[Federal Register Volume 63, Number 1 (Friday, January 2, 1998)]
[Proposed Rules]
[Pages 35-39]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33986]



[[Page 35]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-109333-97]
RIN 1545-AV56


Qualified Long-Term Care Insurance Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to 
consumer protection with respect to qualified long-term care insurance 
contracts and relating to events that will be considered material 
changes with respect to long-term care insurance contracts issued prior 
to January 1, 1997. Changes to the applicable law were made by the 
Health Insurance Portability and Accountability Act of 1996. The 
regulations affect issuers of long-term care insurance contracts and 
individuals entitled to receive payments under these contracts. The 
regulations are necessary to provide these taxpayers with guidance 
needed to comply with these changes.

DATES: Written comments must be received by April 2, 1998. Outlines of 
topics to be discussed at the public hearing scheduled for May 13, 
1998, must be received by April 2, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-109333-97), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-109333-97), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW, 
Washington, DC. Alternatively, taxpayers may also submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at <a href="http://www.irs.ustreas.gov/prod/tax__regs/
comments.html">http://www.irs.ustreas.gov/prod/tax__regs/
comments.html</a>. The public hearing will be held in room 2615, Internal 
Revenue Building, 1111 Constitution Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Katherine 
A. Hossofsky, (202) 622-3477; concerning submissions and the hearing, 
LaNita VanDyke, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) to provide rules under section 7702B of the 
Internal Revenue Code of 1986 (the ``Code''). Section 7702B was added 
by sections 321 and 325 of the Health Insurance Portability and 
Accountability Act of 1996 (Pub. L. 104-191, 110 Stat. 1936, 2054 and 
110 Stat. at 2063) (``HIPAA''). Notice 97-31, 1997-21 I.R.B. 5 (May 6, 
1997), provides interim guidance on certain provisions of section 7702B 
and other provisions of the Code added or amended by HIPAA.

Explanation of Statutory Provisions

    Section 7702B establishes the tax treatment for qualified long-term 
care insurance contracts. Sections 7702B(a) (1) and (3) provide that a 
qualified long-term care insurance contract is treated as an accident 
and health insurance contract and that any employer plan providing 
coverage under a qualified long-term care insurance contract is treated 
as an accident or health plan with respect to that coverage.
    Section 7702B(a)(2) provides that amounts (other than policyholder 
dividends and premium dividends) received under a qualified long-term 
care insurance contract are generally excludable from gross income as 
amounts received for personal injuries and sickness.
    Section 213(d)(1)(D) was amended by section 322 of HIPAA to provide 
that eligible long-term care premiums as defined in section 213(d)(10) 
are deductible medical expenses.
    Under section 7702B(b)(1)(F), a qualified long-term care insurance 
contract must meet the consumer protection provisions of section 
7702B(g). In addition, section 4980C imposes an excise tax on issuers 
of qualified long-term care insurance contracts that do not provide 
further consumer protections.
    Section 7702B of the Code applies to contracts issued after 
December 31, 1996. Section 321(f)(2) of HIPAA treats a contract issued 
before January 1, 1997, as a qualified long-term care insurance 
contract under section 7702B(b) of the Code, and services provided or 
reimbursed under such a contract as qualified long-term care services 
under section 7702B(c) of the Code, provided the contract met the long-
term care requirements of the State in which the contract was sitused 
at the time the contract was issued. Section 321(f)(2) of HIPAA also 
provides that in the case of an individual covered on December 31, 
1996, by a State long-term care plan under section 7702B(f) of the 
Code, the terms of the plan on that date are treated as a contract 
meeting the long-term care insurance requirements of that State.
    Section 321(f)(4) of HIPAA provides that for purposes of applying 
sections 101(f), 7702, and 7702A of the Code, neither the issuance of a 
rider that is treated as a qualified long-term care insurance contract 
nor the addition of any provision required to conform any other long-
term care rider to the requirements applicable to a qualified long-term 
care insurance contract is treated as a modification or material change 
of the contract.

