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12 Life and Annuity Changes in $1.7T Spending Bill

By Allison Bell

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Life insurance and annuity provisions in the Consolidated Appropriations Act, 2023 — the 4,155-page, $1.7 trillion spending bill now flying through Congress — could shape clients’ saving and investment decisions for decades to come.

Groups like the American Council of Life Insurers, the National Association of Insurance and Financial Advisors and Finseca are going through the text carefully to see exactly what’s in there, how the current version of the language compares with earlier drafts, and which bits are the result of their work.

The core of the bill consists of provisions needed to fund the operations of the federal government, but Division T is the text of the Setting Every Community Up for Retirement Enhancement (Secure 2.0) Act, a 358-page package of retirement and general financial security provisions. Some could improve the ability of annuities to provide a guaranteed source of income for retirees’ entire lives.

Division AA, another part of the bill, would affect the fate of a hot, relatively new type of annuity.

What It Means

If CAA 2023 makes it through the Senate and the House, and President Joe Biden signs it into law, the package could have a big effect on your clients’ life insurance and annuity options.

Spending Bill Status

Congressional leaders are packaging the CAA 2023 text as Senate Amendment 6552 to H.R. 2617.

Members of the Senate voted 70-25 Tuesday to proceed with consideration of the package. On Thursday morning, Senate leaders had announced that they had a deal for getting the bill through the Senate, but prospects for final bill passage were not certain.

President Joe Biden; House Democratic leaders; Senate Minority Leader Mitch McConnell, R-Ky.; and many Senate Republicans support passage of the package.

Some Republicans in the Senate; House Minority Leader Kevin McCarthy, R-Calif.; and a group of Republican House members led by Rep. Chip Roy, R-Texas, oppose the bill. The Roy group wrote a public letter arguing that the spending package is an “indefensible assault on the American people” and asking allies in the Senate to block it.

The CAA 2023 Life and Annuity Provisions

Some sections of the CAA 2023 package that make no direct mention of life insurance, annuities or related topics could turn out to have significant, possibly unexpected effects on life insurance and annuities.

Here’s a look at 12 sections that mention life insurance, annuities or both and look as if they could have an especially powerful effect on the products, the issuers or the users.

Note that, although all parts of Division T are now part of CAA 2023′s Secure 2.0 Act section, many of the provisions moved into the Secure 2.0 Act from other House and Senate bills, such as the Retirement Security and Savings Act of 2021 bill and the Enhancing American Retirement Now Act bill.

1. Registration for Index-Linked Annuities

Division AA, Title I

This key annuity provision came from the Registration for Index-Linked Annuities Act bill, or H.R. 4865, rather than from the Secure 2.0 bill.

It would direct the Securities and Exchange Commission to develop a relatively simple registration for RILA contracts, rather than requiring RILA issuers to put a product through the same kind of registration process used when a company wants to go public.

The Insured Retirement Institute and other life and annuity groups have argued that the change could make the popular products even more popular by cutting down on the time needed to launch a RILA product.

2. QLACs: Repeal of the Percent Premium Limit

Division TT, Section 202

A qualified longevity annuity contract is a single-premium annuity designed to pay income, starting at a date in the future, for the remaining life of a retiree.

The QLAC program is designed to help reduce a retiree’s required minimum distributions, and federal income tax bills, while ensuring that at least part of the retiree’s retirement savings will last until the retiree dies.

One obstacle to QLAC adoption has been strict premium contribution rules, which hold down the amount of income a QLAC can generate.

Current law limits the premium contribution to 25% of the account balance.

The QLAC section in CAA 2023 would eliminate the cap on the percentage of the account balance that can be fed into a QLAC.

This QLAC provision also appeared in a stand-alone Secure 2.0 bill, H.R. 2954, and in the Retirement Security and Savings Act of 2021, S. 1770.

3. QLACs: Premium Amount Limit Increase

Division TT, Section 202

A second obstacle to widespread use of QLACs is the fact that current federal rules limit the amount of premiums a taxpayer can contribute to a QLAC, without running into RMD conflicts, to $125,000, before adjustments for inflation, meaning that a QLAC can generate only a modest amount of annual income.

One section of the CAA 2023 Secure 2.0 section would increase the maximum contribution to $200,000.

This QLAC provision also appeared in the Secure 2.0 bill, H.R. 2954, and in the Retirement Security and Savings Act of 2021, S. 1770.

4. QLACs: Dollar Limit Inflation Adjustments

Division TT, Section 202

Another section of the Secure 2.0 Act would adjust the new $200,000 premium contribution limit for inflation, starting one year after the enactment of the QLAC provisions.

