[Federal Register Volume 63, Number 237 (Thursday, December 10, 1998)]
[Rules and Regulations]
[Pages 68184-68188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32759]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8792]
RIN 1545-AV56


Qualified Long-Term Care Insurance Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final Income Tax Regulations relating 
to consumer protection with respect to qualified long-term care 
insurance contracts and relating to events that will result in the loss 
of grandfathered status for long-term care insurance contracts issued 
prior to January 1, 1997. Changes to the applicable law were made by 
the Health Insurance Portability and Accountability Act of 1996. The 
regulations affect issuers of long-term care insurance contracts and 
individuals entitled to receive payments under these contracts. The 
regulations are necessary to provide these taxpayers with guidance 
needed to comply with these changes.

DATES: Effective date. These regulations are effective December 10, 
1998.
    Applicability date. Section 1.7702B-1 (concerning consumer 
protection provisions) of the regulations applies with respect to 
contracts issued after December 10, 1999. Section 1.7702B-2 (concerning 
special rules for pre-1997 contracts) of the regulations is applicable 
January 1, 1999.

FOR FURTHER INFORMATION CONTACT: Katherine A. Hossofsky, (202) 622-3477 
(not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) to provide rules relating to consumer protection with 
respect to qualified long-term care insurance contracts and relating to 
events that will result in the loss of grandfathered status for long-
term care insurance contracts issued prior to January 1, 1997.
    A notice of proposed rulemaking (REG-109333-97) under section 7702B 
of the Code was published in the Federal Register on January 2, 1998 
(63 FR 35). Written comments were received from the public, and a 
public hearing was held on May 13, 1998. After consideration of all the 
comments, the regulations proposed by REG-109333-97 are adopted as 
revised by this Treasury decision.

Explanation of Statutory Provisions

    The Health Insurance Portability and Accountability Act of 1996 
(Public Law 104-191, 110 Stat. 1936, 2054 and 2063) (HIPAA) added 
section 7702B to the Internal Revenue Code of 1986 (the Code). Section 
7702B establishes the tax treatment for qualified long-term care 
insurance contracts. Section 7702B(a)(1) and (3) of the Code provide 
that a qualified long-term care insurance contract is treated as an 
accident and health insurance contract and that any employer plan 
providing coverage under a qualified long-term care insurance contract 
is treated as an accident or health plan with respect to that coverage.
    Section 7702B(a)(2) of the Code provides that amounts (other than 
policyholder dividends and premium refunds) received under a qualified 
long-term care insurance contract are generally excludable from gross 
income as amounts received for personal injuries and sickness.
    Section 213(d)(1)(D) of the Code was amended by section 322 of 
HIPAA to provide that eligible long-term care insurance premiums, as 
defined in section 213(d)(10) of the Code, are medical care expenses.
    Under section 7702B(b)(1)(F) of the Code, a qualified long-term 
care insurance contract must meet the consumer protection provisions of 
section 7702B(g) of the Code. In addition, section 4980C of the Code 
imposes an excise tax on issuers of qualified long-term care insurance 
contracts that do not provide further consumer protections.
    Section 7702B of the Code applies to contracts issued after 
December 31, 1996. Section 321(f)(2) of HIPAA treats a contract issued 
before January 1, 1997, as a qualified long-term care insurance 
contract under section 7702B(b) of the Code, and services provided or 
reimbursed under such a contract as qualified long-term care services 
under section 7702B(c) of the Code, provided the contract met the long-
term care insurance requirements of the State in which the contract was 
sitused at the time the contract was issued. Section 321(f)(2) of HIPAA 
also provides that in the case of an individual covered on December 31, 
1996, by a State long-term care plan under section 7702B(f) of the 
Code, the terms of the plan on that date are treated as a contract 
meeting the long-term care insurance requirements of that State.
    Section 321(f)(4) of HIPAA provides that for purposes of applying 
sections 101(f), 7702, and 7702A of the Code, neither the issuance of a 
rider that is treated as a qualified long-term care insurance contract 
nor the addition of any provision required to conform any other long-
term care rider to the requirements applicable to a qualified long-term 
care insurance contract is treated as a modification or material change 
of the contract.

