72(b)(5) and 101(d)(4)) shall not exceed 
the income-adjusted limit. 
‘‘(ii) INCOME-ADJUSTED LIMIT.—For 
purposes of this subparagraph, the income-
adjusted limit shall be—
‘‘(I) 10 percent of the limitation 
described in subparagraph (C), re-
duced (but not below zero) by 
‘‘(II) the amount determined 
under clause (iii). 
‘‘(iii) AMOUNT
DETERMINED.—The 
amount determined under this clause shall 
be the amount which bears the same ratio 
to the amount described in clause (ii)(I) 
as—
‘‘(I) the excess of the taxpayer’s 
adjusted gross income for such tax-
able year over the applicable dollar 
amount, bears to 
‘‘(II) $15,000 ($30,000 for a 
joint return). 
‘‘(iv) LIMITATION
ON
REDUCTION.—
The income-adjusted limit shall not be re-
duced below $200 by clause (ii)(II) unless
(without regard to this clause) such limit is 
reduced to zero. 
‘‘(v) ROUNDING RULE.—Any income-
adjusted limit determined under this sub-
paragraph which is not a multiple of $10 
shall be rounded to the next lowest mul-
tiple of $10. 
‘‘(vi) ADJUSTED GROSS INCOME.—For 
purposes of this subparagraph, adjusted 
gross income of any taxpayer shall be de-
termined in the same manner as under sec-
tion 219(g)(3) except that any amount in-
cluded in income under section 408A(d)(3) 
shall not be taken into account. 
‘‘(vii) APPLICABLE DOLLAR LIMIT.—
For purposes of this subparagraph, the ap-
plicable dollar amount is—
‘‘(I) in the case of a taxpayer fil-
ing a joint return, an amount equal to 
twice the amount in effect under sub-
clause (II), 
‘‘(II) in the case of any other 
taxpayer (other than a married indi-
vidual 
filing 
a 
separate 
return), 
$60,000, and
‘‘(III) in the case of a married 
individual filing a separate return, 
zero. 
‘‘(viii) SPECIAL RULE FOR MARRIED 
INDIVIDUALS
FILING
SEPARATELY
AND 
LIVING
APART.—Section 219(g)(4) shall 
apply for purposes of this subparagraph. 
‘‘(ix) 
COST-OF-LIVING
ADJUST-
MENT.—In the case of taxable years begin-
ning after December 31, 2006, the Sec-
retary shall adjust the $60,000 amount in 
clause (vii)(II) at the same time and in the 
same manner as under section 415(d), ex-
cept that the base period shall be the cal-
endar quarter beginning July 1, 2005, and 
any increase under this clause which is not 
a multiple of $5,000 shall be rounded to 
the next lowest multiple of $5,000. 
‘‘(G) INVESTMENT IN THE CONTRACT.—
For purposes of section 72, the investment in 
the contract shall be determined without regard 
to this paragraph.’’. 
(2) SECTION 403(a) PLANS.—Paragraph (4) of 
section 403(a) of such Code (relating to qualified
annuity plans) is amended by adding at the end the 
following new subparagraph: 
‘‘(C) EXCLUSION
OF
PERCENTAGE
OF 
LIFETIME ANNUITY PAYMENTS.—Rules similar 
to the rules of section 402(e)(7) shall apply to 
distributions under any annuity contract to 
which this subsection applies.’’. 
(3) SECTION 403(b) PLANS.—Section 403(b) of 
such Code (relating to purchased annuities) is 
amended by adding at the end the following new 
paragraph: 
‘‘(14) EXCLUSION OF PERCENTAGE OF LIFE-
TIME
ANNUITY
PAYMENTS.—Rules similar to the 
rules of section 402(e)(7) shall apply to distributions 
under any annuity contract or custodial account to 
which this subsection applies.’’. 
(4) IRAS.—Section 408(d) of such Code (relat-
ing to tax treatment of distributions) is amended by 
adding at the end the following new paragraph: 
‘‘(8) EXCLUSION OF PERCENTAGE OF LIFETIME 
ANNUITY PAYMENTS.—Rules similar to the rules of 
section 402(e)(7) shall apply to distributions out of 
an individual retirement plan.’’. 
