Pension Protection Act and Long-Term Care: What You Need to Know

Shawn Plummer

CEO, The Annuity Expert

What is the Pension Protection Act?

The Pension Protection Act, often known as Public Law 109-280, is a big piece of legislation that was signed into law on August 17, 2006. While most of it pertains to pension governance changes and expansions, Section 844 of the act focuses on annuities, long-term care, and new tax benefits.

What does the Pension Protection Act do for annuities?

As of January 1, 2010, cash value withdrawals from specific annuity contracts to pay for qualifying long-term care expenses or premiums are no longer taxable income but a cost-based reduction. Long-term care insurance benefit payments are also not taxed.

See Long-Term Care Annuities.

Pension Protection Act Long Term Care

How does the Pension Protection Act do this?

The Pension Protection Act allows annuity contracts to include long-term care coverage. Under new Code Section 7702B(e)(1), such coverage will be treated as a separate contract for tax purposes.

It is now possible for long-term care coverage to be qualifying under Section 7702B of the Health Insurance Portability and Accountability Act (HIPAA) when the annuity and LTC portions of the contract are separated.

Premiums paid in connection with long-term care coverage that is distributed from an annuity contract’s cash value will not be treated as a taxable distribution under new Code Section 72(e)(11) but rather as a non-taxable reduction of cost basis.

What’s The Difference Between Qualifying and Non-Qualifying LTC Distributions?

Under IRC Sec. 7702B(b) created by HIPAA, a person must be receiving care under a plan of care prescribed by a licensed health care practitioner, and the individual must be certified as “chronically ill” either by being unable to perform at least 2 activities of daily living or requiring substantial supervision due to severe cognitive impairment

Pension Protection Act Of 2006

How do you know that an annuity meets HIPAA guidelines?

Under the Pension Protection Act, only ” qualifying ” annuities under IRC Section 7702B(b) are eligible for its protections. This Contract is designed to be a federally qualifying Long-Term Care insurance contract under Section 7702B(b) of the Internal Revenue Code of 1986 as amended for taxable years beginning on or after January 1, 2010.

Does the PPA require that the Long-Term Care Annuity be underwritten?

There’s nothing in the PPA that says you must underwrite combination products. This has long been an industry practice used to manage the risk of providing additional benefits beyond a life insurance or annuity policy’s cash value.

Can a regular annuity have withdrawals made from it for LTC expenses be treated as tax-free distributions under the PPA?

The short answer is “no.” To qualify for tax-free withdrawals, an annuity policy must contain the phrase that makes it qualifying LTC insurance under IRC Section 7702B, allowing for payments used for LTC costs or premiums to be treated as tax-free reductions of cost basis. This would prevent a “normal” (a conventional annuity with no language regarding free withdrawal or simple nursing home waiver) from benefiting from the PPA’s benefits.

What Is Pension Protection Act

How can you fund an annuity with long-term care provisions?

The Pension Protection Act only applies to annuity contracts compensated from after-tax premium resources. As specified in IRC Section 7702B(e)(4), pre-tax sources such as IRAs, 401ks, and 403bs are excluded from the Pension Protection Act.

How will long-term care benefits be reported?

Long-term care benefits and long-term care insurance premiums paid from annuity values and long-term care benefits paid through riders will be shown on Form 1099-LTC at year-end.

Since HIPAA went into effect, when an insurance firm pays a benefit as part of a long-term care contract, it must report the information to the IRS and policy owner using Form 1099-LTC.

Next Steps

The Pension Protection Act of 2006 was designed to help safeguard pensions in the United States. This act also established new rules and regulations for long-term care insurance. If you are looking for coverage, it is important to understand what this means for you and your family. Contact us today for a quote on long-term care insurance – we can help make sure you have the protection you need.

Pension Protection Act

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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