II 109th CONGRESS 2d Session S. 2281 IN THE SENATE OF THE UNITED STATES February 14, 2006 Mr. Santorum 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 allow Americans to age with respect and dignity by providing tax incentives to assist them in preparing for the financial impact of their long-term care needs.

1.

Short title

This Act may be cited as the Aging with Respect and Dignity Act of 2005.

2.

Long-term care insurance or services permitted to be offered under cafeteria plans and flexible spending arrangements

(a)

Cafeteria plans

The last sentence of section 125(f) of the Internal Revenue Code of 1986 (defining qualified benefits) is amended by inserting before the period at the end ; except that such term shall include the payment of premiums for any qualified long-term care insurance contract (as defined in section 7702B) to the extent the amount of such payment does not exceed the eligible long-term care premiums (as defined in section 213(d)(10)) for such contract. (b)

Flexible spending arrangements

So much of section 106(c) of such Code as precedes paragraph (2) thereof is amended to read as follows: (c)

Rules relating to long-Term care benefits provided through flexible spending arrangements

(1)

In general

For purposes of subsection (a), in the case of employer-provided coverage for qualified long-term care services provided through a flexible spending or similar arrangement— (A)such coverage shall be treated as provided under an accident or health plan, and (B)if such services are provided to an individual who bears a relationship described in section 152(d)(2) (other than subparagraph (H) thereof) to the employee, such services shall be treated as provided to a dependent of the employee without regard to whether the individual is treated as a dependent of the employee under section 152(a). . (c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2005.

3.

Deduction for contributions to Long-Term Care Accounts

(a)

In general

Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to additional itemized deductions for individuals) is amended by redesignating section 224 as section 225 and by adding at the end the following new section:

224.

Long-Term Care Accounts

(a)

Deduction allowed

In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by or on behalf of such individual to a long-term care account with respect to which the individual is the account beneficiary. (b)

Limitations

(1)

Dollar limitation

(A)

In general

The aggregate amount allowable as a deduction under subsection (a) for any taxable year with respect to any individual shall not exceed $5,000. (B)

Inflation adjustment

In the case of any taxable year beginning in a calendar year after 2007, the $5,000 amount under subparagraph (A) shall be increased by an amount equal to— (i)such dollar amount, multiplied by (ii)the medical care cost adjustment under section 213(d)(10)(B)(ii) for the calendar year in which the taxable year begins, determined by substituting 2006 for 1996 in subclause (II) thereof. If any amount as adjusted under the preceding sentence is not a multiple of $10, such amount shall be rounded to the next lowest multiple of $10.(2)

Denial of deduction to dependents

No deduction shall be allowed under this section with respect to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual's taxable year begins. (c)

Long-Term Care Account

For purposes of this section, the term long-term care account means a trust which is created or organized in the United States for the exclusive benefit of the individual who is the account beneficiary of the trust and members of the individual's family and which is designated (in such manner as the Secretary shall prescribe) at the time of the establishment of the trust as a long-term care account, but only if the written governing instrument creating the trust meets the following requirements: (1)Except in the case of a qualified rollover contribution described in subsection (e)(5)— (A)no contribution will be accepted unless it is in cash, and (B)contributions will not be accepted for the calendar year in excess of the limit specified in subsection (b)(1). (2)The trustee is a bank (as defined in section 408(n)), an insurance company (as defined in section 816), or another person who demonstrates to the satisfaction of the Secretary that the manner in which that person will administer the trust will be consistent with the requirements of this section or who has so demonstrated with respect to any individual retirement plan. (3)No part of the trust assets will be invested in life insurance contracts. (4)The interest of an individual in the balance of his account is nonforfeitable. (5)The assets of the trust shall not be commingled with other property except in a common trust fund or common investment fund. (d)

Tax treatment of accounts

(1)

In general

A long-term care account shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such account shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations). (2)

Account terminations

Rules similar to the rules under paragraphs (2) and (4) of section 408(e) shall apply to long-term care accounts, and any amount treated as distributed under such rules shall be treated as not used to pay for qualified long-term care expenses. (e)