Explanation of Provisions

    The proposed regulations provide guidance concerning:

<bullet> the consumer protection requirements that apply to qualified 
long-term care insurance contracts under sections 7702B(g), 
7702B(b)(1)(F), and 4980C of the Code; and
<bullet> the grandfather provisions of section 321(f)(2) of HIPAA under 
which pre-1997 contracts are treated as qualified long-term care 
insurance contracts if certain conditions are met.

    The standards in the proposed regulations are based on safe harbors 
that were originally set forth in Notice 97-31. They reflect comments 
made by consumer representatives, issuers of long-term care insurance, 
independent sales agents, State regulators of long-term care insurance, 
and others. The proposed regulations are intended to provide clear and 
workable rules to assist those who want to ensure that a contract 
issued before 1997 retains its status as a qualified long-term care 
insurance contract.

Notice 97-31

    Notice 97-31 was issued to provide interim standards for taxpayers 
to use in interpreting the new long-term care provisions and to 
facilitate operation of the insurance market by avoiding the need to 
amend contracts. For example, Notice 97-31 includes interim guidance on 
the determination of whether an individual is a ``chronically ill 
individual,'' including safe harbor definitions of the terms 
``substantial assistance,'' ``hands-on assistance,'' ``standby 
assistance,'' ``severe cognitive impairment,'' and ``substantial 
supervision.'' The standards contained in Notice 97-31 include interim 
guidance on both the consumer protection provisions and the scope of 
the statutory grandfather provisions that apply to long-term care 
insurance contracts issued before 1997.

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Consumer Protection Requirements

    Under sections 7702B(b)(1)(F), 7702B(g), and 4980C, qualified long-
term care insurance contracts and issuers of those contracts are 
required to satisfy certain provisions of the model act and model 
regulation promulgated by the National Association of Insurance 
Commissioners (NAIC) for long-term care insurance as of January 1993. 
The requirements relate to guaranteed renewability, unintentional 
lapse, disclosure, prohibitions against post-claims underwriting, 
inflation protection, and prohibitions against pre-existing conditions 
exclusions and probationary periods. Section 4980C imposes an excise 
tax on an issuer of a qualified long-term care insurance contract if, 
after 1996, the issuer fails to satisfy certain requirements, including 
requirements relating to application forms, reporting, marketing, 
appropriateness of recommended purchase, standard format outline of 
coverage, delivery of a shopper's guide, right to return, outline of 
coverage, and incontestability. Most of these requirements are based on 
the NAIC model act and regulation.
    The proposed regulations reflect the standards that were set forth 
in Notice 97-31. For example, the consumer protection requirements will 
be considered satisfied if a contract complies with State law in a 
State that has adopted the related NAIC model or a more stringent 
version of the model.

