Understanding the 25-Contract Test in the Proposed PPLI Bill

The proposed PPLI Abuse Act introduces what is arguably its most significant structural requirement: the 25-contract test contained in proposed IRC §7702C(c).

Rather than focusing solely on the policyholder or the investment strategy, the proposal fundamentally changes how a segregated asset account must be organised if the contracts it supports are to avoid classification as Applicable Private Placement Contracts (APPCs).

If enacted, these rules would significantly reshape the design of private placement life insurance and private placement annuity products.

The discussion below describes proposed legislation and not current law.

⚖️ 1️⃣ The Two-Part 25-Contract Test

Under proposed IRC §7702C(c), a segregated asset account must satisfy two statutory conditions.

First:

• The account must support at least 25 private placement contracts.

Second:

• Every contract supported by the account must participate in every asset held within that account in exactly the same proportion as every other contract.

Both requirements must be satisfied to avoid APPC classification under the proposal.

📊 2️⃣ More Than Simply Having 25 Policyholders

The proposal makes clear that satisfying the numerical threshold alone would not be enough.

It is not sufficient to have 25 separate contracts on the books.

Instead, every participating contract must share the entire investment portfolio of the segregated account on a strictly proportional basis.

This creates a pooled investment model rather than one based on individually tailored portfolios.

💼 3️⃣ The End of Bespoke PPLI?

Historically, one of the principal attractions of Private Placement Life Insurance has been investment customisation.

Many structures have incorporated:

• Insurance-dedicated funds (IDFs)

• Individually managed portfolios

• Bespoke investment mandates

• Alternative investment strategies selected for a particular policyholder

The proposed pro rata participation requirement would make many of these highly customised structures difficult to reconcile with the statutory conditions required to avoid APPC treatment.

👥 4️⃣ The Aggregation Rule

The proposal also addresses one of the most obvious planning responses.

Contracts held:

• Directly or indirectly by the same individual, or

• By related persons,

would generally be aggregated and treated as a single contract when applying the 25-contract requirement.

This provision is designed to prevent the numerical threshold from being satisfied merely by dividing ownership among related parties or commonly controlled entities.

🛡️ 5️⃣ Broad Anti-Avoidance Authority

In addition to the aggregation rule, the proposal grants the U.S. Treasury broad authority to address arrangements designed to achieve substantially similar economic results through different legal forms.

For example, Treasury would have authority under the proposal to treat certain asset accounts that are not formally segregated accounts under IRC §817(d) as though they were, where appropriate under the statutory standard.

This reflects an intention to focus on economic substance rather than legal form alone.

🌍 6️⃣ Private Placement Annuities Are Also Included

An important aspect of the proposal is that it extends beyond life insurance contracts.

The proposed regime would also apply to certain private placement annuities (PPAs) that fall within the APPC framework.

In addition, the bill would amend Foreign Account Tax Compliance Act (FATCA) so that foreign-issued APPCs and their supporting segregated accounts are generally treated as financial accounts, with the issuing entity treated as a foreign financial institution for FATCA purposes.

The proposal also provides that an election under Internal Revenue Code §953(d) would be disregarded when determining foreign financial institution status under these provisions.

📋 7️⃣ Planning Implications

If enacted, the proposed 25-contract test would require advisers and insurers to reconsider:

✅ Segregated account design

✅ Investment pooling arrangements

✅ Related-party ownership structures

✅ Insurance-dedicated fund architecture

✅ Offshore PPLI and PPA structures

✅ FATCA classification and reporting obligations

The proposal would represent a significant shift from individually customised policies toward broader pooled investment arrangements.

🎯 Key Takeaway

The proposed 25-contract test is the technical cornerstone of the PPLI Abuse Act.

To avoid APPC classification, a segregated asset account would generally need to satisfy two core requirements:

✅ Support at least 25 private placement contracts

✅ Ensure every contract participates in every asset of the account on a strictly pro rata basis

The proposal further reinforces these rules through:

• Aggregation of contracts held by related persons

• Broad Treasury anti-avoidance authority

• Extension of the regime to certain private placement annuities and related FATCA provisions

In practice:

The proposed legislation shifts the focus from individually customised insurance wrappers to broadly pooled investment structures. If enacted, the 25-contract test would become a defining consideration in the design of future private placement insurance and annuity products, requiring insurers, advisers, and policyholders to reassess existing structures against the proposed statutory framework.