The Pension Protection Act of 2006 was enacted to help safeguard American pensions. It’s also responsible for the creation of new long-term care insurance laws and regulations. Let’s look at what this means for you in more detail. 1. Where Does The Pension Protection Act Come From? Public Law 109-280, often known as the Pension Protection Act, is a large piece of legislation signed into law on August 17, 2006. While most of it concerns improvements and additions to pension governance, Section 844 of the act focuses on annuities, long-term care, and additional tax benefits. 2. What Do Annuities Get From The Pension Protection Act? Cash value withdrawals from specified annuity contracts to pay for eligible long-term care expenses or premiums are no longer taxable income but rather a reduction in cost basis as of January 1, 2010. Long-term care insurance benefits are also exempt from taxation. 3. What Effect Does The Pension Protection Act Have? The Pension Protection Act empowers annuity contracts to cover long-term care coverage, which will be considered a separate contract for tax purposes under new Code Section 7702B(e)(1). Premiums that are paid in connection to long-term care coverage received from an annuity contract’s cash value will be recognized as a non-taxable reduction of cost basis rather than a taxable distribution under new Code Section 72(e)(11). 4. Does The PPA Require The Underwritten Long-Term Care Annuity? There is no requirement in the PPA to underwrite combo products. This has long been a standard industry practice for reducing the risk of delivering benefits beyond the cash value of a life insurance or annuity policy. 5. What Is The Difference Between Qualifying and Non-Qualifying LTC Distributions? A person must be receiving care under a plan of care prescribed by a licensed healthcare practitioner and be certified as “chronically ill” by being unable to do at least two daily living activities or requiring substantial supervision due to severe cognitive impairment under IRC Sec. 7702B(b) created by HIPAA. 6. How Do Annuities Conforms To HIPAA Requirements? Only annuities that “qualify” under IRC Section 7702B(b) are eligible for the Pension Protection Act’s provisions. For taxable years starting from or after January 1, 2010, 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. 7. Can Withdrawals For LTC Expenses Made From A Regular Annuity Be Treated As Tax-Free Distributions Under The PPA? “No” is the short answer. An annuity policy must include the term that qualifies it as qualified LTC insurance under IRC Section 7702B, allowing payments utilized for LTC expenditures or premiums to be considered as tax-free cost basis reductions. This would preclude a “regular” annuity from benefiting from the PPA’s benefits.
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