Explanation of Provisions

    The final regulations provide guidance concerning
     The consumer protection requirements that apply to 
qualified long-term care insurance contracts under sections 7702B(g), 
7702B(b)(1)(F), and 4980C of the Code; and
     The grandfather provisions of section 321(f)(2) of HIPAA 
under which pre-1997 contracts are treated as qualified long-term care 
insurance contracts if certain conditions are met.
    The standards in the final regulations are based on safe harbors 
that were originally set forth in Notice 97-31 (1997-1 C.B. 417), and 
in the regulations proposed in REG-109333-97.

Notice 97-31

    Notice 97-31 was issued to provide interim standards for taxpayers 
to use in interpreting the new long-term care provisions and to 
facilitate operation of the insurance market by avoiding the

[[Page 68185]]

need to amend contracts. For example, Notice 97-31 includes interim 
guidance on the determination of whether an individual is a chronically 
ill individual, including safe harbor definitions of the terms 
substantial assistance, hands-on assistance, standby assistance, severe 
cognitive impairment, and substantial supervision. The standards 
contained in Notice 97-31 include interim guidance on both the consumer 
protection provisions and the scope of the statutory grandfather 
provisions that apply to long-term care insurance contracts issued 
before 1997.

Consumer Protection Requirements

    Under sections 7702B(b)(1)(F), 7702B(g), and 4980C of the Code, 
qualified long-term care insurance contracts and issuers of those 
contracts are required to satisfy certain provisions of the Long-Term 
Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model 
Regulation (Model Regulation) promulgated by the National Association 
of Insurance Commissioners (NAIC) for long-term care insurance as of 
January 1993. The requirements relate to guaranteed renewability, 
unintentional lapse, disclosure, prohibitions against post-claims 
underwriting, inflation protection, and prohibitions against pre-
existing conditions exclusions and probationary periods. Section 4980C 
imposes an excise tax on an issuer of a qualified long-term care 
insurance contract if, after 1996, the issuer fails to satisfy certain 
requirements, including requirements relating to application forms, 
reporting, marketing, appropriateness of recommended purchase, standard 
format outline of coverage, delivery of a shopper's guide, right to 
return, outline of coverage, and incontestability. Most of these 
requirements are based on the NAIC Model Act and Regulation.
    The final regulations reflect the standards that were set forth in 
Notice 97-31 and in the regulations proposed in REG-109333-97. For 
example, the consumer protection requirements will be considered 
satisfied if a contract complies with State law in a State that has 
adopted the related NAIC model or a more stringent version of the 
model.
    Commentators generally approved of the consumer protection 
provisions of the proposed regulations. Some commentators suggested 
that the provisions should be applied on a prospective basis, such as 
for long-term care insurance contracts issued more than one year after 
publication of the final regulations. Consistent with this suggestion, 
the final regulations apply to contracts issued after December 10, 
1999.
    Commentators suggested that if any State has adopted a Model Act or 
Model Regulation requirement, such State's interpretation of that 
requirement should be considered probative but not controlling of the 
meaning of the analogous requirements for purposes of applying sections 
7702B(g) and 4980C of the Code to a contract sitused in another State. 
This suggestion was not adopted. If a particular State has adopted a 
Model Act or Model Regulation requirement, that State's interpretation 
should apply to determine whether the contract meets that State's 
requirement. If a State has not adopted a particular requirement, the 
determination of what interpretation should apply for purposes of 
section 7702B(g) and 4980C of the Code is more appropriately made on a 
case-by-case basis.

