Final Senate Finance Bill Text Keeps Narrow LTCI Tax Break Provision

Senate Finance Committee leaders want to give some of your clients a little help with using retirement savings to pay long-term care insurance premiums.

Sen. Ron Wyden, D-Ore., the committee chairman, and Sen. Mike Crapo, R-Idaho, the highest-ranking Republican, released the formal text of the committee’s Enhancing American Retirement Now Act, or EARN Act, bill Thursday.

The new EARN Act formal text includes a provision, starting on page 127 of the PDF version, that would let clients spend up to $2,500 per year in retirement plan or IRA assets on premiums for high-quality LTCI coverage.

Clients who used the provision could avoid paying the 10% penalty tax on early retirement savings withdrawals. But clients who took the distributions would have to pay federal income taxes on the distributions.

What It Means

If the provision is enacted and implemented as written and works as expected, it might help some clients who already want LTCI protection and have large amounts of retirement savings to pay for the coverage.

The provision might have only a modest effect on other consumers’ interest in LTCI coverage.

The Outline and the Text

Members of the Senate Finance Committee approved a plain-language outline of the EARN Act bill in June, by a voice vote.

The EARN Act bill has support from both Republican and Democratic lawmakers, and it appears to have a good chance of moving through Congress as part of the Securing a Strong Retirement Act bill  — the big “Secure 2.0″ consumer finance package.

What the Senate Finance Committee is now working on is a version of the plain-language outline that has been translated into formal legislative language.

The June outline is available here.

The committee has now posted the full formal language and a plain-English outline of the new version of the bill.

Other Provisions

The new EARN Act bill’s formal text includes many provisions of interest to financial and insurance advisors.

One is an often-introduced, never-passed measure that would help consumers make more use of a special class of deferred immediate annuities — qualifying longevity annuity contracts, or QLACs.

QLACs are deferred income annuities that start paying benefits at age 85 or later, protect the holder against extreme longevity, and qualify for special federal income tax breaks.

A QLAC provision, which starts on page 81 of the EARN Act full-text version file, would make using QLACs more attractive by increasing the current QLAC premium limit to $200,000 — and indexed for inflation — from $135,000 or 25% of the participant’s account balance today.

Some other bill sections could affect insurers’ behind-the-scenes administration of annuities.

The Future

In June, the committee considered and then rejected an amendment proposed by Sen. Pat Toomey, R-Pa. that could have let clients exclude up to $2,500 in retirement plan LTCI premium payments per year from taxable income.

Wyden and Crapo now must work to get the bill through the Senate, as part of the Secure 2.0 package or through another process, and to reconcile any version that gets through the Senate with any version that gets through the House.

The Toomey LTCI proposal could return at some point during that process.

One obstacle is that the United States faces a large budget deficit. Members of Congress are supposed to find ways to offset the cost of any proposed tax break, and “pay for” proposals tend to be less popular than tax break proposals.

Pictured: Sen. Pat Toomey, R-Pa. (Photo: Toomey)