Pre-1997 Long-Term Care Insurance Contracts

    Section 321(f)(2) of HIPAA provides that a contract issued before 
January 1, 1997, is treated as a qualified long-term care insurance 
contract if the contract met the ``long-term care insurance 
requirements of the State'' in which the contract was sitused at the 
time it was issued. Under the proposed regulations, the date on which a 
long-term care insurance contract other than a group long-term care 
insurance contract is issued is generally the date assigned to the 
contract by the insurance company. In no event is the issue date 
earlier than the date on which the policyholder submitted a signed 
application for coverage to the insurance company. In addition, if the 
period between the date of application and the date on which the long-
term care insurance contract actually becomes effective is 
substantially longer than under the insurance company's usual business 
practice, then the issue date is the date the contract becomes 
effective. For purposes of applying the grandfather rule of section 
321(f)(2) to a group long-term care insurance contract, the issue date 
of the contract is the date the group contract was issued. As a result, 
coverage for an individual who joins a grandfathered group long-term 
care insurance contract on or after January 1, 1997, is accorded the 
same treatment under section 321(f)(2) as is accorded coverage for 
those who joined the group before that date.
    For purposes of applying section 321(f)(2) of HIPAA to long-term 
care insurance contracts issued before January 1, 1997, a material 
change in the contract generally is considered the issuance of a new 
contract. Notice 97-31 provides that a material change includes any 
change in the terms of the contract altering the amount or timing of 
any item payable by the policyholder (or certificate holder), the 
insured, or the insurance company. Notice 97-31 also provides that the 
exercise of an option or right granted to a policyholder under a 
qualified long-term care insurance contract as in effect on December 
31, 1996, does not constitute a material change.\1\
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    \1\ The definition of material change in Notice 97-31 is 
narrower than the definition of material change for purposes of 
other sections of the Code. For example, the exercise of an option 
in a life insurance contract results in the loss of grandfathering 
under section 7702 if the option only guarantees terms that are 
likely to be available when the option is exercised.
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    After Notice 97-31 was issued, commentators recommended that 
certain common practices should not cause long-term care insurance 
contracts issued before January 1, 1997, to lose their grandfathered 
status. In response to these comments, the proposed regulations provide 
additional exceptions to the general rule that a material change in a 
long-term care insurance contract issued before January 1, 1997, will 
be considered the issuance of a new contract.
    <bullet> The proposed regulations provide that the exercise of any 
right provided to a policyholder (i.e., a right that can be exercised 
without the issuer's consent and without other conditions, such as 
underwriting) or the addition of any right that is required by State 
law to be provided to the policyholder will not be treated as a 
material change to a long-term care insurance contract.
    <bullet> In addition, the proposed regulations provide that the 
following practices will not be treated as material changes for 
purposes of section 7702B: (1) Any change in the mode of premium 
payment, such as a change from paying premiums monthly to quarterly; 
(2) any classwide increase or decrease in premiums for contracts that 
have been issued on a guaranteed renewable basis; (3) a reduction in 
premiums due to the purchase of a long-term care insurance policy by a 
member of the policyholder's family; (4) any reduction in coverage 
(with correspondingly lower premiums) made at the request of a 
policyholder; (5) the addition, without an increase in premiums, of 
alternative forms of benefits that may be selected by the policyholder; 
(6) the purchase of a rider to increase benefits under a pre-1997 
contract if the rider would constitute a qualified long-term care 
insurance contract if it were a separate contract; \2\ (7) the deletion 
of a rider or provision of a contract (called an HHS rider) that 
prohibited coordination of benefits with Medicare; and (8) the 
effectuation of a continuation or conversion of coverage right under a 
group contract following an individual's ineligibility for continued 
coverage under the group contract.
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    \2\ Thus for example, the only coverage provided under the rider 
must be coverage for qualified long-term care services and the 
purchase must satisfy the consumer protection requirements of 
section 7702B(g) of the Code. (This would not include protections 
that apply only the first time a contract is purchased, i.e., 
subsections (g)(2)(A)(i)(III), (V), (VII) (other than section 6B of 
the NAIC model regulation), and (X), (g)(3), and (g)(4) of section 
7702B. Similarly, subsections (c)(1)(A)(i) and (c)(2) of section 
4980C would apply only the first time a contract is purchased.)
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    The proposed regulations include examples illustrating certain of 
these standards. The exceptions to the general rule that a material 
change results in the issuance of a new contract apply solely for 
purposes of determining whether a pre-1997 insurance contract is 
treated as a qualified long-term care insurance contract under section 
7702B.\3\
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    \3\ The exceptions depart from the definition of material change 
that would apply for purposes of other sections of the Code, 
including sections 7702, 7702A, 101(f), and 264. These exceptions 
are consistent with the purpose of section 7702B, which has the 
effect of expanding the tax benefits for certain long-term care 
insurance contracts. By contrast, sections 7702, 7702A, 101(f), and 
264, for example, limit the tax benefits associated with certain 
insurance products and, unlike pre-1997 long-term care insurance 
contracts, apply to contracts with a substantial investment 
orientation.
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    Comments are requested on these standards, including (1) whether 
the material change rules in the proposed regulations should be limited 
to pre-1997 long-term care insurance contracts that cannot have cash 
surrender value; (2) whether there are any conditions under which the 
expansion of coverage under a group long-term care insurance contract 
in connection with a corporate merger, acquisition or similar 
transaction should not constitute a material change; and (3) whether 
the extension of a group long-term care contract to a collective 
bargaining unit is a material change in all cases. For

