[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 3029 Introduced in Senate (IS)]







108th CONGRESS
  2d Session
                                 S. 3029

  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 SENATE OF THE UNITED STATES

                            December 7, 2004

 Mr. Smith (for himself and Mr. Conrad) introduced the following bill; 
     which was read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 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 ``Retirement Security for Life Act of 
2004''.

SEC. 2. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS.

    (a) Lifetime Annuity Payments Under Annuity Contracts.--Section 
72(b) of the Internal Revenue Code of 1986 (relating to exclusion 
ratio) is amended by adding at the end 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 $20,000.
                    ``(B) Cost-of-living adjustment.--In the case of 
                taxable years beginning after December 31, 2005, 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 2004' 
                        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.
                    ``(C) 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.
                    ``(D) 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 the Internal 
Revenue Code of 1986 is amended by adding at the end 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 (w), 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 (w)(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 the 
Internal Revenue Code of 1986 is amended by redesignating subsection 
(w) as subsection (x) and by inserting after subsection (v) the 
following new subsection:
    ``(w) 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.--Section 101(d) of the Internal Revenue 
        Code of 1986 (relating to payment of life insurance proceeds at 
        a date later than death) is amended by adding at the end 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(w) 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.--Section 101(d)(1) of such Code 
        is amended by inserting ``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.
                                 <all>