109th CONGRESS
2d Session
S. 2281
To amend the Internal Revenue Code of 1986 to allow Americans to
age with respect and dignity by providing tax incentives to assist them
in preparing for the financial impact of their long-term care needs.
IN THE SENATE OF THE UNITED STATES
February 14, 2006
Mr. SANTORUM introduced the following bill; which was read twice and referred
to the Committee on Finance
A BILL
To amend the Internal Revenue Code of 1986 to allow Americans to
age with respect and dignity by providing tax incentives to assist them
in preparing for the financial impact of their long-term care needs.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Aging with Respect and Dignity Act of 2005'.
SEC. 2. LONG-TERM CARE INSURANCE OR SERVICES PERMITTED TO BE OFFERED UNDER
CAFETERIA PLANS AND FLEXIBLE SPENDING ARRANGEMENTS.
(a) Cafeteria Plans- The last sentence of section 125(f) of the Internal
Revenue Code of 1986 (defining qualified benefits) is amended by inserting
before the period at the end `; except that such term shall include the
payment of premiums for any qualified long-term care insurance contract
(as defined in section 7702B) to the extent the amount of such payment does
not exceed the eligible long-term care premiums (as defined in section 213(d)(10))
for such contract'.
(b) Flexible Spending Arrangements- So much of section 106(c) of such Code
as precedes paragraph (2) thereof is amended to read as follows:
`(c) Rules Relating to Long-Term Care Benefits Provided Through Flexible
Spending Arrangements-
`(1) IN GENERAL- For purposes of subsection (a), in the case of employer-provided
coverage for qualified long-term care services provided through a flexible
spending or similar arrangement--
`(A) such coverage shall be treated as provided under an accident or
health plan, and
`(B) if such services are provided to an individual who bears a relationship
described in section 152(d)(2) (other than subparagraph (H) thereof)
to the employee, such services shall be treated as provided to a dependent
of the employee without regard to whether the individual is treated
as a dependent of the employee under section 152(a).'.
(c) Effective Date- The amendments made by this section shall apply to taxable
years beginning after December 31, 2005.
SEC. 3. DEDUCTION FOR CONTRIBUTIONS TO LONG-TERM CARE ACCOUNTS.
(a) In General- Part VII of subchapter B of chapter 1 of the Internal Revenue
Code of 1986 (relating to additional itemized deductions for individuals)
is amended by redesignating section 224 as section 225 and by adding at
the end the following new section:
`SEC. 224. LONG-TERM CARE ACCOUNTS.
`(a) Deduction Allowed- In the case of an individual, there shall be allowed
as a deduction for the taxable year an amount equal to the aggregate amount
paid in cash during such taxable year by or on behalf of such individual
to a long-term care account with respect to which the individual is the
account beneficiary.
`(A) IN GENERAL- The aggregate amount allowable as a deduction under
subsection (a) for any taxable year with respect to any individual shall
not exceed $5,000.
`(B) INFLATION ADJUSTMENT- In the case of any taxable year beginning
in a calendar year after 2007, the $5,000 amount under subparagraph
(A) shall be increased by an amount equal to--
`(i) such dollar amount, multiplied by
`(ii) the medical care cost adjustment under section 213(d)(10)(B)(ii)
for the calendar year in which the taxable year begins, determined
by substituting `2006' for `1996' in subclause (II) thereof.
If any amount as adjusted under the preceding sentence is not a multiple
of $10, such amount shall be rounded to the next lowest multiple of
$10.
`(2) DENIAL OF DEDUCTION TO DEPENDENTS- No deduction shall be allowed
under this section with respect to any individual with respect to whom
a deduction under section 151 is allowable to another taxpayer for a taxable
year beginning in the calendar year in which the individual's taxable
year begins.
`(c) Long-Term Care Account- For purposes of this section, the term `long-term
care account' means a trust which is created or organized in the United
States for the exclusive benefit of the individual who is the account beneficiary
of the trust and members of the individual's family and which is designated
(in such manner as the Secretary shall prescribe) at the time of the establishment
of the trust as a long-term care account, but only if the written governing
instrument creating the trust meets the following requirements:
`(1) Except in the case of a qualified rollover contribution described
in subsection (e)(5)--
`(A) no contribution will be accepted unless it is in cash, and
`(B) contributions will not be accepted for the calendar year in excess
of the limit specified in subsection (b)(1).