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example, should the extension of a group long-term care contract to a 
bargaining unit after 1997 be treated as a material change if the 
bargaining agreement for the unit has not been renewed since before the 
group contract was first adopted?
    Comments also are requested on what the effective date of the final 
regulations should be. It is intended that the regulations will not be 
effective until after the end of a specified period following adoption 
of the final regulations. Taxpayers may rely on these proposed 
regulations for guidance pending the issuance of final regulations. If, 
and to the extent, future guidance is more restrictive than the 
guidance in these proposed regulations, the future guidance will be 
applied without retroactive effect. In addition, until further notice, 
taxpayers may continue to rely on Notice 97-31.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It has also been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) does not apply to these regulations, and because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS (a signed original and eight (8) copies). All comments will 
be available for public inspection and copying.
    A public hearing has been scheduled for May 13, 1998, at 10 a.m., 
in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW, 
Washington, DC. Because of access restrictions, visitors will not be 
admitted beyond the Internal Revenue Building lobby more than 15 
minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments by April 2, 1998 and submit an outline of the 
topics to be discussed and the time to be devoted to each topic by 
April 2, 1998.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Katherine A. 
Hossofsky, Office of Assistant Chief Counsel (Financial Institutions & 
Products). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Sections 1.7702B-1 through 1.7702B-2 are added to read as 
follows:


Sec. 1.7702B-1  Consumer protection provisions.

    (a) In general. Under sections 7702B(b)(1)(F), 7702B(g), and 4980C, 
qualified long-term care insurance contracts and issuers of those 
contracts are required to satisfy certain provisions of the Long-Term 
Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model 
Regulation (Model Regulation) promulgated by the National Association 
of Insurance Commissioners (NAIC), as adopted as of January 1993. The 
requirements for qualified long-term care insurance contracts under 
sections 7702B(b)(1)(F) and 7702B(g) relate to guaranteed renewal or 
noncancellability, prohibitions on limitations and exclusions, 
extension of benefits, continuation or conversion of coverage, 
discontinuance and replacement of policies, unintentional lapse, 
disclosure, prohibitions against post-claims underwriting, minimum 
standards, inflation protection, prohibitions against pre-existing 
conditions exclusions and probationary periods, and prior 
hospitalization. The requirements for qualified long-term care 
insurance contracts under section 4980C relate to application forms and 
replacement coverage, reporting requirements, filing requirements for 
marketing, standards for marketing, appropriateness of recommended 
purchase, standard format outline of coverage, delivery of a shopper's 
guide, right to return, outline of coverage, certificates under group 
plans, policy summary, monthly reports on accelerated death benefits, 
and incontestability period.
    (b) Coordination with State requirements--(1) Contracts issued in a 
State that imposes more stringent requirements. If a State imposes a 
requirement that is more stringent than the analogous requirement 
imposed by section 7702B(g) or 4980C, then, under section 4980C(f), 
compliance with the more stringent requirement of State law is 
considered compliance with the parallel requirement of section 7702B(g) 
or 4980C. The principles of paragraph (b)(3) of this section apply to 
any case in which a State imposes a requirement that is more stringent 
than the analogous requirement imposed by section 7702B(g) or 4980C (as 
described in this paragraph (b)(1)), but in which there has been a 
failure to comply with that State requirement.
    (2) Contracts issued in a State that has adopted the model 
provisions. If a State imposes a requirement that is the same as the 
parallel requirement imposed by section 7702B(g) or 4980C, compliance 
with that requirement of State law is considered compliance with the 
parallel requirement of section 7702B(g) or 4980C, and failure to 
comply with that requirement of State law is considered failure to 
comply with the parallel requirement of section 7702B(g) or 4980C.
    (3) Contracts issued in a State that has not adopted the model 
provisions or more stringent requirements. If a State has not adopted 
the Model Act, the Model Regulation, or a requirement that is the same 
as or more stringent than the analogous requirement imposed by section 
7702B(g) or 4980C, then the language, caption, format, and content 
requirements imposed by sections 7702B(g) and 4980C with respect to 
contracts, applications, outlines of coverage, policy summaries, and 
notices will be considered satisfied for a contract subject to the law 
of that State if the language, caption, format, and content are 
substantially similar to those required under the parallel provision of 
the Model Act or Model Regulation. Only nonsubstantive deviations are 
permitted in order for language, caption, format, and content to be 
considered substantially similar to the requirements of the Model Act 
or Model Regulation.

