[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3912 Introduced in House (IH)]
109th CONGRESS
1st Session
H. R. 3912
To amend the Internal Revenue Code of 1986 to encourage guaranteed
lifetime income payments from annuities and similar payments of life
insurance proceeds at dates later than death by excluding from income a
portion of such payments.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
September 27, 2005
Mrs. Johnson of Connecticut (for herself, Mrs. Jones of Ohio, and Mr.
English of Pennsylvania) introduced the following bill; which was
referred to the Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to encourage guaranteed
lifetime income payments from annuities and similar payments of life
insurance proceeds at dates later than death by excluding from income a
portion of such payments.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Flexible Retirement Security for
Life Act of 2005''.
SEC. 2. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS.
(a) Lifetime Annuity Payments Under Annuity Contracts.--Subsection
(b) of section 72 of the Internal Revenue Code (relating to annuities)
is amended by adding at the end thereof the following new paragraph:
``(5) Exclusion for lifetime annuity payments.--
``(A) In general.--In the case of lifetime annuity
payments received under one or more annuity contracts
in any taxable year, gross income shall not include 50
percent of the portion of lifetime annuity payments
otherwise includible (without regard to this paragraph)
in gross income under this section. For purposes of the
preceding sentence, the amount excludible from gross
income in any taxable year shall not exceed the
applicable amount.
``(B) Applicable amount.--For purposes of
subparagraph (A), the applicable amount shall be
determined in accordance with the following table:
Applicable
``Taxable Years Beginning in: Amount is:
2006, 2007, 2008, 2009, 2010, or 2011......... $1,000
2012 or 2013.................................. $5,000
2014.......................................... $10,000
2015 or thereafter............................ $20,000.
``(C) Cost-of-living adjustment.--In the case of
taxable years beginning after December 31, 2015, the
$20,000 amount in subparagraph (A) shall be increased
by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2005'
for `calendar year 1992' in subparagraph (B)
thereof.
If any amount as increased under the preceding sentence
is not a multiple of $500, such amount shall be rounded
to the next lower multiple of $500.
``(D) Application of paragraph.--Subparagraph (A)
shall not apply to--
``(i) any amount received under an eligible
deferred compensation plan (as defined in
section 457(b)) or under a qualified retirement
plan (as defined in section 4974(c)),
``(ii) any amount paid under an annuity
contract that is received by the beneficiary
under the contract--
``(I) after the death of the
annuitant in the case of payments
described in subsection
(c)(5)(A)(ii)(III), unless the
beneficiary is the surviving spouse of
the annuitant, or
``(II) after the death of the
annuitant and joint annuitant in the
case of payments described in
subsection (c)(5)(A)(ii)(IV), unless
the beneficiary is the surviving spouse
of the last to die of the annuitant and
the joint annuitant, or
``(iii) any annuity contract that is a
qualified funding asset (as defined in section
130(d)), but without regard to whether there is
a qualified assignment.
``(E) Investment in the contract.--For purposes of
this section, the investment in the contract shall be
determined without regard to this paragraph.''.
(b) Definitions.--Subsection (c) of section 72 of such Code is
amended by adding at the end thereof the following new paragraph:
``(5) Lifetime annuity payment.--
``(A) In general.--For purposes of subsection
(b)(5), the term `lifetime annuity payment' means any
amount received as an annuity under any portion of an
annuity contract, but only if--
``(i) the only person (or persons in the
case of payments described in subclause (II) or
(IV) of clause (ii)) legally entitled (by
operation of the contract, a trust, or other
legally enforceable means) to receive such
amount during the life of the annuitant or
joint annuitant is such annuitant or joint
annuitant, and
``(ii) such amount is part of a series of
substantially equal periodic payments made not
less frequently than annually over--
``(I) the life of the annuitant,
``(II) the lives of the annuitant
and a joint annuitant, but only if the
annuitant is the spouse of the joint
annuitant as of the annuity starting
date or the difference in age between
the annuitant and joint annuitant is 15
years or less,
``(III) the life of the annuitant
with a minimum period of payments or
with a minimum amount that must be paid
in any event, or
``(IV) the lives of the annuitant
and a joint annuitant with a minimum
period of payments or with a minimum
amount that must be paid in any event,
but only if the annuitant is the spouse
of the joint annuitant as of the
annuity starting date or the difference
in age between the annuitant and joint
annuitant is 15 years or less.
