House Panel Approves Annuity/LTC Combo

Under the LTC rider provision approved by the committee, insurance companies will not be able to amortize the LTC portion in the combo product at the rate they currently otherwise could for LTC even though the LTC portion is a "known number," according to one industry official.

Tax treatment for insurers booking annuities is contained in Section 848 of the IRS Code, lawyers said. This provision requires an insurance company to capitalize a percentage of the premiums it receives for a contract, 1.75% for annuities and 7.7% for life insurance, and amortize the amount over 10 years. As a result, the company cannot immediately deduct its acquisition costs and must deduct the costs ratably over a period of years thus increasing its tax in the year of policy acquisition.

Under the legislation as approved by the panel, premiums paid for the combo product will not be allowed to be deducted as medical expenses. But tax-free conversions of existing life, annuity and LTC products into annuities with LTC riders will be permitted.

But the bill faces huge problems in being enacted this year because Congress is in disarray and also because a similar Senate bill is being bottled up at the request of employers and unions concerned that the defined benefit provisions in it are so stringent that enactment of the bill could lead to the demise of the defined benefit plan.

However, the mere fact that the Ways and Means Committee, regarded as the primary tax-writing body of Congress, has included such a provision in a bill is a giant first step. Whether it passes this year or not, it will now likely continue to be debated by congressional tax writers until ultimately enacted.

"We support the retirement security legislation passed by the House Ways and Means Committee," said Jack Dolan, a spokesman for the American Council of Life Insurers. "It contains a variety of provisions that will increase the ability of taxpayers to save for their retirement and protect their families. A key provision for life insurers will make long term care insurance more accessible.

"It does this by changing the tax code to allow life insurance or annuity policies to be offered in combination with long term care insurance," Dolan continued. "Chairman Thomas and his panel are to be commended for this innovative approach to addressing the nation's growing long term care crisis."

James Klein, president of the American Benefits Council, said the language in the bill "represents progress in the effort to reform funding rules for defined benefit plans."

However, Klein said, "the legislation still does not satisfy the needs of defined benefit plan sponsors, who must have flexibility and predictability in the funding rules if they are to stay in the system."

The bill contains "some good features and some that give reason for concern," including the lack of sufficient transition time for employers to comply–though it is better than other proposals in this regard, Klein said.

"Congress and the President must understand that legislation of this magnitude should only be adopted with an adequate transition period before it takes effect," Klein said. "We look forward to the opportunity to improve H.R. 2830 as it moves through the process."

The legislation clarifies that hybrid pension plan designs are valid and provides additional incentives for workers with defined contribution plans.