II 

109TH CONGRESS 

1ST SESSION S. 381 

To amend the Internal Revenue Code of 1986 to encourage guaranteed 

lifetime income payments from annuities and similar payments of life 

insurance proceeds at dates later than death by excluding from income 

a portion of such payments. 

IN THE SENATE OF THE UNITED STATES 

FEBRUARY 15, 2005 

Mr. SMITH (for himself, Mr. CONRAD, Ms. SNOWE, and Mrs. CLINTON) introduced the following bill; which was read twice and referred to the Committee on Finance 

A BILL

To amend the Internal Revenue Code of 1986 to encourage 

guaranteed lifetime income payments from annuities and 

similar payments of life insurance proceeds at dates later 

than death by excluding from income a portion of such 

payments.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Retirement Security 

5 for Life Act of 2005’’. 
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1 SEC. 2. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS. 

2 (a) LIFETIME ANNUITY PAYMENTS UNDER ANNUITY

3 CONTRACTS.—Section 72(b) of the Internal Revenue Code 

4 of 1986 (relating to exclusion ratio) is amended by adding 

5 at the end the following new paragraph: 

6 ‘‘(5) EXCLUSION FOR LIFETIME ANNUITY PAY7 MENTS.— 

8 ‘‘(A) IN GENERAL.—In the case of lifetime 

9 annuity payments received under one or more 

10 annuity contracts in any taxable year, gross in11 come shall not include 50 percent of the portion 

12 of lifetime annuity payments otherwise includ13 ible (without regard to this paragraph) in gross 

14 income under this section. For purposes of the 

15 preceding sentence, the amount excludible from 

16 gross income in any taxable year shall not ex17 ceed $20,000. 

18 ‘‘(B) COST-OF-LIVING ADJUSTMENT.—In 

19 the case of taxable years beginning after De20 cember 31, 2006, the $20,000 amount in sub21 paragraph (A) shall be increased by an amount 

22 equal to— 

23 ‘‘(i) such dollar amount, multiplied by 

24 ‘‘(ii) the cost-of-living adjustment de25 termined under section 1(f)(3) for the cal26 endar year in which the taxable year be-
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1 gins, determined by substituting ‘calendar 

2 year 2005’ for ‘calendar year 1992’ in sub3 paragraph (B) thereof. 

4 If any amount as increased under the preceding 

5 sentence is not a multiple of $500, such amount 

6 shall be rounded to the next lower multiple of 

7 $500. 

8 ‘‘(C) APPLICATION OF PARAGRAPH.—Sub9 paragraph (A) shall not apply to— 

10 ‘‘(i) any amount received under an eli11 gible deferred compensation plan (as de12 fined in section 457(b)) or under a quali13 fied retirement plan (as defined in section 

14 4974(c)), 

15 ‘‘(ii) any amount paid under an annu16 ity contract that is received by the bene17 ficiary under the contract— 

18 ‘‘(I) after the death of the annu19 itant in the case of payments de20 scribed in subsection (c)(5)(A)(ii)(III), 

21 unless the beneficiary is the surviving 

22 spouse of the annuitant, or 

23 ‘‘(II) after the death of the annu24 itant and joint annuitant in the case 

25 of payments described in subsection 
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1 (c)(5)(A)(ii)(IV), unless the bene2 ficiary is the surviving spouse of the 

3 last to die of the annuitant and the 

4 joint annuitant, or 

5 ‘‘(iii) any annuity contract that is a 

6 qualified funding asset (as defined in sec7 tion 130(d)), but without regard to wheth8 er there is a qualified assignment. 

9 ‘‘(D) INVESTMENT IN THE CONTRACT.—

10 For purposes of this section, the investment in 

11 the contract shall be determined without regard 

12 to this paragraph.’’. 

13 (b) DEFINITIONS.—Subsection (c) of section 72 of 

14 the Internal Revenue Code of 1986 is amended by adding 

15 at the end the following new paragraph: 

16 ‘‘(5) LIFETIME ANNUITY PAYMENT.— 

17 ‘‘(A) IN GENERAL.—For purposes of sub18 section (b)(5), the term ‘lifetime annuity pay19 ment’ means any amount received as an annu20 ity under any portion of an annuity contract, 

21 but only if— 

22 ‘‘(i) the only person (or persons in the 

23 case of payments described in subclause 

24 (II) or (IV) of clause (ii)) legally entitled 

25 (by operation of the contract, a trust, or 
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1 other legally enforceable means) to receive 

2 such amount during the life of the annu3 itant or joint annuitant is such annuitant 

