Exclusion for lifetime income payments

(a)

Lifetime income payments under annuity contracts

Subsection (b) of section 72 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

(5)

Exclusion for lifetime income payments

(A)

In general

In the case of lifetime income payments received under one or more annuity contracts (which are not taken into account under subparagraph (B)) in any taxable year, gross income shall not include 50 percent of the portion of such payments which would (without regard to this paragraph) be includible 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 $10,000. (B)

Lower percentage exclusion and separate limitation for annuities provided under certain retirement plans

In the case of lifetime income payments received under any qualified retirement plan (as defined in section 4974(c)), or any eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A), gross income shall not include 25 percent of the portion of such payments which would (without regard to this paragraph) be includible 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 $5,000 (twice such amount in the case of a joint return). (C)

Cost-of-living adjustment

In the case of taxable years beginning after December 31, 2010, the dollar amounts in subparagraphs (A) and (B) shall each 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 2009 for calendar year 1992 in subparagraph (B) thereof.

If any amount as increased under the preceding sentence is not a multiple of $100, such amount shall be rounded to the next lower multiple of $100.

(D)

Application of paragraph

Subparagraphs (A) and (B) shall not apply to— (i)any amount received under a defined benefit plan, (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 the following new paragraph:

(5)

Lifetime income payments

(A)

In general

For purposes of subsections (b) and (x), the term lifetime income 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 to the extent that the requirement of subparagraph (D) is met, (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 to the extent that the requirement of subparagraph (D) is met. (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 (not less than zero) 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, (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, (IV)because the payments are reduced on account of a qualified domestic relations order (within the meaning of section 414(p)) which becomes effective after the commencement of the annuity payments, or (V)because, in the case of an annuity payable over the lives of the annuitant and a joint annuitant, the amounts paid after the death of the annuitant or joint annuitant are less than the amounts payable during their joint lives. (B)

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 income 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 income 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 minimum period of payments shall be determined as of the annuity starting date and reduced by one for each subsequent year.

(C)

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 income payments under the contract or the amount, if any, available for withdrawal under the contract on the date of death. (D)

Special rules for joint annuitants

For purposes of subclauses (II) and (IV) of subparagraph (A)(ii), the requirement of this subparagraph is met only to the extent that— (i)the annuitant is the spouse of the joint annuitant as of the annuity starting date, (ii)the difference in age between the annuitant and joint annuitant is 15 years or less, (iii)in the case of any payment received under an annuity contract described in subsection (b)(5)(A), such payment is made to or for the benefit of the individual who furnished the consideration for such annuity contract, or (iv)in the case of any payment received under a plan described in subsection (b)(5)(B), such payment is made to or for the benefit of the employee or the individual for whose benefit the plan was established. (6)

Annuity contract

For purposes of paragraph (5) and subsection (b)(5), the term annuity contract means a commercial annuity (as defined by section 3405(e)(6)), other than an endowment or life insurance contract.

(c)

Recapture tax for lifetime income payments

Section 72 of such Code is amended by redesignating subsection (x) as subsection (y) and by inserting after subsection (w) the following new subsection:

(x)

Recapture tax for modifications to or reductions in lifetime income payments

(1)

In general

If any amount received under an annuity contract is excluded from income by reason of subsection (b)(5) (relating to exclusion for lifetime income payments), and— (A)the series of payments under such contract is subsequently modified so any future payments are not lifetime income payments, (B)after the date of receipt of the first lifetime income 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 income 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)(B) or a minimum amount that must be paid in any event (within the meaning of subsection (c)(5)(C)),

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 excess of— (i)the amount that was excluded from the taxpayer’s gross income under subsection (b)(5) before the modification or reduction described in paragraph (1), over (ii)the amount that would have been excludible under such subsection if such modification or reduction 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 payment of life insurance proceeds at a date later than death) is amended by redesignating paragraph (3) as paragraph (4) and inserting after paragraph (2) the following new paragraph:

(3)

Exclusion for lifetime income 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 income payments (within the meaning of section 72(c)(5), applied with the substitutions described in subparagraph (B)) 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)(A). (B)

Recapture and other special rules

For purposes of this paragraph, rules similar to the rules of subparagraphs (D) and (E) of section 72(b)(5) and section 72(x) shall be applied by substituting beneficiary of the life insurance contract for annuitant and life insurance contract for annuity contract therein.

(2)

Conforming amendment

Paragraph (1) of section 101(d) of such Code is amended by inserting or paragraph (3) 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 taxable 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.