``(iii) Exceptions.--For purposes of clause
(ii), annuity payments shall not fail to be
treated as part of a series of substantially
equal periodic payments--
``(I) because the amount of the
periodic payments may vary in
accordance with investment experience,
reallocations among investment options,
actuarial gains or losses, cost of
living indices, a constant percentage
applied not less frequently than
annually, or similar fluctuating
criteria,
``(II) due to the existence of, or
modification of the duration of, a
provision in the contract permitting a
lump sum withdrawal after the annuity
starting date, or
``(III) because the period between
each such payment is lengthened or
shortened, but only if at all times
such period is no longer than one
calendar year.
``(B) Annuity contract.--For purposes of
subparagraph (A) and subsections (b)(5) and (x), the
term `annuity contract' means a commercial annuity (as
defined by section 3405(e)(6)), other than an endowment
or life insurance contract.
``(C) Minimum period of payments.--For purposes of
subparagraph (A), the term `minimum period of payments'
means a guaranteed term of payments that does not
exceed the greater of 10 years or--
``(i) the life expectancy of the annuitant
as of the annuity starting date, in the case of
lifetime annuity payments described in
subparagraph (A)(ii)(III), or
``(ii) the life expectancy of the annuitant
and joint annuitant as of the annuity starting
date, in the case of lifetime annuity payments
described in subparagraph (A)(ii)(IV).
For purposes of this subparagraph, life expectancy
shall be computed with reference to the tables
prescribed by the Secretary under paragraph (3). For
purposes of subsection (x)(1)(C)(ii), the permissible
minimum period of payments shall be determined as of
the annuity starting date and reduced by one for each
subsequent year.
``(D) Minimum amount that must be paid in any
event.--For purposes of subparagraph (A), the term
`minimum amount that must be paid in any event' means
an amount payable to the designated beneficiary under
an annuity contract that is in the nature of a refund
and does not exceed the greater of the amount applied
to produce the lifetime annuity payments under the
contract or the amount, if any, available for
withdrawal under the contract on the date of death.''.
(c) Recapture Tax for Lifetime Annuity Payments.--Section 72 of
such Code is amended by redesignating subsection (x) as subsection (y)
and inserting after subsection (w) the following new subsection:
``(x) Recapture Tax for Modifications to or Reductions in Lifetime
Annuity Payments.--
``(1) In general.--If any amount received under an annuity
contract is excluded from income by reason of subsection (b)(5)
(relating to lifetime annuity payments), and--
``(A) the series of payments under such contract is
subsequently modified so any future payments are not
lifetime annuity payments,
``(B) after the date of receipt of the first
lifetime annuity payment under the contract an
annuitant receives a lump sum and thereafter is to
receive annuity payments in a reduced amount under the
contract, or
``(C) after the date of receipt of the first
lifetime annuity payment under the contract the dollar
amount of any subsequent annuity payment is reduced and
a lump sum is not paid in connection with the
reduction, unless such reduction is--
``(i) due to an event described in
subsection (c)(5)(A)(iii), or
``(ii) due to the addition of, or increase
in, a minimum period of payments within the
meaning of subsection (c)(5)(C) or a minimum
amount that must be paid in any event (within
the meaning of subsection (c)(5)(D)),
then gross income for the first taxable year in which
such modification or reduction occurs shall be
increased by the recapture amount.
``(2) Recapture amount.--
``(A) In general.--For purposes of this subsection,
the recapture amount shall be the amount, determined
under rules prescribed by the Secretary, equal to the
amount that (but for subsection (b)(5)) would have been
includible in the taxpayer's gross income if the
modification or reduction described in paragraph (1)
had been in effect at all times, plus interest for the
deferral period at the underpayment rate established by
section 6621.
