1.
This Act may be cited as the
Retirement Security for Life Act of
2005
.
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 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, 2006, 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.
(C)
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)
Subsection (c) of section 72
of the Internal Revenue Code of 1986 is amended by adding at the end the
following new paragraph:
(5)
(A)
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)
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)
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 (x) as subsection
(y) and by inserting after subsection (x) the following new subsection:
(x)
Recapture tax for modifications to or reductions in lifetime
annuity payments
(1)
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)
(A)
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)
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)
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 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)
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)
(1)
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.