Tax treatment of distributions

(1)

Amounts used for qualified long-term care expenses

Any amount paid or distributed out of a long-term care account which is used exclusively to pay qualified long-term care expenses of the account beneficiary or any member of the beneficiary's family shall not be includible in gross income. (2)

Inclusion of amounts not used for qualified long-term care expenses

Any amount paid or distributed out of a long-term care account which is not used exclusively to pay the qualified long-term care expenses of the account beneficiary or any member of the beneficiary's family shall be included in the gross income of such beneficiary. (3)

Excess contributions returned before due date of return

(A)

In general

If any excess contribution is contributed for a taxable year to any long-term care account of an individual, paragraph (2) shall not apply to distributions from the long-term care accounts of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if— (i)such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual's return for such taxable year, and (ii)such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received.(B)

Excess contribution

For purposes of subparagraph (A), the term excess contribution means any contribution (other than a rollover contribution described in paragraph (5)) which is not deductible under this section. (4)

Additional tax on distributions not used for qualified long-term expenses

(A)

In general

The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a long-term care account of such beneficiary which is includible in gross income under paragraph (2) shall be increased by 10 percent of the amount which is so includible. (B)

Exception for disability or death

Subparagraph (A) shall not apply if the payment or distribution is made after the account beneficiary becomes disabled within the meaning of section 72(m)(7) or dies. (5)

Rollover contribution

(A)

In general

An amount is a rollover contribution described in this paragraph if it meets the requirements of subparagraphs (B) and (C). (B)

Payment to other account

Paragraph (2) shall not apply to any amount paid or distributed from a long-term care account to the account beneficiary to the extent the amount received is paid into a long-term care account for the benefit of such beneficiary not later than the 60th day after the day on which the beneficiary receives the payment or distribution. (C)

Limitation

This paragraph shall not apply to any amount described in subparagraph (B) received by an individual from a long-term care account if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (B) from a long-term care account which was not includible in the individual's gross income because of the application of this paragraph. (6)

Coordination with medical expense deduction

For purposes of determining the amount of the deduction under section 213, any payment or distribution out of a long-term care account for qualified long-term care expenses shall not be treated as an expense paid for medical care. (7)

Transfer of account incident to divorce

The transfer of an individual's interest in a long-term care account to an individual's spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) shall not be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as a long-term care account with respect to which such spouse is the account beneficiary. (8)

Treatment after death of account beneficiary

(A)

Treatment if designated beneficiary is spouse

If the account beneficiarys surviving spouse acquires such beneficiarys interest in a long-term care account by reason of being the beneficiary of such account at the death of the account beneficiary, such account shall be treated as if the spouse were the account beneficiary. (B)

Other cases

(i)

In general

If, by reason of the death of the account beneficiary, any person acquires the account beneficiary's interest in a long-term care account in a case to which subparagraph (A) does not apply— (I)such account shall cease to be a long-term care account as of the date of death, and (II)an amount equal to the fair market value of the assets in such account on such date shall be includible in such person's gross income for the taxable year which includes such date if such person is not the estate of such beneficiary, or shall be includible in such beneficiary's gross income for the last taxable year of such beneficiary if such person is the estate of such beneficiary. (ii)

Special rules

(I)

Reduction of inclusion for predeath expenses

The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified long-term care expenses which were incurred by the decedent before the date of the decedent's death and paid by such person within 1 year after such date. (II)

Deduction for estate taxes

An appropriate deduction shall be allowed under section 691(c) to any person (other than the decedent or the decedent's spouse) with respect to amounts included in gross income under clause (i) by such person. (9)

Gift tax exception

A distribution to a member of the account beneficiary's family which is not includible in gross income under paragraph (1) shall in no event be treated as a taxable gift for purposes of chapters 12 and 13. (10)

Operating rules

For purposes of applying section 72— (A)to the extent provided by the Secretary, all long-term care accounts of which an individual is an account beneficiary shall be treated as one account, (B)except to the extent provided by the Secretary, all distributions during a taxable year shall be treated as one distribution, and (C)except to the extent provided by the Secretary, the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins. (f)