``(B) Deferral period.--For purposes of this
subsection, the term `deferral period' means the period
beginning with the taxable year in which (without
regard to subsection (b)(5)) the payment would have
been includible in gross income and ending with the
taxable year in which the modification described in
paragraph (1) occurs.
``(3) Exceptions to recapture tax.--Paragraph (1) shall not
apply in the case of any modification or reduction that occurs
because an annuitant--
``(A) dies or becomes disabled (within the meaning
of subsection (m)(7)),
``(B) becomes a chronically ill individual within
the meaning of section 7702B(c)(2), or
``(C) encounters hardship.''.
(d) Lifetime Distributions of Life Insurance Death Benefits.--
(1) In general.--Subsection (d) of section 101 of such Code
(relating to life insurance proceeds) is amended by adding at
the end thereof the following new paragraph:
``(4) Exclusion for lifetime annuity payments.--
``(A) In general.--In the case of amounts to which
this subsection applies, gross income shall not include
the lesser of--
``(i) 50 percent of the portion of lifetime
annuity payments otherwise includible in gross
income under this section (determined without
regard to this paragraph), or
``(ii) the amount in effect under section
72(b)(5).
``(B) Rules of section 72(b)(5) to apply.--For
purposes of this paragraph, rules similar to the rules
of section 72(b)(5) and section 72(x) shall apply,
substituting the term `beneficiary of the life
insurance contract' for the term `annuitant' wherever
it appears, and substituting the term `life insurance
contract' for the term `annuity contract' wherever it
appears.''.
(2) Conforming amendment.--Paragraph (1) of subsection (d)
of section 101 of such Code is amended by adding ``or paragraph
(4)'' after ``to the extent not excluded by the preceding
sentence''.
(e) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to amounts received in calendar years beginning after the
date of the enactment of this Act.
(2) Special rule for existing contracts.--In the case of a
contract in force on the date of the enactment of this Act that
does not satisfy the requirements of section 72(c)(5)(A) of the
Internal Revenue Code of 1986 (as added by this section), or
requirements similar to such section 72(c)(5)(A) in the case of
a life insurance contract), any modification to such contract
(including a change in ownership) or to the payments thereunder
that is made to satisfy the requirements of such section (or
similar requirements) shall not result in the recognition of
any gain or loss, any amount being included in gross income, or
any addition to tax that otherwise might result from such
modification, but only if the modification is completed prior
to the date that is 2 years after the date of the enactment of
this Act.
SEC. 3. ANNUITY AND LIFE INSURANCE CONTRACTS WITH LONG-TERM CARE
INSURANCE RIDERS.
(a) Exclusion From Gross Income.--Subsection (e) of section 72 of
the Internal Revenue Code of 1986 (relating to amounts not received as
annuities) is amended by redesignating paragraph (11) as paragraph (12)
and by inserting after paragraph (10) the following new paragraph:
``(11) Special rules for certain combination contracts
providing long-term care insurance.--Notwithstanding paragraphs
(2), (5)(C), and (10), in the case of any amount applied
against the cash value of an annuity contract or the cash
surrender value of a life insurance contract as payment for
coverage under a qualified long-term care insurance contract
which is part of or a rider on such annuity or life insurance
contract--
``(A) the investment in the contract shall be
reduced (but not below zero) by such amount, and
``(B) such amount shall not be includible in gross
income.''.
(b) Treatment of Coverage Provided as Part of a Life Insurance or
Annuity Contract.--Subsection (e) of section 7702B of such Code
(relating to treatment of qualified long-term care insurance) is
amended to read as follows:
``(e) Treatment of Coverage Provided as Part of a Life Insurance or
Annuity Contract.--
``(1) Coverage treated as contract.--Except as otherwise
provided in regulations prescribed by the Secretary, in the
case of any long-term care insurance coverage (whether or not
qualified) provided by a rider on or as part of a life
insurance contract or an annuity contract, this title shall
apply as if the portion of the contract providing such coverage
is a separate contract.