(5) SECTION
457
PLANS.—Section 457(e) of 
such Code (relating to special rules for deferred
compensation plans) is amended by adding at the 
end the following new paragraph: 
‘‘(18) EXCLUSION OF PERCENTAGE OF LIFE-
TIME
ANNUITY
PAYMENTS.—Rules similar to the 
rules of section 402(e)(7) shall apply to distributions 
from an eligible deferred compensation plan of an el-
igible employer described in subsection (e)(1)(A).’’. 
(b) FACILITATION OF CERTAIN ROLLOVERS AND AN-
NUITY DISTRIBUTIONS.—Section 404(c) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 
1104(c)) is amended by adding at the end the following 
new paragraph: 
‘‘(7)(A) In the case of a pension plan which makes 
a transfer under section 401(a)(31)(A) of the Internal 
Revenue Code of 1986 to an individual retirement plan 
(as defined in section 7701(a)(37) of such Code) in con-
nection with a participant or beneficiary or makes a dis-
tribution to a participant or beneficiary of an annuity con-
tract described in subparagraph (B), the participant or 
beneficiary shall, for purposes of paragraph (1), be treated 
as exercising control over the transfer or distribution if—
‘‘(i) the participant or beneficiary elected such 
transfer or distribution, and 
‘‘(ii) in connection with such election, the par-
ticipant or beneficiary was given an opportunity to
elect any other individual retirement plan (in the 
case of a transfer) or any other annuity contract de-
scribed in subparagraph (B) (in the case of a dis-
tribution). 
‘‘(B) An annuity contract is described in this sub-
paragraph if it provides, either on an immediate or de-
ferred basis, a series of substantially equal periodic pay-
ments (not less frequently than annually) for the life of 
the participant or beneficiary or the joint lives of the par-
ticipant or beneficiary and such individual’s designated 
beneficiary. Annuity payments shall not fail to be treated 
as part of a series of substantially equal periodic payments 
merely because the amount of the periodic payments may 
vary in accordance with investment experience, realloca-
tions among investment options, actuarial gains or losses, 
cost of living indices, a constant percentage (not less than 
zero) applied not less frequently than annually, or similar 
fluctuating criteria. Annuity payments shall not fail to be 
treated as part of a series of substantially equal periodic 
payments merely because the period between each such 
payment is lengthened or shortened, but only if at all 
times such period is not longer than one year. The avail-
ability of a commutation benefit or other feature permit-
ting acceleration of annuity payments (or a modification 
of the period during which such a benefit is available),
a minimum period of payments certain, or a minimum 
amount to be paid in any event shall not affect the treat-
ment of an annuity contract as an annuity contract de-
scribed in this subparagraph. 
‘‘(C) Under regulations prescribed by the Secretary, 
this paragraph shall apply without regard to whether the 
particular individual retirement plan receiving the transfer 
or the particular annuity contract being distributed is spe-
cifically identified by the pension plan as available to the 
participant or beneficiary. 
‘‘(D) Notwithstanding the preceding provisions of 
this paragraph, paragraph (1)(B) shall not apply with re-
spect to liability under section 406 in connection with the 
specific identification of any individual retirement plan or 
annuity contract as being available to the participant or 
beneficiary.’’. 
(c) EFFECTIVE DATE.—
(1) EXCLUSION.—The amendments made by 
subsection (a) shall apply to distributions after De-
cember 31, 2005. 
(2) FACILITATION.—The amendments made by 
subsection (b) shall take effect on the date of enact-
ment of this Act. 
(3) ISSUANCE OF FINAL REGULATIONS.—Final 
regulations under section 404(c)(7) of the Employee
Retirement Income Security Act of 1974 (added by 
this section) shall be issued no later than 1 year 
after the date of the enactment of this Act. 
SEC. 208. EXCLUSION OF CERTAIN NONQUALIFIED ANNU-
ITY PAYMENTS. 
(a) IN GENERAL.—
(1) NONQUALIFIED ANNUITIES.—
(A) IN GENERAL.—Section 72(b) of the In-
ternal Revenue Code of 1986 (relating to annu-
ities) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(5) EXCLUSION OF PERCENTAGE OF LIFETIME 
ANNUITY PAYMENTS.—
‘‘(A) IN GENERAL.—In the case of a life-
time annuity payment to a qualified distributee, 
gross income shall not include 10 percent of the 
amount otherwise includible in gross income 
(determined without regard to this paragraph). 