Pre-1997 Long-Term Care Insurance Contracts

    Section 321(f)(2) of HIPAA provides that a contract issued before 
January 1, 1997, is treated as a qualified long-term care insurance 
contract if the contract met the ``long-term care insurance 
requirements of the State'' in which the contract was sitused at the 
time it was issued. Under the final regulations, the date on which a 
long-term care insurance contract other than a group long-term care 
insurance contract is issued is generally the date assigned to the 
contract by the insurance company. In no event is the issue date 
earlier than the date on which the policyholder submitted a signed 
application for coverage to the insurance company. In addition, if the 
period between the date of application and the date on which the long-
term care insurance contract actually becomes effective is 
substantially longer than under the insurance company's usual business 
practice, then the issue date is generally the date the contract 
becomes effective. For purposes of applying the grandfather rule of 
section 321(f)(2) of HIPAA to a group long-term care insurance 
contract, the issue date of the contract is the date the group contract 
was issued. As a result, coverage for an individual who joins a 
grandfathered group long-term care insurance contract on or after 
January 1, 1997, is accorded the same treatment under section 321(f)(2) 
as is accorded coverage for those who joined the group before that 
date.
    Notice 97-31 and the proposed regulations use the term material 
change to identify those changes to pre-1997 long-term care insurance 
contracts that are treated as the issuance of a new contract and, 
therefore, result in the loss of grandfathered status under section 
7702B. The use of the term material may have caused some confusion in 
light of the bright line standards that the regulations are generally 
intended to provide. For this reason, the final regulations do not use 
the term material in this context. No substantive change is intended by 
this modification.
    The final regulations generally adopt the standards set forth in 
the proposed regulations for purposes of determining whether a change 
to a pre-1997 long-term care insurance contract is considered the 
issuance of a new contract.\1\ For example, the final regulations 
provide that the exercise of any right provided to a policyholder or 
the addition of any right that is required by State law to be provided 
to the policyholder will not be treated as the issuance of a new 
contract. Thus, as illustrated in an example in the regulations, the 
exercise of a right set forth in a pre-1997 contract, without 
underwriting, does not result in the loss of grandfathered status.
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    \1\ These standards are different from those that apply for 
purposes of determining the grandfathered status of other types of 
insurance contracts under the Code (including sections 7702, 7702A, 
101(f), and 264). Those other provisions limit the tax benefits 
associated with the purchase of insurance products that, unlike pre-
1997 long-term care insurance contracts, have a substantial 
investment orientation.
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    The final regulations also provide that the following practices 
will not be treated as the issuance of a new contract for purposes of 
the grandfathering provision of section 321(f)(2) of HIPAA: (1) A 
change in the mode of premium payment, such as a change from paying 
premiums monthly to quarterly; (2) a classwide increase or decrease in 
premiums for contracts that have been issued on a guaranteed renewable 
basis; (3) a reduction in premiums due to the purchase of a long-term 
care insurance policy by a member of the policyholder's family; (4) a 
reduction in coverage (with correspondingly lower premiums) made at the 
request of a policyholder; (5) a reduction in premiums that occurs 
because the policyholder becomes entitled to a discount under the 
issuer's pre-1997 premium rate structure (such as when a policyholder 
becomes a member of a group entitled to a group discount, or changes 
from smoker to nonsmoker status); (6) the addition, without an increase 
in premiums, of alternative forms of benefits that may be selected by 
the policyholder; (7) the addition of a rider to increase benefits 
under a pre-1997 contract if the rider would

[[Page 68186]]

