the affected period, the insurer's assessment, the action taken and the evidence of resolution. It should also name the person responsible for updating the owner's advisers. These are practical recordkeeping suggestions, not a substitute for any statutory or procedural requirement.

Prospective owners can ask about this process before funding. Carrier due diligence should cover the reporting the family will receive and the escalation route when something goes wrong. A clear answer helps assess the service behind a long-term contract without requiring the insurer to disclose another policyholder's confidential information.

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

Item 25 has a longer history and a missed target. 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; the notice has not appeared. 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. 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," and that the transactions may later be identified as transactions of interest or listed transactions. The comment period closed on October 28.

The notice 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 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. The two documents were almost certainly written by different offices, and neither says anything about enforcement against life insurance one way or the other.

The internal IRS memo pulling the other way

A 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 in our article of October 6.

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. PLR 201436005, issued in May 2014, approved an insurance-dedicated series of a registered fund that ran alongside an identical retail fund, accepted because policyholders received the holdings only well after each quarter end and had no arrangement with the adviser. PLR 201502003, issued in October 2014, concerned a family limited partnership owning two variable universal life policies from a foreign insurer that had elected under section 953(d) to be taxed as a domestic company; the IRS ruled that the insurer, not the partnership, owned the fund's assets for tax purposes.

Neither recommendation appears in the Priority Guidance Plan. A reporting requirement for private separate accounts would be guidance, and it is not on the list. The plan does not explain its omissions, and it can be amended at any time. 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.

What to watch next

The next substantive development would be the publication of actual correction guidance, with its eligibility rules, effective dates and treatment of earlier failures. Until then, the plan should be read as a statement of work the government intends to undertake.

The Senate proposal on private placement contracts is a separate legislative question. S. 4279, introduced by Senator Ron Wyden on April 13, 2026, would change the treatment of defined contracts; as of this update the official record shows one action, referral to the Committee on Finance, with no cosponsors, no hearing and no House companion. The correction project concerns failures under existing insurance-tax provisions. A review of one does not settle exposure to the other. Our analysis of S. 4279 sets out what the bill would do. Who chairs the Finance Committee in the new Congress, which convenes on January 3, 2027, will decide whether that bill gets a hearing; we will update this article once control of the Senate is settled.

Dates already in view: the lame-duck session opens on November 9 and federal funding expires on December 11. The quarterly 817(h) diversification test runs again on December 31. In January 2027 the IRS publishes its revenue ruling with the applicable federal rates, including the 60-month average for section 7702(f)(11), one input to the minimum rate for contracts issued in 2027. Later in the plan year, if the plan holds, come a proposed rule on insurance-dedicated ETFs and a first draft of the new correction procedures. Neither has a date.

For an existing PPLI owner, the present task is specific: establish which tests apply, obtain evidence that they have been performed and understand the insurer's response if an exception appears. A policy intended to last for decades needs a record that can explain what happened along the way.

This article provides general information on U.S. federal tax rules and is not advice on an individual policy. Contract terms, ownership, state law and other jurisdictions may require separate analysis. First published October 23, 2026; substantially updated November 3, 2026.

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 Ruling 2003-91
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 (SALI Fund Management data as of March 31, 2026)
Notice 2026-62 and Revenue Ruling 2026-20, September 28, 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 as introduced