Life insurance and annuity provisions in the Consolidated Appropriations Act, 2023 — the 4,155-page, $1.7 trillion spending bill now flying through Congress — could shape clients' saving and investment decisions for decades to come.
Groups like the American Council of Life Insurers, the National Association of Insurance and Financial Advisors and Finseca are going through the text carefully to see exactly what's in there, how the current version of the language compares with earlier drafts, and which bits are the result of their work.
The core of the bill consists of provisions needed to fund the operations of the federal government, but Division T is the text of the Setting Every Community Up for Retirement Enhancement (Secure 2.0) Act, a 358-page package of retirement and general financial security provisions. Some could improve the ability of annuities to provide a guaranteed source of income for retirees' entire lives.
Division AA, another part of the bill, would affect the fate of a hot, relatively new type of annuity.
What It Means
If CAA 2023 makes it through the Senate and the House, and President Joe Biden signs it into law, the package could have a big effect on your clients' life insurance and annuity options.
Spending Bill Status
Congressional leaders are packaging the CAA 2023 text as Senate Amendment 6552 to H.R. 2617.
Members of the Senate voted 70-25 Tuesday to proceed with consideration of the package. On Thursday morning, Senate leaders had announced that they had a deal for getting the bill through the Senate, but prospects for final bill passage were not certain.
President Joe Biden; House Democratic leaders; Senate Minority Leader Mitch McConnell, R-Ky.; and many Senate Republicans support passage of the package.
Some Republicans in the Senate; House Minority Leader Kevin McCarthy, R-Calif.; and a group of Republican House members led by Rep. Chip Roy, R-Texas, oppose the bill. The Roy group wrote a public letter arguing that the spending package is an "indefensible assault on the American people" and asking allies in the Senate to block it.
The CAA 2023 Life and Annuity Provisions
Some sections of the CAA 2023 package that make no direct mention of life insurance, annuities or related topics could turn out to have significant, possibly unexpected effects on life insurance and annuities.
Here's a look at 12 sections that mention life insurance, annuities or both and look as if they could have an especially powerful effect on the products, the issuers or the users.
Note that, although all parts of Division T are now part of CAA 2023′s Secure 2.0 Act section, many of the provisions moved into the Secure 2.0 Act from other House and Senate bills, such as the Retirement Security and Savings Act of 2021 bill and the Enhancing American Retirement Now Act bill.
1. Registration for Index-Linked Annuities
Division AA, Title I
This key annuity provision came from the Registration for Index-Linked Annuities Act bill, or H.R. 4865, rather than from the Secure 2.0 bill.
It would direct the Securities and Exchange Commission to develop a relatively simple registration for RILA contracts, rather than requiring RILA issuers to put a product through the same kind of registration process used when a company wants to go public.
The Insured Retirement Institute and other life and annuity groups have argued that the change could make the popular products even more popular by cutting down on the time needed to launch a RILA product.
2. QLACs: Repeal of the Percent Premium Limit
Division TT, Section 202
A qualified longevity annuity contract is a single-premium annuity designed to pay income, starting at a date in the future, for the remaining life of a retiree.
The QLAC program is designed to help reduce a retiree's required minimum distributions, and federal income tax bills, while ensuring that at least part of the retiree's retirement savings will last until the retiree dies.
One obstacle to QLAC adoption has been strict premium contribution rules, which hold down the amount of income a QLAC can generate.
Current law limits the premium contribution to 25% of the account balance.
The QLAC section in CAA 2023 would eliminate the cap on the percentage of the account balance that can be fed into a QLAC.
This QLAC provision also appeared in a stand-alone Secure 2.0 bill, H.R. 2954, and in the Retirement Security and Savings Act of 2021, S. 1770.
3. QLACs: Premium Amount Limit Increase
Division TT, Section 202
A second obstacle to widespread use of QLACs is the fact that current federal rules limit the amount of premiums a taxpayer can contribute to a QLAC, without running into RMD conflicts, to $125,000, before adjustments for inflation, meaning that a QLAC can generate only a modest amount of annual income.
One section of the CAA 2023 Secure 2.0 section would increase the maximum contribution to $200,000.
This QLAC provision also appeared in the Secure 2.0 bill, H.R. 2954, and in the Retirement Security and Savings Act of 2021, S. 1770.
4. QLACs: Dollar Limit Inflation Adjustments
Division TT, Section 202
Another section of the Secure 2.0 Act would adjust the new $200,000 premium contribution limit for inflation, starting one year after the enactment of the QLAC provisions.
This QLAC inflation adjustment provision also appeared in the Secure 2.0 bill, H.R. 2954, and in the Retirement Security and Savings Act of 2021, S. 1770.
5. Qualified Long-Term Care Distributions: Certified Long-Term Care Insurance
Division T, Section 334
This provision is part of a section that would let a 401(k) plan participant use up to $2,500 in plan assets per year to pay long-term care insurance premiums without a 10% early withdrawal penalty. A participant would have to pay income taxes on the distributions.