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Sec. 1.7702B-2  Special rules for pre-1997 long-term care insurance 
contracts.

    (a) Scope. The definitions and special provisions of this section 
apply solely for purposes of determining whether an insurance contract 
(other than a qualified long-term care insurance contract described in 
section 7702B(b) and any regulations issued thereunder) is treated as a 
qualified long-term care insurance contract for purposes of the 
Internal Revenue Code.
    (b) Pre-1997 long-term care insurance contracts.--(1) In general. A 
pre-1997 long-term care insurance contract is treated as a qualified 
long-term care insurance contract, regardless of whether the contract 
satisfies section 7702B(b) and any regulations issued thereunder.
    (2) Pre-1997 long-term care insurance contract defined. A pre-1997 
long-term care insurance contract is any insurance contract with an 
issue date before January 1, 1997, that met the long-term care 
insurance requirements of the State in which the contract was sitused 
on the issue date. For this purpose, the long-term care insurance 
requirements of the State are the State laws (including statutory and 
administrative law) that are intended to regulate insurance coverage 
that constitutes ``long-term care insurance'' (as defined in section 4 
of the National Association of Insurance Commissioners (NAIC) Long-Term 
Care Insurance Model Act, as in effect on August 21, 1996), regardless 
of the terminology used by the State in describing the insurance 
coverage.
    (3) Issue date of a contract. (i) In general. The issue date of a 
contract is the issue date assigned to the contract by the insurance 
company, but in no event is the issue date earlier than the date the 
policyholder submitted a signed application for coverage to the 
insurance company. However, if the period between the date the signed 
application is submitted to the insurance company and the date coverage 
under the contract actually becomes effective is substantially longer 
than under the insurance company's usual business practice, then the 
issue date is the date coverage under the contract becomes effective 
(if this is later than the issue date assigned to the contract by the 
insurance company). A policyholder's right to return a contract within 
a ``free-look'' period following delivery for a full refund of any 
premiums paid is not taken into account in determining the contract's 
issue date.
    (ii) Special rule for group contracts. The issue date of a group 
contract (including any certificate issued thereunder) is the date on 
which coverage under the group contract becomes effective.
    (iii) Exchange of contract or material change in a contract treated 
as a new issuance. For purposes of this paragraph (b)(3)--
    (A) A contract issued in exchange for an existing contract after 
December 31, 1996, is considered a contract issued after that date;
    (B) Any material change (as defined in paragraph (b)(4) of this 
section) in a contract is treated as the issuance of a new contract 
with an issue date no earlier than the date the material change goes 
into effect; and
    (C) If a material change occurs with regard to one or more, but 
fewer than all, of the certificates evidencing coverage under a group 
contract, then the insurance coverage under the changed certificates is 
treated as coverage under a newly issued group contract (and the 
insurance coverage provided by any unchanged certificate continues to 
be treated as coverage under the original group contract).
    (4) Material change. (i) In general. For purposes of paragraph 
(b)(3) of this section, except as provided in paragraph (b)(4)(ii) of 
this section, a material change means--
    (A) A change in the terms of a contract that alters the amount or 
timing of an item payable by the policyholder (or certificate holder), 
the insured, or the insurance company;
    (B) A substitution of the insured under an individual contract; or
    (C) A change (other than an immaterial change) in the eligibility 
for membership in the group covered under a group contract.
    (ii) Exceptions. For purposes of this paragraph (b)(4), the 
following changes are not treated as a material change:
    (A) A policyholder's exercise of any right provided under the terms 
of the contract as in effect on December 31, 1996, or a right required 
by applicable State law to be provided to the policyholder;
    (B) A change in the mode of premium payment (for example, a change 
from monthly to quarterly premiums);
    (C) In the case of a policy that is guaranteed renewable or 
noncancellable, a classwide increase or decrease in premiums;
    (D) A reduction in premiums due to the purchase of a long-term care 
insurance contract by a family member of the policyholder;
    (E) A reduction in coverage (with a corresponding reduction in 
premiums) made at the request of a policyholder;
    (F) The addition, without an increase in premiums, of alternative 
forms of benefits that may be selected by the policyholder;
    (G) The addition of a rider (including any similarly identifiable 
amendment) to a pre-1997 long-term care insurance contract in any case 
in which the rider, if issued as a separate contract of insurance, 
would itself be a qualified long-term care insurance contract under 
section 7702B and any regulations issued thereunder (including the 
consumer protection provisions in section 7702B(g) to the extent 
applicable to the addition of a rider);
    (H) The deletion of a rider or provision of a contract (often 
referred to as an HHS rider) that prohibited coordination of benefits 
with Medicare; and
    (I) The effectuation of a continuation or conversion of coverage 
right provided under a group contract following an individual's 
ineligibility for continued coverage under the group contract.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. (i) On December 3, 1996, A, an individual, submits a 
signed application to an insurance company to purchase a nursing 
home contract that meets the long-term care insurance requirements 
of the State in which the contract is sitused. The insurance company 
decides on December 20, 1996, that it will issue the contract, and 
assigns December 20, 1996, as the issue date for the contract. Under 
the terms of the contract, A's insurance coverage becomes effective 
on January 1, 1997. The company delivers the contract to A on 
January 3, 1997. A has the right to return the contract within 15 
days following delivery for a refund of all premiums paid.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date 
of the contract is December 20, 1996. Thus, the contract is a pre-
1997 long-term care insurance contract that is treated as a 
qualified long-term care insurance contract.
    Example 2. (i) The facts are the same as in Example 1, except 
that the insurance coverage under the contract does not become 
effective until March 1, 1997. Under the insurance company's usual 
business practice, the period between the date of the application 
and the date the contract becomes effective is 30 days or less.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date 
of the contract is March 1, 1997. Thus, the contract is not a pre-
1997 long-term care insurance contract, and, accordingly, the 
contract must meet the requirements of section 7702B(b) and any 
regulations issued thereunder to be a qualified long-term care 
insurance contract.
    Example 3. (i) B, an individual, is the policyholder under a 
long-term care insurance contract purchased in 1995. On June 15, 
2000, the insurance coverage and premiums under the contract are 
increased by agreement between B and the insurance company.

