[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.
                                 <all>