Tell the IRS What You Think of Changes Affecting LTC Insurance

Do you offer long-term care (LTC) insurance to your employees? If so, and the changes the Pension Protection Act of 2006 (PPA) made to the tax and information reporting requirements affecting some LTC coverage apply, you can offer your two cents’ worth to the IRS.

The PPA amended the tax rules for qualified LTC insurance, annuity and life insurance contracts. The IRS on Aug.16 issued Notice 2001-68, which provides interim guidance on the application of those amendments.

The PPA amended Section 7702B(e) so that now a rider or portion of a life insurance contract or annuity contract that provides LTC coverage is treated as a separate contract.

The PPA also added Section 6050U to the tax code. This new section says that any person who makes a charge against the cash value of an annuity contract (or the cash surrender value of a life insurance contract) that is excludable must provide information on the following to the parties to which information about the contract is due:

1. the aggregate amount of the charges for the year;
2. the amount of the reduction in investment in the contract because of these charges; and
3. the name, address and taxpayer identification number of the contract holder.

Since LTC insurance can be provided as part of an annuity contract and a life insurance contract, Section 6050U can apply to some LTC insurance coverage.

Comments Requested

These provisions generally are effective for contracts issued after Dec. 31, 1996, but only for taxable years beginning on or after Jan. 1, 2010. Nonetheless, the IRS has requested comments to help it develop further guidance on taxation of annuity and life insurance contracts with an LTC insurance feature. Following are examples of what the IRS wants to know:

1) What issues arise when the owner of an annuity contract with an LTC insurance feature decides to annuitize the contract? Are the policyholder’s rights under the LTC insurance feature typically the same or different before and after the annuity starting date? How should LTC insurance charges be accounted for after the annuity starting date? How should the exclusion ratio be determined?

2) For the purpose of determining whether the LTC features of an annuity contract qualify as an insurance contract and thus as a qualified LTC insurance contract, what is the appropriate characterization of LTC payments that cause a reduction in a contract’s cash value? Are there common features or contract designs that would lend themselves to guidance on determining whether enough insurance risk is present for the LTC features to qualify as an insurance contract?

3) 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 LTC insurance contract? If so, how is such an exchange effected? Under what circumstances should such an exchange be treated as tax-free under Code Section 1035? How should the basis and investment in the contract be apportioned between the qualified LTC insurance contract received in the exchange and the rights still held in the exchanged annuity?

4) What changes are needed to existing guidance (including publications, forms, and instructions) on information reporting and record keeping to assist issuers of life insurance, annuity, or qualified LTC insurance contracts in meeting their obligations with regard to the amendments the PPA made to Section 844?

Comments should be submitted in writing on or before Nov. 9, 2011 and should contain a reference to this Notice 2011-68. Comments may be submitted to:

CC:PA:LPD:PR (Notice 2011-68)
Room 5203, Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Taxpayers may submit comments electronically to Notice.Comments@irscounsel.treas.gov. Please include “Notice 2011-68” in the subject line of any electronic communications.

Submissions may be hand-delivered Monday through Friday between 8:00 a.m. and 4:00 p.m. to:

CC:PA:LPD:PR (Notice 2011-68)
Courier’s Desk, Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224