The MEC test most people know is the one at issue. The carrier works out the seven-pay premium for the death benefit you bought. Keep what you put in during the first seven years under that running limit and the policy keeps its tax treatment. A high cash value design is usually funded right up against that limit by design. And the limit itself is laid out in the MEC line. That's why a later change to the death benefit is dangerous.
Reduce the death benefit inside the first seven years and the test reruns. It's recomputed as if the policy had been issued at the lower amount from the beginning, looking back at everything you've already paid. If the premiums that fit under the original limit don't fit under the smaller one, the policy is a MEC, retroactively, and it stays one. Every loan and withdrawal from that point forward comes out gains first, taxed as income, with a 10% penalty on the taxable part before age 59½. I'm a broker and not a CPA, so take this as the mechanism rather than advice on your return.
The reductions that trigger it aren't always labeled as reductions. Dropping a term rider that was part of a blended design lowers the death benefit. Electing a face-amount decrease to cut charges does. Switching from an increasing death benefit option to a level one can. A 1035 exchange into a smaller policy starts a new test on the new contract with the old cash value counted against it.
Increases have their own rule. A material change starts a fresh seven-pay period from the date of the change. That includes a death benefit increase that required underwriting, and most riders you add that raise the benefit. The carrier sets a new limit, calculated on the new benefit plus the cash value already in the contract. Sometimes that opens room. Sometimes, because the existing cash value counts against the new limit, it closes room you thought you had.
After year seven, a reduction by itself doesn't rerun the test unless a material change restarted the clock. So a twelve-year-old policy with no changes can reduce its face amount without a tax consequence. And a policy that was increased three years ago can't.
There's one escape hatch. If a payment goes over the limit, the carrier can send the excess back with interest. That has to happen within sixty days after the contract year ends. Then the policy gets treated as if it never failed. Most carriers track this and refuse the excess up front. There's no equivalent hatch for a reduction that's already been processed.
So before any change that raises or lowers the death benefit, ask the carrier for a written seven-pay recalculation. Get it in writing that the policy stays clear of MEC status. Do that inside the first seven years, and inside seven years of the last material change. Get the letter first.