`(2) The trustee is a bank (as defined in section 408(n)), an insurance
company (as defined in section 816), or another person who demonstrates
to the satisfaction of the Secretary that the manner in which that person
will administer the trust will be consistent with the requirements of
this section or who has so demonstrated with respect to any individual
retirement plan.
`(3) No part of the trust assets will be invested in life insurance contracts.
`(4) The interest of an individual in the balance of his account is nonforfeitable.
`(5) The assets of the trust shall not be commingled with other property
except in a common trust fund or common investment fund.
`(d) Tax Treatment of Accounts-
`(1) IN GENERAL- A long-term care account shall be exempt from taxation
under this subtitle. Notwithstanding the preceding sentence, such account
shall be subject to the taxes imposed by section 511 (relating to imposition
of tax on unrelated business income of charitable organizations).
`(2) ACCOUNT TERMINATIONS- Rules similar to the rules under paragraphs
(2) and (4) of section 408(e) shall apply to long-term care accounts,
and any amount treated as distributed under such rules shall be treated
as not used to pay for qualified long-term care expenses.
`(e) Tax Treatment of Distributions-
`(1) AMOUNTS USED FOR QUALIFIED LONG-TERM CARE EXPENSES- Any amount paid
or distributed out of a long-term care account which is used exclusively
to pay qualified long-term care expenses of the account beneficiary or
any member of the beneficiary's family shall not be includible in gross
income.
`(2) INCLUSION OF AMOUNTS NOT USED FOR QUALIFIED LONG-TERM CARE EXPENSES-
Any amount paid or distributed out of a long-term care account which is
not used exclusively to pay the qualified long-term care expenses of the
account beneficiary or any member of the beneficiary's family shall be
included in the gross income of such beneficiary.
`(3) EXCESS CONTRIBUTIONS RETURNED BEFORE DUE DATE OF RETURN-
`(A) IN GENERAL- If any excess contribution is contributed for a taxable
year to any long-term care account of an individual, paragraph (2) shall
not apply to distributions from the long-term care accounts of such
individual (to the extent such distributions do not exceed the aggregate
excess contributions to all such accounts of such individual for such
year) if--
`(i) such distribution is received by the individual on or before
the last day prescribed by law (including extensions of time) for
filing such individual's return for such taxable year, and
`(ii) such distribution is accompanied by the amount of net income
attributable to such excess contribution.
Any net income described in clause (ii) shall be included in the gross
income of the individual for the taxable year in which it is received.
`(B) EXCESS CONTRIBUTION- For purposes of subparagraph (A), the term
`excess contribution' means any contribution (other than a rollover
contribution described in paragraph (5)) which is not deductible under
this section.
`(4) ADDITIONAL TAX ON DISTRIBUTIONS NOT USED FOR QUALIFIED LONG-TERM
EXPENSES-
`(A) IN GENERAL- The tax imposed by this chapter on the account beneficiary
for any taxable year in which there is a payment or distribution from
a long-term care account of such beneficiary which is includible in
gross income under paragraph (2) shall be increased by 10 percent of
the amount which is so includible.
`(B) EXCEPTION FOR DISABILITY OR DEATH- Subparagraph (A) shall not apply
if the payment or distribution is made after the account beneficiary
becomes disabled within the meaning of section 72(m)(7) or dies.
`(5) ROLLOVER CONTRIBUTION-
`(A) IN GENERAL- An amount is a rollover contribution described in this
paragraph if it meets the requirements of subparagraphs (B) and (C).
`(B) PAYMENT TO OTHER ACCOUNT- Paragraph (2) shall not apply to any
amount paid or distributed from a long-term care account to the account
beneficiary to the extent the amount received is paid into a long-term
care account for the benefit of such beneficiary not later than the
60th day after the day on which the beneficiary receives the payment
or distribution.
