Q: Congress just passed the PPACA and the HCERA, and the president signed health care reform into law — but what does all this have to do with annuities?

A: Plenty! For one, the Senate’s reconciliation bill included a 3.8 percent Medicare tax on unearned income — that includes annuities, and even possibly income recognized from the surrender or sale of life insurance.

The tax is imposed on single taxpayers with more than $200,000 in adjusted gross income, or $250,000 for joint filers. This will hit many small-business owners whose businesses are unincorporated. The tax credits in the bill won’t make up for the tax hikes because many small businesses won’t qualify for them. Also, the credits are temporary.

“This isn’t a health care bill. This is a tax bill wrapped up in health care paper,” said Susan Eckerly, senior vice president of the National Federation of Independent Business in the Washington Business Journal.

Unlike previous generations of consumers who enjoyed access to defined benefit (DB) pension plans, most members of the baby boom generation — and even younger consumers — cannot rely on an employer-provided DB pension as a means to secure retirement income. A recent report by Babbel and Merrill states that in the last 15 years, only one new pension program has been initiated. The number of pension plans in the United States peaked at 175,000 in 1983, and has since declined to less than 25,000. Meanwhile, 30 percent of the remaining programs are expected to close within the next two years.

In their place, defined contribution plans — 401(k)s, 403(b)s, etc. — have increased from 17,000 to more than 650,000. With more and more retirement savings accumulating in these defined contribution plans, the demand for a predetermined, guaranteed income stream will continue to grow.

There is proposed legislation in the Senate (S. 2832), however, that recognizes this demand by encouraging defined contribution participants to roll their plans into retirement annuities.

Under S. 2832, defined contribution plan sponsors would be required to show annually how the value of retirement accounts translates into guaranteed monthly payments. According to the Employee Benefit Research Institute, that would affect more than $3 trillion in defined contribution plan assets.

Another bill that was recently introduced is the Retirement Security Needs Lifetime Pay Act (H.R. 2748), which encourages workers to annuitize some of their retirement savings by providing a 50 percent percent tax exclusion for up $10,000 of lifetime annuity payments per year.

However, the current taxation on this income under the current health care reform bill will have the undesired effect of discouraging retirees from securing their retirement with annuities.

One final thought: The need for annuities will not be limited to funding retirement. More and more people will continue to use income annuities in charitable giving and to provide legacies for future generations. Charitable or legacy fixed income annuities are valuable precisely because they help ensure that the funds intended for the beneficiary will remain intact, or even increase in value, thanks to the guarantees. They also help assure the benefactor that their gift will not be squandered or misused, but will instead be paid out as directed by the contract provisions or trust.

Individual fixed annuities are an important tool used by millions of Americans to accumulate retirement savings and secure lifetime retirement income. This is particularly true for the 78 million working Americans without access to a workplace retirement plan. The 3.8 percent Medicare contribution on income received from individual annuities would serve as a disincentive to save in a product that uniquely allows an individual to accumulate retirement savings and to guarantee that savings can never be outlived.

In this monthly column, the National Association for Fixed Annuities (NAFA) will provide essential information about fixed annuity product features, regulation, tax issues, and industry news. We invite you, the reader, to send us any questions that you often hear — or that you may have yourself. Submit your questions to ASJeditor@AgentMedia.com with the subject line “Fixed Annuity FAQ” to have your problems answered here.

The National Association for Fixed Annuities (NAFA) is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities — including income, declared rate, market value adjusted, and indexed. You can follow NAFA on twitter at www.twitter.com/nafausa.