Definitions and special rules

For purposes of this section— (1)

Account beneficiary

The term account beneficiary means the individual on whose behalf the long-term care account was established. (2)

Qualified long-term care expenses

The term qualified long-term care expenses means any amount paid or incurred— (A)for premiums for any qualified long-term care insurance contract (as defined in section 7702B) to the extent the amount of such payment does not exceed the eligible long-term care premiums (as defined in section 213(d)(10)) for such contract, or (B)for qualified long-term care services (as defined in section 7702B(c)) unless such payment is not treated as paid for medical care under section 213(d)(11). (3)

Member of the family

The term member of the family means, with respect to any account beneficiary, an individual who bears a relationship described in section 152(d)(2) (other than subparagraph (H) thereof) to the beneficiary. (4)

Other rules

Rules similar to the rules described in section 223(d)(4) shall apply. (g)

Custodial accounts

For purposes of this section, a custodial account or an annuity contract issued by an insurance company qualified to do business in a State shall be treated as a trust under this section if— (1)the custodial account or annuity contract would, except for the fact that it is not a trust, constitute a trust which meets the requirements of subsection (b), and (2)in the case of a custodial account, the assets of such account are held by a bank (as defined in section 408(n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which the person will administer the account will be consistent with the requirements of this section. For purposes of this title, in the case of a custodial account or annuity contract treated as a trust by reason of the preceding sentence, the person holding the assets of such account or holding such annuity contract shall be treated as the trustee thereof.(h)

Reports

The trustee of a long-term care account shall make such reports regarding such account to the Secretary and to the beneficiary of the account with respect to contributions, distributions, and such other matters as the Secretary may require. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required.

. (b)

Deduction allowed in determining adjusted gross income

Section 62(a) of the Internal Revenue Code of 1986 (defining adjusted gross income) is amended by adding at the end the following: (21)

Long-term care accounts

The deduction allowed by section 224. (c)

Tax on excess contributions

(1)

In general

Subsection (a) of section 4973 of the Internal Revenue Code of 1986 (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended by striking or at the end of paragraph (4), by inserting or at the end of paragraph (5), and by inserting after paragraph (5) the following new paragraph: (6)a long-term care account (as defined in section 224(c)), . (2)

Excess contribution

Section 4973 of such Code is amended by adding at the end the following new subsection: (h)

Excess contributions to long-term care accounts

For purposes of this section— (1)

In general

In the case of long-term care accounts (within the meaning of section 224(c)), the term excess contributions means the sum of— (A)the amount by which the amount contributed for the calendar year to such accounts (other than qualified rollover contributions (as defined in section 224(e)(5)) exceeds the contribution limit under section 224(b)(1), and (B)the amount determined under this subsection for the preceding calendar year, reduced by the excess (if any) of the maximum amount allowable as a contribution under section 224(b)(1) for the calendar year over the amount contributed to the accounts for the calendar year. (2)

Special rule

A contribution which is distributed out of a long-term care account in a distribution to which section 224(e)(3) applies shall not be taken into account under paragraph (1). . (d)

Failure to provide reports on long-term care accounts

Paragraph (2) of section 6693(a) of the Internal Revenue Code of 1986 (relating to failure to provide reports on individual retirement accounts or annuities) is amended by redesignating subparagraphs (D) and (E) as subparagraphs (E) and (F), respectively, and by inserting after subparagraph (C) the following new subparagraph: (D)section 224(h) (relating to long-term care accounts), . (e)

Conforming amendment

The table of sections for part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by striking the item relating to section 224 and inserting the following new items: Sec. 224. Long-term care accounts. Sec. 225. Cross reference. . (f)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2005.

4.