`(C) LIMITATION- This paragraph shall not apply to any amount described
in subparagraph (B) received by an individual from a long-term care
account if, at any time during the 1-year period ending on the day of
such receipt, such individual received any other amount described in
subparagraph (B) from a long-term care account which was not includible
in the individual's gross income because of the application of this
paragraph.
`(6) COORDINATION WITH MEDICAL EXPENSE DEDUCTION- For purposes of determining
the amount of the deduction under section 213, any payment or distribution
out of a long-term care account for qualified long-term care expenses
shall not be treated as an expense paid for medical care.
`(7) TRANSFER OF ACCOUNT INCIDENT TO DIVORCE- The transfer of an individual's
interest in a long-term care account to an individual's spouse or former
spouse under a divorce or separation instrument described in subparagraph
(A) of section 71(b)(2) shall not be considered a taxable transfer made
by such individual notwithstanding any other provision of this subtitle,
and such interest shall, after such transfer, be treated as a long-term
care account with respect to which such spouse is the account beneficiary.
`(8) TREATMENT AFTER DEATH OF ACCOUNT BENEFICIARY-
`(A) TREATMENT IF DESIGNATED BENEFICIARY IS SPOUSE- If the account beneficiary`s
surviving spouse acquires such beneficiary's interest in a long-term
care account by reason of being the beneficiary of such account at the
death of the account beneficiary, such account shall be treated as if
the spouse were the account beneficiary.
`(i) IN GENERAL- If, by reason of the death of the account beneficiary,
any person acquires the account beneficiary's interest in a long-term
care account in a case to which subparagraph (A) does not apply--
`(I) such account shall cease to be a long-term care account as
of the date of death, and
`(II) an amount equal to the fair market value of the assets in
such account on such date shall be includible in such person's gross
income for the taxable year which includes such date if such person
is not the estate of such beneficiary, or shall be includible in
such beneficiary's gross income for the last taxable year of such
beneficiary if such person is the estate of such beneficiary.
`(I) REDUCTION OF INCLUSION FOR PREDEATH EXPENSES- The amount includible
in gross income under clause (i) by any person (other than the estate)
shall be reduced by the amount of qualified long-term care expenses
which were incurred by the decedent before the date of the decedent's
death and paid by such person within 1 year after such date.
`(II) DEDUCTION FOR ESTATE TAXES- An appropriate deduction shall
be allowed under section 691(c) to any person (other than the decedent
or the decedent's spouse) with respect to amounts included in gross
income under clause (i) by such person.
`(9) GIFT TAX EXCEPTION- A distribution to a member of the account beneficiary's
family which is not includible in gross income under paragraph (1) shall
in no event be treated as a taxable gift for purposes of chapters 12 and
13.
`(10) OPERATING RULES- For purposes of applying section 72--
`(A) to the extent provided by the Secretary, all long-term care accounts
of which an individual is an account beneficiary shall be treated as
one account,
`(B) except to the extent provided by the Secretary, all distributions
during a taxable year shall be treated as one distribution, and
`(C) except to the extent provided by the Secretary, the value of the
contract, income on the contract, and investment in the contract shall
be computed as of the close of the calendar year in which the taxable
year begins.
`(f) Definitions and Special Rules- For purposes of this section--
`(1) ACCOUNT BENEFICIARY- The term `account beneficiary' means the individual
on whose behalf the long-term care account was established.
`(2) QUALIFIED LONG-TERM CARE EXPENSES- The term `qualified long-term
care expenses' means any amount paid or incurred--
`(A) for premiums for any qualified long-term care insurance contract
(as defined in section 7702B) to the extent the amount of such payment
does not exceed the eligible long-term care premiums (as defined in
section 213(d)(10)) for such contract, or
`(B) for qualified long-term care services (as defined in section 7702B(c))
unless such payment is not treated as paid for medical care under section
213(d)(11).
`(3) MEMBER OF THE FAMILY- The term `member of the family' means, with
respect to any account beneficiary, an individual who bears a relationship
described in section 152(d)(2) (other than subparagraph (H) thereof) to
the beneficiary.
`(4) OTHER RULES- Rules similar to the rules described in section 223(d)(4)
shall apply.