constitute a qualified long-term care insurance contract if it were a 
separate contract; (8) the deletion of a rider or provision of a 
contract (called an HHS (Health and Human Services) rider) that 
prohibited coordination of benefits with Medicare; (9) the effectuation 
of a continuation or conversion of coverage right under a group 
contract following an individual's ineligibility for continued coverage 
under the group contract; and (10) the substitution of one insurer for 
another in an assumption reinsurance transaction. These exceptions are 
generally similar to those listed in the proposed regulations. In 
response to comments, however, the exceptions have been broadened to 
permit certain premium reductions and to clarify that a change in 
insurer pursuant to an assumption reinsurance transaction is not 
treated as the issuance of a new contract (assuming that the contract 
would not otherwise be treated as newly issued, such as by reason of a 
change in the amount or timing of benefits or premiums).
    Some commentators suggested that the regulations include a 
parenthetical to the effect that some changes in the amount or timing 
of items (such as de minimis changes in premiums) are not treated as 
the issuance of a new contract, even if no specific exception applies 
under the regulation. An important purpose of these regulations is to 
provide certainty as to the qualification of pre-1997 long-term care 
insurance contracts, and the exceptions enumerated in the proposed 
regulations provide broad relief from treatment as the issuance of a 
new contract resulting in the loss of grandfathered status. 
Accordingly, the final regulations do not contain this additional 
parenthetical.
    Some commentators identified additional circumstances under which 
expansion of coverage under a group long-term care insurance contract 
should not be treated as the issuance of a new contract. For example, 
some requested that the addition of a spouse, dependent children, or 
others should not be treated as the issuance of a new contract. Other 
commentators suggested that no loss of grandfathering should result 
from the expansion of coverage under a group contract by reason of a 
corporate merger or acquisition, or the extension of coverage to 
collectively bargained employees, or the addition of former employees. 
The final regulations clarify that such expansion is not treated as the 
issuance of a new contract, provided that the addition is without 
underwriting and is pursuant to the terms of the contract and the plan 
under which the contract was issued as in effect on December 31, 1996. 
Thus, the addition of a business's assets and related employees by a 
company with a pre-1997 group contract is not treated as the issuance 
of a new contract if, as of December 31, 1996, the contract and the 
plan under which it was issued provided that new employees 
automatically are eligible to participate in the group contract. If, 
however, a new subsidiary is acquired by the company and the company's 
pre-1997 group contract or plan requires that a subsidiary be 
designated by the company in order for its employees to be eligible to 
participate, then the designation of the new subsidiary would be a 
change in the terms of the contract or in the plan relating to 
eligibility. Although the final regulations were not modified to 
accommodate further expansion, a new qualified long-term care insurance 
contract could be entered into to expand coverage under these 
circumstances. Alternatively, the final regulations permit coverage 
under the pre-1997 contract to be expanded by a rider to the pre-1997 
contract if the rider would constitute a qualified long-term care 
insurance contract if it were issued as a separate contract.\2\
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    \2\ As was indicated in the preamble to the proposed 
regulations, certain of the consumer protection requirements would 
not apply to such a rider. Specifically, sections 
7702B(g)(2)(A)(i)(III), 7702B(g)(2)(A)(i)(V), 7702B(g)(2)(A)(i)(VII) 
(other than section 9B of the NAIC Model regulation), 
7702B(g)(2)(A)(i)(X), 7702B(g)(3), 7702B(g)(4), 4980C(c)(1)(A)(I), 
and 4980C(c)(2) of the Internal Revenue Code would apply only the 
first time a contract is purchased, and would not apply to the 
purchase of a rider.
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    Finally, it was suggested that the grandfather provisions of the 
final regulations should be effective immediately. The final 
regulations with respect to contracts issued before 1997 are effective 
January 1, 1999.

Standards Before the Effective Date of the Final Regulations

    The consumer protection provisions in the final regulations apply 
with respect to contracts issued after December 10, 1999. Taxpayers may 
continue to rely on Notice 97-31 with respect to contracts issued on or 
before that date. In addition, a contract issued on or before December 
10, 1999 will not be treated as failing to satisfy the consumer 
protection requirements of section 7702B(g) or 4980C of the Code if the 
contract satisfies the requirements of the final regulations. Taxpayers 
may not rely on Notice 97-31 with respect to contracts issued after 
December 10, 1999.
    The final regulations are effective January 1, 1999, with respect 
to pre-1997 long-term care insurance contracts. Taxpayers may continue 
to rely on Notice 97-31 for the purpose of determining whether a change 
made before January 1, 1999, to a pre-1997 contract is treated as the 
issuance of a new contract. In addition, a change made before that date 
to a pre-1997 contract will not be treated as the issuance of a new 
contract if the change is not treated as the issuance of a new contract 
under the final regulations. Taxpayers may not rely on Notice 97-31 
with respect to changes made on or after January 1, 1999.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Internal Revenue Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.
    Drafting information. The principal author of these regulations is 
Katherine A. Hossofsky, Office of Assistant Chief Counsel (Financial 
Institutions & Products). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Sections 1.7702B-1 and 1.7702B-2 are added to read as 
follows:


Sec. 1.7702B-1  Consumer protection provisions.

