Tax Treatment of Nonqualified Investment Advisory Fees for Pacific Advisory Variable Annuity
 

Effective January 1, 2020, Pacific Life received a favorable private letter ruling from the IRS on whether withdrawals from a nonqualified contract’s account value to pay advisory fees should be treated as taxable distributions to the contract owner.
 

What does the Private Letter Ruling (PLR) say?
 

Investment advisory fee withdrawals will not be treated as taxable distributions to the contract owner provided the following conditions are met:
 

• The fee withdrawal does not exceed an annual rate of 1.50% of the contract’s account value.
• The fees are to pay for investment advice solely for that specific contract.
• Written authorization must be given by the contract owner directing Pacific Life to deduct such fees from the contract and remit them to the investment advisor providing the investment advice.
   

What products are covered by the PLR?
 

Both Pacific Advisory Variable Annuity and Pacific Odyssey® variable annuity are currently the only two fee-based products that Pacific Life will allow advisory fees to be taken from. This ruling has no impact on Pacific Index Advisory® fixed indexed annuity. This is a Pacific Life policy; no product distinction is made in the PLR.
 

Are advisory fee withdrawals with Pacific Advisory Variable Annuity “fee-friendly”?
 

Pacific Advisory Variable Annuity allows financial professionals to withdraw advisory fees from a non-qualified contract, if the fee withdrawal does not exceed an annual rate of 1.50% of the account value during the calendar year and the fees are only used to pay for advisory fees related to the contract, without creating a reportable, taxable event.
 

The optional benefits available with Pacific Advisory Variable Annuity are also “fee-friendly”:

• Return of Investment death benefit: Withdrawals for advisory fees up to 1.50% will reduce the account value but will not reduce the death benefit.
• Guaranteed Minimum Withdrawal Benefit (GMWB): Withdrawals for advisory fees will not affect the protected payment base for income purposes and will not be considered non-compliant or early withdrawals, if applicable. Withdrawals for advisory fees more than 1.50% are not allowed if a GMWB is elected.
   

How is the annual 1.50% limitation calculated based upon account value?
 

At the time of each advisory fee withdrawal, the annual 1.50% limit for the calendar year is reduced by the amount of the withdrawal. This reduction is a percentage of average daily account value of the contract, calculated over the number of days in the payment period. For scheduled fee withdrawals, this determination will be done each time a fee is scheduled to be taken out.
 

What happens once the 1.50% limitation is reached?
 

Once the 1.50% limitation is met, advisory fee withdrawals will be reportable/taxable for the remainder of the calendar year. If an optional living benefit is elected, advisory fee withdrawals more than 1.50% are not allowed.
 

What are the fee request processing requirements?
 

Clients must first authorize their financial professional to be able to process advisory fee withdrawals by signing the Advisory Authorization form. The financial professional can then process advisory fee withdrawals in writing using the Advisory Fee Withdrawal Request form.
 

Will Pacific Life still send tax reporting documents?
 

Fees are not reportable/taxable if they do not exceed 1.50% of the account value. Any fees taken above the allowable 1.50% will trigger reporting/taxation and documents will be sent to the client.
 

In line with current procedure, Pacific Life does not send out a Form 1099 or any tax reporting documents to the financial professionals to report the fees as income.
 

For additional information, please contact your Pacific Life managing director.

Phone: (866) 441-2354

Email: PacificLifeAdvisory@PacificLife.com

The account value is the annuity contract value. Optional benefits are available for an additional cost.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.
 

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products. 

Return of Investment Death Benefit is named “Return of Purchase Payment Death Benefit Rider” in the contract.
 

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Annuity products are not FDIC insured, may lose value, and are not guaranteed by any bank.
 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Fixed and variable annuities are available through licensed, independent third parties.