`(g) Custodial Accounts- For purposes of this section, a custodial account
or an annuity contract issued by an insurance company qualified to do business
in a State shall be treated as a trust under this section if--
`(1) the custodial account or annuity contract would, except for the fact
that it is not a trust, constitute a trust which meets the requirements
of subsection (b), and
`(2) in the case of a custodial account, the assets of such account are
held by a bank (as defined in section 408(n)) or another person who demonstrates,
to the satisfaction of the Secretary, that the manner in which the person
will administer the account will be consistent with the requirements of
this section.
For purposes of this title, in the case of a custodial account or annuity
contract treated as a trust by reason of the preceding sentence, the person
holding the assets of such account or holding such annuity contract shall
be treated as the trustee thereof.
`(h) Reports- The trustee of a long-term care account shall make such reports
regarding such account to the Secretary and to the beneficiary of the account
with respect to contributions, distributions, and such other matters as
the Secretary may require. The reports required by this subsection shall
be filed at such time and in such manner and furnished to such individuals
at such time and in such manner as may be required.'.
(b) Deduction Allowed in Determining Adjusted Gross Income- Section 62(a)
of the Internal Revenue Code of 1986 (defining adjusted gross income) is
amended by adding at the end the following:
`(21) LONG-TERM CARE ACCOUNTS- The deduction allowed by section 224.'
(c) Tax on Excess Contributions-
(1) IN GENERAL- Subsection (a) of section 4973 of the Internal Revenue
Code of 1986 (relating to tax on excess contributions to certain tax-favored
accounts and annuities) is amended by striking `or' at the end of paragraph
(4), by inserting `or' at the end of paragraph (5), and by inserting after
paragraph (5) the following new paragraph:
`(6) a long-term care account (as defined in section 224(c)),'.
(2) EXCESS CONTRIBUTION- Section 4973 of such Code is amended by adding
at the end the following new subsection:
`(h) Excess Contributions to Long-Term Care Accounts- For purposes of this
section--
`(1) IN GENERAL- In the case of long-term care accounts (within the meaning
of section 224(c)), the term `excess contributions' means the sum of--
`(A) the amount by which the amount contributed for the calendar year
to such accounts (other than qualified rollover contributions (as defined
in section 224(e)(5)) exceeds the contribution limit under section 224(b)(1),
and
`(B) the amount determined under this subsection for the preceding calendar
year, reduced by the excess (if any) of the maximum amount allowable
as a contribution under section 224(b)(1) for the calendar year over
the amount contributed to the accounts for the calendar year.
`(2) SPECIAL RULE- A contribution which is distributed out of a long-term
care account in a distribution to which section 224(e)(3) applies shall
not be taken into account under paragraph (1).'.
(d) Failure to Provide Reports on Long-Term Care Accounts- Paragraph (2)
of section 6693(a) of the Internal Revenue Code of 1986 (relating to failure
to provide reports on individual retirement accounts or annuities) is amended
by redesignating subparagraphs (D) and (E) as subparagraphs (E) and (F),
respectively, and by inserting after subparagraph (C) the following new
subparagraph:
`(D) section 224(h) (relating to long-term care accounts),'.
(e) Conforming Amendment- The table of sections for part VII of subchapter
B of chapter 1 of the Internal Revenue Code of 1986 is amended by striking
the item relating to section 224 and inserting the following new items:
`Sec. 224. Long-term care accounts.
`Sec. 225. Cross reference.'.
(f) Effective Date- The amendments made by this section shall apply to taxable
years beginning after December 31, 2005.
SEC. 4. TREATMENT OF ANNUITY AND LIFE INSURANCE CONTRACTS WITH A LONG-TERM
CARE INSURANCE FEATURE.