    (a) In general. Under sections 7702B(b)(1)(F), 7702B(g), and 4980C, 
qualified long-term care insurance contracts and issuers of those 
contracts are required to satisfy certain provisions

[[Page 68187]]

of the Long-Term Care Insurance Model Act (Model Act) and Long-Term 
Care Insurance Model Regulation (Model Regulation) promulgated by the 
National Association of Insurance Commissioners (NAIC), as adopted as 
of January 1993. The requirements for qualified long-term care 
insurance contracts under section 7702B(b)(1)(F) and (g) relate to 
guaranteed renewal or noncancellability, prohibitions on limitations 
and exclusions, extension of benefits, continuation or conversion of 
coverage, discontinuance and replacement of policies, unintentional 
lapse, disclosure, prohibitions against post-claims underwriting, 
minimum standards, inflation protection, prohibitions against pre-
existing conditions exclusions and probationary periods, and prior 
hospitalization. The requirements for qualified long-term care 
insurance contracts under section 4980C relate to application forms and 
replacement coverage, reporting requirements, filing requirements for 
marketing, standards for marketing, appropriateness of recommended 
purchase, standard format outline of coverage, delivery of a shopper's 
guide, right to return, outline of coverage, certificates under group 
plans, policy summary, monthly reports on accelerated death benefits, 
and incontestability period.
    (b) Coordination with State requirements--(1) Contracts issued in a 
State that imposes more stringent requirements. If a State imposes a 
requirement that is more stringent than the analogous requirement 
imposed by section 7702B(g) or 4980C, then, under section 4980C(f), 
compliance with the more stringent requirement of State law is 
considered compliance with the parallel requirement of section 7702B(g) 
or 4980C. The principles of paragraph (b)(3) of this section apply to 
any case in which a State imposes a requirement that is more stringent 
than the analogous requirement imposed by section 7702B(g) or 4980C (as 
described in this paragraph (b)(1)), but in which there has been a 
failure to comply with that State requirement.
    (2) Contracts issued in a State that has adopted the model 
provisions. If a State imposes a requirement that is the same as the 
parallel requirement imposed by section 7702B(g) or 4980C, compliance 
with that requirement of State law is considered compliance with the 
parallel requirement of section 7702B(g) or 4980C, and failure to 
comply with that requirement of State law is considered failure to 
comply with the parallel requirement of section 7702B(g) or 4980C.
    (3) Contracts issued in a State that has not adopted the model 
provisions or more stringent requirements. If a State has not adopted 
the Model Act, the Model Regulation, or a requirement that is the same 
as or more stringent than the analogous requirement imposed by section 
7702B(g) or 4980C, then the language, caption, format, and content 
requirements imposed by sections 7702B(g) and 4980C with respect to 
contracts, applications, outlines of coverage, policy summaries, and 
notices will be considered satisfied for a contract subject to the law 
of that State if the language, caption, format, and content are 
substantially similar to those required under the parallel provision of 
the Model Act or Model Regulation. Only nonsubstantive deviations are 
permitted in order for language, caption, format, and content to be 
considered substantially similar to the requirements of the Model Act 
or Model Regulation.
    (c) Effective date. This section applies with respect to contracts 
issued after December 10, 1999.


Sec. 1.7702B-2  Special rules for pre-1997 long-term care insurance 
contracts.