4 or joint annuitant, and 

5 ‘‘(ii) such amount is part of a series 

6 of substantially equal periodic payments 

7 made not less frequently than annually 

8 over— 

9 ‘‘(I) the life of the annuitant, 

10 ‘‘(II) the lives of the annuitant 

11 and a joint annuitant, but only if the 

12 annuitant is the spouse of the joint 

13 annuitant as of the annuity starting 

14 date or the difference in age between 

15 the annuitant and joint annuitant is 

16 15 years or less, 

17 ‘‘(III) the life of the annuitant 

18 with a minimum period of payments 

19 or with a minimum amount that must 

20 be paid in any event, or 

21 ‘‘(IV) the lives of the annuitant 

22 and a joint annuitant with a minimum 

23 period of payments or with a min24 imum amount that must be paid in 

25 any event, but only if the annuitant is 
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1 the spouse of the joint annuitant as of 

2 the annuity starting date or the dif3 ference in age between the annuitant 

4 and joint annuitant is 15 years or 

5 less. 

6 ‘‘(iii) EXCEPTIONS.—For purposes of 

7 clause (ii), annuity payments shall not fail 

8 to be treated as part of a series of substan9 tially equal periodic payments— 

10 ‘‘(I) because the amount of the 

11 periodic payments may vary in accord12 ance with investment experience, re13 allocations among investment options, 

14 actuarial gains or losses, cost of living 

15 indices, a constant percentage applied 

16 not less frequently than annually, or 

17 similar fluctuating criteria, 

18 ‘‘(II) due to the existence of, or 

19 modification of the duration of, a pro20 vision in the contract permitting a 

21 lump sum withdrawal after the annu22 ity starting date, or 

23 ‘‘(III) because the period between 

24 each such payment is lengthened or 

25 shortened, but only if at all times 
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1 such period is no longer than one cal2 endar year. 

3 ‘‘(B) ANNUITY CONTRACT.—For purposes 

4 of subparagraph (A) and subsections (b)(5) and 

5 (w), the term ‘annuity contract’ means a com6 mercial annuity (as defined by section 

7 3405(e)(6)), other than an endowment or life 

8 insurance contract. 

9 ‘‘(C) MINIMUM PERIOD OF PAYMENTS.—

10 For purposes of subparagraph (A), the term 

11 ‘minimum period of payments’ means a guaran12 teed term of payments that does not exceed the 

13 greater of 10 years or— 

14 ‘‘(i) the life expectancy of the annu15 itant as of the annuity starting date, in the 

16 case of lifetime annuity payments de17 scribed in subparagraph (A)(ii)(III), or 

18 ‘‘(ii) the life expectancy of the annu19 itant and joint annuitant as of the annuity 

20 starting date, in the case of lifetime annu21 ity payments described in subparagraph 

22 (A)(ii)(IV). 

23 For purposes of this subparagraph, life expect24 ancy shall be computed with reference to the ta25 bles prescribed by the Secretary under para-
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1 graph (3). For purposes of subsection 

2 (w)(1)(C)(ii), the permissible minimum period 

3 of payments shall be determined as of the annu4 ity starting date and reduced by one for each 

5 subsequent year. 

6 ‘‘(D) MINIMUM AMOUNT THAT MUST BE

7 PAID IN ANY EVENT.—For purposes of subpara8 graph (A), the term ‘minimum amount that 

9 must be paid in any event’ means an amount 

10 payable to the designated beneficiary under an 

11 annuity contract that is in the nature of a re12 fund and does not exceed the greater of the 

13 amount applied to produce the lifetime annuity 

14 payments under the contract or the amount, if 

15 any, available for withdrawal under the contract 

16 on the date of death.’’. 

17 (c) RECAPTURE TAX FOR LIFETIME ANNUITY PAY18 MENTS.—Section 72 of the Internal Revenue Code of 

19 1986 is amended by redesignating subsection (x) as sub20 section (y) and by inserting after subsection (x) the fol21 lowing new subsection: 

22 ‘‘(x) RECAPTURE TAX FOR MODIFICATIONS TO OR

23 REDUCTIONS IN LIFETIME ANNUITY PAYMENTS.— 

24 ‘‘(1) IN GENERAL.—If any amount received 

25 under an annuity contract is excluded from income 
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1 by reason of subsection (b)(5) (relating to lifetime 

2 annuity payments), and— 

3 ‘‘(A) the series of payments under such 

4 contract is subsequently modified so any future 

5 payments are not lifetime annuity payments, 

6 ‘‘(B) after the date of receipt of the first 

7 lifetime annuity payment under the contract an 

8 annuitant receives a lump sum and thereafter is 

9 to receive annuity payments in a reduced 

10 amount under the contract, or 

11 ‘‘(C) after the date of receipt of the first 

12 lifetime annuity payment under the contract the 

13 dollar amount of any subsequent annuity pay14 ment is reduced and a lump sum is not paid in 

15 connection with the reduction, unless such re16 duction is— 

17 ‘‘(i) due to an event described in sub18 section (c)(5)(A)(iii), or 

19 ‘‘(ii) due to the addition of, or in20 crease in, a minimum period of payments 

21 within the meaning of subsection (c)(5)(C) 

22 or a minimum amount that must be paid 

23 in any event (within the meaning of sub24 section (c)(5)(D)), then gross income for 

25 the first taxable year in which such modi-
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1 fication or reduction occurs shall be in2 creased by the recapture amount. 