(a) Exclusion From Gross Income- Subsection (e) of section 72 of the Internal
Revenue Code of 1986 (relating to amounts not received as annuities) is
amended by redesignating paragraph (11) as paragraph (12) and by inserting
after paragraph (10) the following new paragraph:
`(11) SPECIAL RULES FOR CERTAIN COMBINATION CONTRACTS PROVIDING LONG-TERM
CARE INSURANCE- Notwithstanding paragraphs (2), (5)(C), and (10), in the
case of any charge against the cash value of an annuity contract or the
cash surrender value of a life insurance contract made as payment for
coverage under a qualified long-term care insurance contract which is
part of or a rider on such annuity or life insurance contract--
`(A) the investment in the contract shall be reduced (but not below
zero) by such charge, and
`(B) such charge shall not be includible in gross income.'.
(b) Tax-Free Exchanges Among Certain Insurance Policies-
(1) ANNUITY CONTRACTS CAN INCLUDE QUALIFIED LONG-TERM CARE INSURANCE RIDERS-
Paragraph (2) of section 1035(b) of such Code is amended by adding at
the end the following new sentence: `For purposes of the preceding sentence,
a contract shall not fail to be treated as an annuity contract solely
because a qualified long-term care insurance contract is a part of or
a rider on such contract.'.
(2) LIFE INSURANCE CONTRACTS CAN INCLUDE QUALIFIED LONG-TERM CARE INSURANCE
RIDERS- Paragraph (3) of section 1035(b) of such Code is amended by adding
at the end the following new sentence: `For purposes of the preceding
sentence, a contract shall not fail to be treated as a life insurance
contract solely because a qualified long-term care insurance contract
is a part of or a rider on such contract.'.
(3) EXPANSION OF TAX-FREE EXCHANGES OF LIFE INSURANCE, ENDOWMENT, AND
ANNUITY CONTRACTS FOR LONG-TERM CARE CONTRACTS- Subsection (a) of section
1035 of such Code (relating to certain exchanges of insurance policies)
is amended--
(A) in paragraph (1) by striking `contract;' and inserting `contract
or for a qualified long-term care insurance contract;',
(B) in paragraph (2) by striking `contract;' and inserting `contract,
or (C) for a qualified long-term care insurance contract;', and
(C) in paragraph (3) by striking `contract.' and inserting `contract
or for a qualified long-term care insurance contract.'.
(4) TAX-FREE EXCHANGES OF QUALIFIED LONG-TERM CARE INSURANCE CONTRACT-
Subsection (a) of section 1035 of such Code (relating to certain exchanges
of insurance policies) is amended by striking `or' at the end of paragraph
(2), by striking the period at the end of paragraph (3) and inserting
`; or', and by inserting after paragraph (3) the following new paragraph:
`(4) a qualified long-term care insurance contract for a qualified long-term
care insurance contract.'.
(c) Treatment of Coverage Provided as Part of a Life Insurance or Annuity
Contract- Subsection (e) of section 7702B of such Code (relating to treatment
of qualified long-term care insurance) is amended to read as follows:
`(e) Treatment of Coverage Provided as Part of a Life Insurance or Annuity
Contract-
`(1) COVERAGE TREATED AS CONTRACT- Except as otherwise provided in regulations
prescribed by the Secretary, in the case of any long-term care insurance
coverage (whether or not qualified) provided by a rider on or as part
of a life insurance contract or an annuity contract, this title shall
apply as if the portion of the contract providing such coverage is a separate
contract.
`(2) DENIAL OF DEDUCTION UNDER SECTION 213- No deduction shall be allowed
under section 213(a) for any payment made for coverage under a qualified
long-term care insurance contract if such payment is made as a charge
against the cash value of an annuity contract or the cash surrender value
of a life insurance contract.
`(3) APPLICATION OF SECTION 7702- Section 7702(c)(2) (relating to the
guideline premium limitation) shall be applied by increasing the guideline
premium limitation with respect to the life insurance contract, as of
any date--
`(A) by the sum of any charges (but not premium payments) against the
life insurance contract's cash surrender value (within the meaning of
section 7702(f)(2)(A)) for coverage under the qualified long-term care
insurance contract made to that date under the life insurance contract,
less
`(B) any such charges the imposition of which reduces the premiums paid
for the life insurance contract (within the meaning of section 7702(f)(1)).
This paragraph shall not apply to any charges described in subparagraph
(A) which are otherwise taken into account in computing the guideline
premium limitation by reason of section 7702(f)(5)(A)(v).