    (a) Scope. The definitions and special provisions of this section 
apply solely for purposes of determining whether an insurance contract 
(other than a qualified long-term care insurance contract described in 
section 7702B(b) and any regulations issued thereunder) is treated as a 
qualified long-term care insurance contract for purposes of the 
Internal Revenue Code under section 321(f)(2) of the Health Insurance 
Portability and Accountability Act of 1996 (Public Law 104-191).
    (b) Pre-1997 long-term care insurance contracts--(1) In general. A 
pre-1997 long-term care insurance contract is treated as a qualified 
long-term care insurance contract, regardless of whether the contract 
satisfies section 7702B(b) and any regulations issued thereunder.
    (2) Pre-1997 long-term care insurance contract defined. A pre-1997 
long-term care insurance contract is any insurance contract with an 
issue date before January 1, 1997, that met the long-term care 
insurance requirements of the State in which the contract was sitused 
on the issue date. For this purpose, the long-term care insurance 
requirements of the State are the State laws (including statutory and 
administrative law) that are intended to regulate insurance coverage 
that constitutes ``long-term care insurance'' (as defined in section 4 
of the National Association of Insurance Commissioners (NAIC) Long-Term 
Care Insurance Model Act, as in effect on August 21, 1996), regardless 
of the terminology used by the State in describing the insurance 
coverage.
    (3) Issue date of a contract--(i) In general. Except as otherwise 
provided in this paragraph (b)(3), the issue date of a contract is the 
issue date assigned to the contract by the insurance company. In no 
event is the issue date earlier than the date the policyholder 
submitted a signed application for coverage to the insurance company. 
If the period between the date the signed application is submitted to 
the insurance company and the date coverage under which the contract 
actually becomes effective is substantially longer than under the 
insurance company's usual business practice, then the issue date is the 
later of the date coverage under which the contract becomes effective 
or the issue date assigned to the contract by the insurance company. A 
policyholder's right to return a contract within a free-look period 
following delivery for a full refund of any premiums paid is not taken 
into account in determining the contract's issue date.
    (ii) Special rule for group contracts. The issue date of a group 
contract (including any certificate issued thereunder) is the date on 
which coverage under the group contract becomes effective.
    (iii) Exchange of contract or certain changes in a contract treated 
as a new issuance. For purposes of this paragraph (b)(3)--
    (A) A contract issued in exchange for an existing contract after 
December 31, 1996, is considered a contract issued after that date;
    (B) Any change described in paragraph (b)(4) of this section is 
treated as the issuance of a new contract with an issue date no earlier 
than the date the change goes into effect; and
    (C) If a change described in paragraph (b)(4) of this section 
occurs with regard to one or more, but fewer than all, of the 
certificates evidencing coverage under a group contract, then the 
insurance coverage under the changed certificates is treated as 
coverage under a newly issued group contract (and the insurance 
coverage provided by any unchanged certificate continues to be treated 
as coverage under the original group contract).
    (4) Changes treated as the issuance of a new contract--(i) In 
general. For purposes of paragraph (b)(3) of this section, except as 
provided in paragraph (b)(4)(ii) of this section, the following changes 
are treated as the issuance of a new contract--
    (A) A change in the terms of a contract that alters the amount or 
timing of an item payable by either the

[[Page 68188]]