Treatment of annuity and life insurance contracts with a long-term care insurance feature

(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 charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made 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 charge, and (B)such charge shall not be includible in gross income. . (b)

Tax-free exchanges among certain insurance policies

(1)

Annuity contracts can include qualified long-term care insurance riders

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.. (2)

Life insurance contracts can include qualified long-term care insurance riders

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.. (3)

Expansion of tax-free exchanges of life insurance, endowment, and annuity contracts for long-term care contracts

Subsection (a) of section 1035 of such Code (relating to certain exchanges of insurance policies) is amended— (A)in paragraph (1) by striking contract; and inserting contract or for a qualified long-term care insurance contract;, (B)in paragraph (2) by striking contract; and inserting contract, or (C) for a qualified long-term care insurance contract;, and (C)in paragraph (3) by striking contract. and inserting contract or for a qualified long-term care insurance 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) is amended by striking or at the end of paragraph (2), by striking the period at the end of paragraph (3) and inserting ; or, and by inserting after paragraph (3) the following new paragraph: (4)a qualified long-term care insurance contract for a qualified long-term care insurance contract. . (c)

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)

Denial of deduction under section 213

No deduction shall be allowed under section 213(a) for any payment made for coverage under a qualified long-term care insurance contract if such payment is made as a charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract. (3)

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 charges (but not premium payments) against the life insurance contract’s cash surrender value (within the meaning of section 7702(f)(2)(A)) for coverage under the qualified long-term care insurance contract made to that date under the life insurance contract, less (B)any such charges the imposition of which reduces the premiums paid for the life insurance contract (within the meaning of section 7702(f)(1)). This paragraph shall not apply to any charges described in subparagraph (A) which are otherwise taken into account in computing the guideline premium limitation by reason of section 7702(f)(5)(A)(v).(4)

Portion defined

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. (5)

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. (C)A contract purchased by an employer for the benefit of the employee (or the employee’s spouse). 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.. (d)

Information reporting

(1)Subpart B of part III of subchapter A of chapter 61 of such Code (relating to information concerning transactions with other persons) is amended by adding at the end the following new section:

6050U.

Charges or payments for qualified long-term care insurance contracts under combined arrangements

(a)

Requirement of reporting

Any person who makes a charge against the cash value of an annuity contract, or the cash surrender value of a life insurance contract, which is excludable from gross income under section 72(e)(11) shall make a return, according to the forms or regulations prescribed by the Secretary, setting forth— (1)the amount of the aggregate of such charges against each such contract for the calendar year, (2)the amount of the reduction in the investment in each such contract by reason of such charges, and (3)the name, address, and TIN of the individual who is the holder of each such contract. (b)

Statements to be furnished to persons with respect to whom information is required

Every person required to make a return under subsection (a) shall furnish to each individual whose name is required to be set forth in such return a written statement showing— (1)the name, address, and phone number of the information contact of the person making the payments, and (2)the information required to be shown on the return with respect to such individual. The written statement required under the preceding sentence shall be furnished to the individual on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made.

. (2)

Clerical amendment

The table of sections for subpart B of part III of subchapter A of such chapter 61 of such Code is amended by adding at the end the following new item: Sec. 6050U. Charges or payments for qualified long-term care insurance contracts under combined arrangements . (e)

Treatment of policy acquisition expenses

Subsection (e) of section 848 of such Code (relating to classification of contracts) is amended by adding at the end the following new paragraph: (6)

Treatment of certain qualified long-term care insurance contract arrangements

An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection (c)(1). . (f)

Application to other definitions and rules

Section 7702(f) of such Code (relating to other definitions and special rules) is amended (1)in paragraph (1), by inserting (other than paragraph (11) thereof) after section 72(e), and (2)in paragraph (5)(A), by striking or at the end of clause (iv), by redesignating clause (v) as clause (vi), and by inserting after clause (iv) the following new clause: (v)qualified long-term care insurance contract which is a part of or a rider on the life insurance contract, or . (g)

Effective dates

(1)

In general

Except as provided by paragraph (2), the amendments made by this section shall apply to contracts issued before, on, or after December 31, 2005, but only with respect to periods beginning after such date. (2)

Subsection (b)

The amendments made by subsection (b) shall apply with respect to exchanges occurring after December 31, 2005.