`(4) PORTION DEFINED- For purposes of this subsection, the term `portion'
means only the terms and benefits under a life insurance contract or annuity
contract that are in addition to the terms and benefits under the contract
without regard to long-term care insurance coverage.
`(5) ANNUITY CONTRACTS TO WHICH PARAGRAPH (1) DOES NOT APPLY- For purposes
of this subsection, none of the following shall be treated as an annuity
contract:
`(A) A trust described in section 401(a) which is exempt from tax under
section 501(a).
`(i) purchased by a trust described in subparagraph (A),
`(ii) purchased as part of a plan described in section 403(a),
`(iii) described in section 403(b),
`(iv) provided for employees of a life insurance company under a plan
described in section 818(a)(3), or
`(v) from an individual retirement account or an individual retirement
annuity.
`(C) A contract purchased by an employer for the benefit of the employee
(or the employee's spouse).
Any dividend described in section 404(k) which is received by a participant
or beneficiary shall, for purposes of this paragraph, be treated as paid
under a separate contract to which subparagraph (B)(i) applies.'.
(d) Information Reporting-
(1) Subpart B of part III of subchapter A of chapter 61 of such Code (relating
to information concerning transactions with other persons) is amended
by adding at the end the following new section:
`SEC. 6050U. CHARGES OR PAYMENTS FOR QUALIFIED LONG-TERM CARE INSURANCE
CONTRACTS UNDER COMBINED ARRANGEMENTS.
`(a) Requirement of Reporting- Any person who makes a charge against the
cash value of an annuity contract, or the cash surrender value of a life
insurance contract, which is excludable from gross income under section
72(e)(11) shall make a return, according to the forms or regulations prescribed
by the Secretary, setting forth--
`(1) the amount of the aggregate of such charges against each such contract
for the calendar year,
`(2) the amount of the reduction in the investment in each such contract
by reason of such charges, and
`(3) the name, address, and TIN of the individual who is the holder of
each such contract.
`(b) Statements to Be Furnished to Persons With Respect to Whom Information
Is Required- Every person required to make a return under subsection (a)
shall furnish to each individual whose name is required to be set forth
in such return a written statement showing--
`(1) the name, address, and phone number of the information contact of
the person making the payments, and
`(2) the information required to be shown on the return with respect to
such individual.
The written statement required under the preceding sentence shall be furnished
to the individual on or before January 31 of the year following the calendar
year for which the return under subsection (a) was required to be made.'.
(2) CLERICAL AMENDMENT- The table of sections for subpart B of part III
of subchapter A of such chapter 61 of such Code is amended by adding at
the end the following new item:
`Sec. 6050U. Charges or payments for qualified long-term care insurance
contracts under combined arrangements'.
(e) Treatment of Policy Acquisition Expenses- Subsection (e) of section
848 of such Code (relating to classification of contracts) is amended by
adding at the end the following new paragraph:
`(6) TREATMENT OF CERTAIN QUALIFIED LONG-TERM CARE INSURANCE CONTRACT
ARRANGEMENTS- An annuity or life insurance contract which includes a qualified
long-term care insurance contract as a part of or a rider on such annuity
or life insurance contract shall be treated as a specified insurance contract
not described in subparagraph (A) or (B) of subsection (c)(1).'.
(f) Application to Other Definitions and Rules- Section 7702(f) of such
Code (relating to other definitions and special rules) is amended
(1) in paragraph (1), by inserting `(other than paragraph (11) thereof)'
after `section 72(e)', and
(2) in paragraph (5)(A), by striking `or' at the end of clause (iv), by
redesignating clause (v) as clause (vi), and by inserting after clause
(iv) the following new clause:
`(v) qualified long-term care insurance contract which is a part of
or a rider on the life insurance contract, or'.
(1) IN GENERAL- Except as provided by paragraph (2), the amendments made
by this section shall apply to contracts issued before, on, or after December
31, 2005, but only with respect to periods beginning after such date.
(2) SUBSECTION (b)- The amendments made by subsection (b) shall apply
with respect to exchanges occurring after December 31, 2005.
END
