October 7, 2011 - The Pension Protection Act of 2006 (the "PPA") amended Internal Revenue Code ("IRC") §§ 72, 1035 and 7702B with respect to annuity and life insurance contracts that also provide long-term care insurance protection either through a rider or as part of the annuity or life insurance contract itself (a "combination contract"). The Internal Revenue Service ("IRS") recently issued Notice 2011-68 providing interim guidance with respect to certain transactions involving such combination contracts. The guidance is applicable to contracts issued after December 31, 1996, but only with respect to transactions, and tax-tree exchanges, occurring in taxable years beginning after December 31, 2009.
Specifically, the interim guidance provides that:
- All premiums paid for a combination contract that is an annuity and also provides long-term care insurance will be included in "investment in the contract" under IRC § 72 if (1) the premiums are credited to the contract's cash value and (ii) the long-term care insurance coverage is paid for by charges against the cash value of the contract;
- A waiver of premiums under a combination contract will be treated in the same manner as a waiver of premiums under other contracts for which "investment in the contract" is determined under IRC § 72;
- The direct transfer of a portion of the cash surrender value of an existing deferred annuity contract for a qualified long-term care insurance contract will be treated as a tax-free exchange, provided the requirements of IRC § 1035, and applicable IRS guidance, are otherwise met;
- The adjusted basis of a qualified long-term care insurance contract received in a tax-free exchange under IRC § 1035 will carry over from the life insurance or annuity contract exchanged.
Notice 2011-68 also provides a summary of the provisions of the PPA dealing with information reporting, the DAC tax and IRC § 7702B dealing with the definition of a qualified long-term care insurance contract.
In addition to the guidance provided, the IRS requested comments on the following issues to assist in the development of future guidance:
- What issues arise when the owner of a combination contract decides to annuitize the contract?
- For the purpose of determining whether the long-term care features of a combination contract qualify as a qualified long-term care insurance contract, what is the appropriate characterization of long-term care payments that reduce a contract's cash value?
- Is guidance needed on the partial exchange of the right to some or all of the payments under an immediate annuity contract for a qualified longterm care insurance contract?
- What changes, if any, are needed to existing guidance on information reporting and record keeping to assist an issuer of a combination contract in meeting its obligations?
Comments should be submitted, in writing, or electronically, no later than November 9, 2011.