‘‘(B) 5-YEAR LIMITATION.—Subparagraph 
(A) shall apply to a qualified distributee only in 
the first 5 taxable years in which the qualified 
distributee receives lifetime annuity payments 
for the entire taxable year. For purposes of this 
subparagraph, all lifetime annuity payments re-
ceived by a qualified distributee shall be taken
into account to the extent that such payments 
are subject to this paragraph or to the rules of 
section 101(d)(4). 
‘‘(C) INVESTMENT
IN
THE
CONTRACT.—
For purposes of this section, the investment in 
the contract shall be determined without regard 
to this paragraph (5). 
‘‘(D) LIMITATION.—
‘‘(i) IN
GENERAL.—With respect to 
any qualified distributee, subparagraph (A) 
shall not apply to any lifetime annuity pay-
ment to the extent that the portion of such 
payment that is includible in income, when 
added to the portion of all previous and si-
multaneous lifetime annuity payments that 
was included in gross income and that was 
paid to such qualified distributee during 
the taxable year, exceeds 50 percent of the 
applicable amount for such year under sec-
tion 415(c)(1)(A). For purposes of the pre-
ceding sentence, the portion of lifetime an-
nuity payments includible in gross income 
shall be determined without regard to sub-
paragraph (A).
‘‘(ii) AGGREGATION RULE.—For pur-
poses of this subparagraph, all lifetime an-
nuity payments received by a qualified dis-
tributee shall be taken into account to the 
extent that such payments are subject to 
this paragraph or to the rules of section 
101(d)(4). 
‘‘(E) PHASEOUT OF EXCLUSION.—
‘‘(i) IN
GENERAL.—In any taxable 
year, the exclusion from gross income for 
any qualified distributee under this para-
graph and under the rules of section 
101(d)(4) shall not exceed the income-ad-
justed limit. 
‘‘(ii) INCOME-ADJUSTED LIMIT.—For 
purposes of this subparagraph, the income-
adjusted limit shall be—
‘‘(I) 10 percent of the limitation 
described in subparagraph (D), re-
duced (but not below zero) by 
‘‘(II) the amount determined 
under clause (iii). 
‘‘(iii) AMOUNT
DETERMINED.—The 
amount determined under this clause shall 
be the amount which bears the same ratio
to the amount described in clause (ii)(I) 
as—
‘‘(I) the excess of the taxpayer’s 
adjusted gross income for such tax-
able year over the applicable dollar 
amount, bears to 
‘‘(II) $15,000 ($30,000 for a 
joint return). 
‘‘(iv) LIMITATION
ON
REDUCTION.—
The income-adjusted limit shall not be re-
duced below $200 by clause (ii)(II) unless 
(without regard to this clause) such limit is 
reduced to zero. 
‘‘(v) ROUNDING
RULE.—Any income 
adjusted limit determined under this sub-
paragraph which is not a multiple of $10 
shall be rounded to the next lowest mul-
tiple of $10. 
‘‘(vi) ADJUSTED GROSS INCOME.—For 
purposes of this subparagraph, adjusted 
gross income of any taxpayer shall be de-
termined in the same manner as under sec-
tion 219(g)(3) except that any amount in-
cluded in income under section 408A(d)(3) 
shall not be taken into account.
‘‘(vii) APPLICABLE DOLLAR LIMIT.—
For purposes of this subparagraph, the ap-
plicable dollar amount is—
‘‘(I) in the case of a taxpayer fil-
ing a joint return, an amount equal to 
twice the amount in effect under sub-
clause (II), 
‘‘(II) in the case of any other 
taxpayer (other than a married indi-
vidual 
filing 
a 
separate 
return), 
$60,000, and 
‘‘(III) in the case of a married 
individual filing a separate return, 
zero. 
‘‘(viii) SPECIAL RULE FOR MARRIED 
INDIVIDUALS
FILING
SEPARATELY
AND 
LIVING
APART.—Section 219(g)(4) shall 
apply for purposes of this subparagraph. 
‘‘(ix) 
COST-OF-LIVING
ADJUST-
MENT.—In the case of taxable years begin-
ning after December 31, 2006, the Sec-
retary shall adjust the $60,000 amount in 
clause (vii)(II) at the same time and in the 
same manner as under section 415(d), ex-
cept that the base period shall be the cal-