The Health Care and Reconciliation Act (the “Act”), signed into law on March 30, 2010, imposes a tax on annuity income to help pay for the multi-billion dollar reform package set forth in both the Act and the Patient Protection and Affordable Care Act, signed into law on March 23, 2010. Specifically, the Act imposes a 3.8% Medicare contribution tax on individuals who earn more than $200,000 a year, and couples who earn more than $250,000 a year. The tax will apply to net investment income, which is defined to include gross income from interest, dividends, annuities, royalties, and rents. The tax will not apply to distributions from a qualified plan under the Internal Revenue Code. Also, with respect to annuities, the tax will only apply to annuity income, and not to the inside build-up of annuities.
The life insurance industry expressed concern over the 3.8% tax in a March 24, 2010 letter to the Senate. The letter states that the tax will hinder individual efforts to save for retirement — it will service as a “disincentive to save in a product that uniquely allows an individual to accumulate savings and to guarantee that savings can never be outlived.” The letter was signed by the National Association of Fixed Annuities, the American Council of Life Insurers, the National Association of Health Underwriters, the Insured Retirement Institute, and the National Association of Insurance and Financial Advisors.
The 3.8% tax will go into effect in 2013.