This QLAC inflation adjustment provision also appeared in the Secure 2.0 bill, H.R. 2954, and in the Retirement Security and Savings Act of 2021, S. 1770.

5. Qualified Long-Term Care Distributions: Certified Long-Term Care Insurance

Division T, Section 334

This provision is part of a section that would let a 401(k) plan participant use up to $2,500 in plan assets per year to pay long-term care insurance premiums without a 10% early withdrawal penalty. A participant would have to pay income taxes on the distributions.

Section 334 makes it clear that a participant can use the distributions to pay for annuities that provide long-term care benefits and life insurance policies that provide LTC benefits, not just stand-alone long-term care insurance policies.

The LTCI payment provision also appeared in the Enhancing American Retirement Now (EARN) Act bill, S. 4808.

6. Insurance-Dedicated ETFs

Division TT, Section 203

This provision would clear up a legal conflict that now makes it difficult for insurers to use exchange-traded funds in the fund menus inside variable life insurance policies and variable annuity contracts.

The insurance ETF provision also appeared in the Secure 2.0 bill, H.R. 2954, and in the Retirement Security and Savings Act of 2021, S. 1770.

7. Charitable Gift Annuity Changes

Division T, Section 307

A client can use a charitable gift annuity to give a large sum of money to a nonprofit organization, then get a small amount of cash back every year.

When the client dies, the nonprofit organization managing the charitable gift annuity keeps the remaining assets.

Section 307 in CAA 2023′s Secure 2.0 section would let a client move up to $50,000 from an individual retirement account into “split interest” charitable giving arrangement, such as a charitable gift annuity, a charitable remainder annuity trust or a charitable remainder unitrust.

Current law caps the amount of cash a client can give to charity through a qualified charitable distribution from an IRA at $100,000 per year. One part of Section 307 would index that cap for inflation starting with distributions made in taxable years beginning after the date of enactment of Section 307.

The kinds of charitable gift annuities described in the provision are transactions between the givers and the nonprofit organizations, not commercial annuity contracts.

But the nonprofit organizations might use life insurers to manage their charitable gift annuity programs, and donors might use charitable gift annuities alongside commercial life and annuity products.

The charitable giving provision also appeared in the Secure 2.0 bill, H.R. 2954 and in the Legacy IRA Act bill, S. 243.

8. Elimination of the 401(k) Plan Partial Annuitization Penalty

Division T, Section 204

This provision could ease the effects of the RMD rules on a client who holds both an annuity and other types of assets inside a 401(k) plan. Today, clients with annuity assets may end up having to take bigger RMDs, and pay higher federal income taxes, than if they held no annuity assets in their retirement plans, according to an analysis by Groom Law Group.

The partial annuitization provision also appeared in the EARN Act bill, S. 4808, and in the Retirement Security and Savings Act of 2021, S. 1770.

9. Pension Annuitized Benefits Buyout Value Notice Requirement

Division T, Section 342

This provision could reduce the number of clients who trade defined benefit pension payment streams for lump-sum payouts.

It would require pension plan sponsors who offer buyouts to show the participants what an equivalent commercial annuity might cost and report on the buyout offer results to the Pension Benefit Guaranty Corp.

Because this provision would compare the value of pension plan benefits with the value of individual annuities, it might increase plan participants’ awareness of individual annuities.

The value notice provision also appeared in the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (Rise & Shine) Act bill, S. 4353.

10. Auto-Enrollment in 403(b)s

Division T, Section 101

This provision could increase the number of clients enrolled automatically in employer-sponsored retirement plans, by making it clear that the Secure 2.0 retirement plan automatic enrollment provisions apply to the teachers, government workers and other participants in nonprofit employers’ annuity-based 403(b) retirement plans, not just to participants in 401(k) plans.

The automatic plan enrollment provision also appeared in the Secure 2.0 bill, H.R. 2954.

11. ‘Substantially Equal Periodic Payments’ and Plan Rollovers

Division T, Section 323

This provision could help clients who are tapping retirement plan assets early use annuities in SEPP arrangements.

The rollover provision, for retirees using the substantially equal periodic payment rule, also appeared in the EARN Act bill, S. 4808, and in the Retirement Security and Savings Act of 2021 bill, S. 1770.

12. Review of DOL Pension Risk Transfer Guidelines

Division T, Section 321

This provision could affect the security of clients’ pension benefits.

It would require the U.S. Labor secretary to look into the possibility of updating the standards for the group annuity providers that can assume pension risk from pension plan sponsors through pension risk transfers.

The pension risk transfer study provision also appeared in the Pension Risk Transfer Accountability of 2021 bill, S. 3746.

(Image: Adobe Stock)

Allison Bell

Think_Allison

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