[[Page 39]]

    (ii) Under paragraph (b)(4)(i)(A) of this section, a change in 
the terms of a contract that alters the amount or timing of an item 
payable by the policyholder or the insurance company is a material 
change in the contract. Thus, B's coverage is treated as coverage 
under a contract issued on June 15, 2000, and, accordingly, the 
contract must meet the requirements of section 7702B(b) and any 
regulations issued thereunder in order to be a qualified long-term 
care insurance contract.
    Example 4. (i) C, an individual, is the policyholder under a 
long-term care insurance contract purchased in 1994. At that time 
and through December 31, 1996, the contract met the long-term care 
insurance requirements of the State in which the contract was 
sitused. In 1996, the policy was amended to add a provision 
requiring the policyholder to be offered the right to increase 
dollar limits for inflation every three years (without the 
policyholder being required to pass a physical or satisfy any other 
underwriting requirements). During 2002, C elects to increase the 
amount of insurance coverage (with a resulting premium increase) 
pursuant to the inflation protection provision.
    (ii) Under paragraph (b)(4)(ii)(A) of this section, an increase 
in the amount of insurance coverage at the election of the 
policyholder (without the insurance company's consent and without 
underwriting or other limitations on the policyholder's rights) 
pursuant to a pre-1997 inflation protection provision does not 
constitute a material change in the contract. Thus, C's contract 
continues to be a pre-1997 long-term care insurance contract that is 
treated as a qualified long-term care insurance contract.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 97-33986 Filed 12-31-97; 8:45 am]
BILLING CODE 4830-01-U