policyholder (or certificate holder), the insured, or the insurance 
company;
    (B) A substitution of the insured under an individual contract; or
    (C) A change (other than an immaterial change) in the contractual 
terms, or in the plan under which the contract was issued, relating to 
eligibility for membership in the group covered under a group contract.
    (ii) Exceptions. For purposes of this paragraph (b)(4), the 
following changes are not treated as the issuance of a new contract--
    (A) A policyholder's exercise of any right provided under the terms 
of the contract as in effect on December 31, 1996, or a right required 
by applicable State law to be provided to the policyholder;
    (B) A change in the mode of premium payment (for example, a change 
from monthly to quarterly premiums);
    (C) In the case of a policy that is guaranteed renewable or 
noncancellable, a classwide increase or decrease in premiums;
    (D) A reduction in premiums due to the purchase of a long-term care 
insurance contract by a family member of the policyholder;
    (E) A reduction in coverage (with a corresponding reduction in 
premiums) made at the request of a policyholder;
    (F) A reduction in premiums as a result of extending to an 
individual policyholder a discount applicable to similar categories of 
individuals pursuant to a premium rate structure that was in effect on 
December 31, 1996, for the issuer's pre-1997 long-term care insurance 
contracts of the same type;
    (G) The addition, without an increase in premiums, of alternative 
forms of benefits that may be selected by the policyholder;
    (H) The addition of a rider (including any similarly identifiable 
amendment) to a pre-1997 long-term care insurance contract in any case 
in which the rider, if issued as a separate contract of insurance, 
would itself be a qualified long-term care insurance contract under 
section 7702B and any regulations issued thereunder (including the 
consumer protection provisions in section 7702B(g) to the extent 
applicable to the addition of a rider);
    (I) The deletion of a rider or provision of a contract that 
prohibited coordination of benefits with Medicare (often referred to as 
an HHS (Health and Human Services) rider);
    (J) The effectuation of a continuation or conversion of coverage 
right that is provided under a pre-1997 group contract and that, in 
accordance with the terms of the contract as in effect on December 31, 
1996, provides for coverage under an individual contract following an 
individual's ineligibility for continued coverage under the group 
contract; and
    (K) The substitution of one insurer for another insurer in an 
assumption reinsurance transaction.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. (i) On December 3, 1996, A, an individual, submits a 
signed application to an insurance company to purchase a nursing 
home contract that meets the long-term care insurance requirements 
of the State in which the contract is sitused. The insurance company 
decides on December 20, 1996, that it will issue the contract, and 
assigns December 20, 1996, as the issue date for the contract. Under 
the terms of the contract, A's insurance coverage becomes effective 
on January 1, 1997. The company delivers the contract to A on 
January 3, 1997. A has the right to return the contract within 15 
days following delivery for a refund of all premiums paid.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date 
of the contract is December 20, 1996. Thus, the contract is a pre-
1997 long-term care insurance contract that is treated as a 
qualified long-term care insurance contract.
    Example 2. (i) The facts are the same as in Example 1, except 
that the insurance coverage under the contract does not become 
effective until March 1, 1997. Under the insurance company's usual 
business practice, the period between the date of the application 
and the date the contract becomes effective is 30 days or less.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date 
of the contract is March 1, 1997. Thus, the contract is not a pre-
1997 long-term care insurance contract, and, accordingly, the 
contract must meet the requirements of section 7702B(b) and any 
regulations issued thereunder to be a qualified long-term care 
insurance contract.
    Example 3. (i) B, an individual, is the policyholder under a 
long-term care insurance contract purchased in 1995. On June 15, 
2000, the insurance coverage and premiums under the contract are 
increased by agreement between B and the insurance company.
    (ii) Under paragraph (b)(4)(i)(A) of this section, a change in 
the terms of a contract that alters the amount or timing of an item 
payable by the policyholder or the insurance company is treated as 
the issuance of a new contract. Thus, B's coverage is treated as 
coverage under a contract issued on June 15, 2000, and, accordingly, 
the contract must meet the requirements of section 7702B(b) and any 
regulations issued thereunder in order to be a qualified long-term 
care insurance contract.
    Example 4. (i) C, an individual, is the policyholder under a 
long-term care insurance contract purchased in 1994. At that time 
and through December 31, 1996, the contract met the long-term care 
insurance requirements of the State in which the contract was 
sitused. In 1996, the policy was amended to add a provision 
requiring the policyholder to be offered the right to increase 
dollar limits for inflation every three years (without the 
policyholder being required to pass a physical or satisfy any other 
underwriting requirements). During 2002, C elects to increase the 
amount of insurance coverage (with a resulting premium increase) 
pursuant to the inflation provision.
    (ii) Under paragraph (b)(4)(ii)(A) of this section, an increase 
in the amount of insurance coverage at the election of the 
policyholder (without the insurance company's consent and without 
underwriting or other limitations on the policyholder's rights) 
pursuant to a pre-1997 inflation provision is not treated as the 
issuance of a new contract. Thus, C's contract continues to be a 
pre-1997 long-term care insurance contract that is treated as a 
qualified long-term care insurance contract.

    (c) Effective date. This section is applicable January 1, 1999.
David A. Mader,
Acting Deputy Commissioner of Internal Revenue.

    Approved: November 24, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-32759 Filed 12-9-98; 8:45 am]
BILLING CODE 4830-01-U