3 ‘‘(2) RECAPTURE AMOUNT.— 

4 ‘‘(A) IN GENERAL.—For purposes of this 

5 subsection, the recapture amount shall be the 

6 amount, determined under rules prescribed by 

7 the Secretary, equal to the amount that (but for 

8 subsection (b)(5)) would have been includible in 

9 the taxpayer’s gross income if the modification 

10 or reduction described in paragraph (1) had 

11 been in effect at all times, plus interest for the 

12 deferral period at the underpayment rate estab13 lished by section 6621. 

14 ‘‘(B) DEFERRAL PERIOD.—For purposes 

15 of this subsection, the term ‘deferral period’ 

16 means the period beginning with the taxable 

17 year in which (without regard to subsection 

18 (b)(5)) the payment would have been includible 

19 in gross income and ending with the taxable 

20 year in which the modification described in 

21 paragraph (1) occurs. 

22 ‘‘(3) EXCEPTIONS TO RECAPTURE TAX.—Para23 graph (1) shall not apply in the case of any modi24 fication or reduction that occurs because an annu25 itant— 
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1 ‘‘(A) dies or becomes disabled (within the 

2 meaning of subsection (m)(7)), 

3 ‘‘(B) becomes a chronically ill individual 

4 within the meaning of section 7702B(c)(2), or 

5 ‘‘(C) encounters hardship.’’. 

6 (d) LIFETIME DISTRIBUTIONS OF LIFE INSURANCE

7 DEATH BENEFITS.— 

8 (1) IN GENERAL.—Section 101(d) of the Inter9 nal Revenue Code of 1986 (relating to payment of 

10 life insurance proceeds at a date later than death) 

11 is amended by adding at the end the following new 

12 paragraph: 

13 ‘‘(4) EXCLUSION FOR LIFETIME ANNUITY PAY14 MENTS.— 

15 ‘‘(A) IN GENERAL.—In the case of 

16 amounts to which this subsection applies, gross 

17 income shall not include the lesser of— 

18 ‘‘(i) 50 percent of the portion of life19 time annuity payments otherwise includible 

20 in gross income under this section (deter21 mined without regard to this paragraph), 

22 or 

23 ‘‘(ii) the amount in effect under sec24 tion 72(b)(5). 
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1 ‘‘(B) RULES OF SECTION 72(b)(5) TO

2 APPLY.—For purposes of this paragraph, rules 

3 similar to the rules of section 72(b)(5) and sec4 tion 72(x) shall apply, substituting the term 

5 ‘beneficiary of the life insurance contract’ for 

6 the term ‘annuitant’ wherever it appears, and 

7 substituting the term ‘life insurance contract’ 

8 for the term ‘annuity contract’ wherever it ap9 pears.’’. 

10 (2) CONFORMING AMENDMENT.—Section 

11 101(d)(1) of such Code is amended by inserting ‘‘or 

12 paragraph (4)’’ after ‘‘to the extent not excluded by 

13 the preceding sentence’’. 

14 (e) EFFECTIVE DATE.— 

15 (1) IN GENERAL.—The amendments made by 

16 this section shall apply to amounts received in cal17 endar years beginning after the date of the enact18 ment of this Act. 

19 (2) SPECIAL RULE FOR EXISTING CON20 TRACTS.—In the case of a contract in force on the 

21 date of the enactment of this Act that does not sat22 isfy the requirements of section 72(c)(5)(A) of the 

23 Internal Revenue Code of 1986 (as added by this 

24 section), or requirements similar to such section 

25 72(c)(5)(A) in the case of a life insurance contract), 
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1 any modification to such contract (including a 

2 change in ownership) or to the payments thereunder 

3 that is made to satisfy the requirements of such sec4 tion (or similar requirements) shall not result in the 

5 recognition of any gain or loss, any amount being in6 cluded in gross income, or any addition to tax that 

7 otherwise might result from such modification, but 

8 only if the modification is completed prior to the 

9 date that is 2 years after the date of the enactment 

10 of this Act.

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