``(2) Application of section 7702.--Section 7702(c)(2)
(relating to the guideline premium limitation) shall be applied
by increasing the guideline premium limitation with respect to
the life insurance contract, as of any date--
``(A) by the sum of any amount (other than premium
payments) applied against the life insurance contract's
cash surrender value (within the meaning of section
7702(f)(2)(A)) for coverage made to that date under the
life insurance contract, less
``(B) any such amounts the application of which
reduces the premiums paid for the life insurance
contract (within the meaning of section 7702(f)(1)).
``(3) Portion defined.--
``(A) In general.--For purposes of this subsection,
the term `portion' means only the terms and benefits
under a life insurance contract or annuity contract
that are in addition to the terms and benefits under
the contract without regard to long-term care insurance
coverage.
``(B) Treatment of distribution for purposes of
title.--For purposes of this title, any distribution
made pursuant to the terms of the long-term care
portion of the contract shall be treated as made solely
under such portion, irrespective of the effect of the
distribution on the cash value of the annuity contract
portion or the cash surrender value of the life
insurance contract portion.
``(4) Annuity contracts to which paragraph (1) does not
apply.--For purposes of this subsection, none of the following
shall be treated as an annuity contract:
``(A) A trust described in section 401(a) which is
exempt from tax under section 501(a).
``(B) A contract--
``(i) purchased by a trust described in
subparagraph (A),
``(ii) purchased as part of a plan
described in section 403(a),
``(iii) described in section 403(b),
``(iv) provided for employees of a life
insurance company under a plan described in
section 818(a)(3), or
``(v) from an individual retirement account
or an individual retirement annuity.
Any dividend described in section 404(k) which is received by a
participant or beneficiary shall, for purposes of this
paragraph, be treated as paid under a separate contract to
which subparagraph (B)(i) applies.''.
(c) Tax-Free Exchanges Among Certain Insurance Policies.--
(1) Exchange of life insurance, endowment, and annuity
contracts for long-term care contracts.--Subsection (a) of
section 1035 of such Code (relating to general rules) is
amended by striking the period at the end of paragraph (3) and
inserting ``; or'' and by adding after paragraph (3) the
following new paragraph:
``(4) a contract of life insurance, contract of endowment
insurance, or annuity contract for a qualified long-term care
insurance contract.''.
(2) Annuity contracts can include qualified long-term care
insurance.--Paragraph (2) of section 1035(b) of such Code is
amended by adding at the end the following new sentence: ``For
purposes of the preceding sentence, a contract shall not fail
to be treated as an annuity contract solely because a qualified
long-term care insurance contract is a part of or a rider on
such contract.''.
(3) Life insurance contracts can include qualified long-
term care insurance.--Paragraph (3) of section 1035(b) of such
Code is amended by adding at the end the following new
sentence: ``For purposes of the preceding sentence, a contract
shall not fail to be treated as a life insurance contract
solely because a qualified long-term care insurance contract is
a part of or a rider on such contract.''.
(4) Tax-free exchanges of qualified long-term care
insurance contract.--Subsection (a) of section 1035 of such
Code (relating to certain exchanges of insurance policies), as
amended by paragraph (1), is amended by striking ``or'' at the
end of paragraph (3), by striking the period at the end of
paragraph (4) and inserting ``; or'', and by inserting after
paragraph (4) the following new paragraph:
``(5) a qualified long-term care insurance contract for a
qualified long-term care insurance contract which only covers
the same insured.''.
(d) Qualified Long-Term Care Coverage Treated as Qualified
Additional Benefits Under Life Insurance Contract.--Subparagraph (A) of
section 7702(f)(5) of such Code (defining qualified additional
benefits) is amended by striking ``or'' at the end of clause (iv), by
redesignating clause (v) as clause (vi) and inserting after clause (iv)
the following new clause:
``(v) coverage under a qualified long-term
care insurance (as defined under section
7702(B)(e)).''.
(e) Effective Dates.--
(1) In general.--Except as provided by paragraph (2), the
amendments made by this section shall apply to contracts issued
after the date of the enactment of this Act.
(2) Subsection (c).--The amendments made by subsection (c)
shall apply with respect to exchanges occurring after the date
of the enactment of this Act.
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