made to or for the benefit of the individual 
who furnished the consideration for such 
annuity contract, or 
‘‘(iv) in the case of any payment re-
ceived under a plan described in subsection 
(b)(5)(B), such payment is made to or for 
the benefit of the employee or the indi-
vidual for whose benefit the plan was es-
tablished. 
‘‘(6) ANNUITY
CONTRACT.—For purposes of 
paragraph (5) and subsection (b)(5), the term ‘an-
nuity contract’ means a commercial annuity (as de-
fined by section 3405(e)(6)), other than an endow-
ment or life insurance contract.’’. 
(c) RECAPTURE TAX FOR LIFETIME INCOME PAY-
MENTS.—Section 72 of such Code is amended by redesig-
nating subsection (x) as subsection (y) and by inserting 
after subsection (v) the following new subsection: 
‘‘(x) RECAPTURE TAX FOR MODIFICATIONS TO OR 
REDUCTIONS IN LIFETIME INCOME PAYMENTS.— 
‘‘(1) IN
GENERAL.—If any amount received 
under an annuity contract is excluded from income 
by reason of subsection (b)(5) (relating to exclusion 
for lifetime income payments), and—
‘‘(A) the series of payments under such 
contract is subsequently modified so any future 
payments are not lifetime income payments, 
‘‘(B) after the date of receipt of the first 
lifetime income payment under the contract an 
annuitant receives a lump sum and thereafter is 
to receive annuity payments in a reduced 
amount under the contract, or 
‘‘(C) after the date of receipt of the first 
lifetime income payment under the contract the 
dollar amount of any subsequent annuity pay-
ment is reduced and a lump sum is not paid in 
connection with the reduction, unless such re-
duction is— 
‘‘(i) due to an event described in sub-
section (c)(5)(A)(iii), or 
‘‘(ii) due to the addition of, or in-
crease in, a minimum period of payments 
within the meaning of subsection (c)(5)(B) 
or a minimum amount that must be paid 
in any event (within the meaning of sub-
section (c)(5)(C)), 
then gross income for the first taxable year in 
which such modification or reduction occurs 
shall be increased by the recapture amount.
‘‘(2) RECAPTURE AMOUNT.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the recapture amount shall be the 
amount, determined under rules prescribed by 
the Secretary, equal to the amount that (but for 
subsection (b)(5)) would have been includible in 
the taxpayer’s gross income if the modification 
or reduction described in paragraph (1) had 
been in effect at all times, plus interest for the 
deferral period at the underpayment rate estab-
lished by section 6621. 
‘‘(B) DEFERRAL
PERIOD.—For purposes 
of this subsection, the term ‘deferral period’ 
means the period beginning with the taxable 
year in which (without regard to subsection 
(b)(5)) the payment would have been includible 
in gross income and ending with the taxable 
year in which the modification described in 
paragraph (1) occurs. 
‘‘(3) EXCEPTIONS TO RECAPTURE TAX.—Para-
graph (1) shall not apply in the case of any modi-
fication or reduction that occurs because an annu-
itant— 
‘‘(A) dies or becomes disabled (within the 
meaning of subsection (m)(7)),
‘‘(B) becomes a chronically ill individual 
within the meaning of section 7702B(c)(2), or 
‘‘(C) encounters hardship.’’. 
(d) LIFETIME DISTRIBUTIONS OF LIFE INSURANCE 
DEATH BENEFITS.— 
(1) IN
GENERAL.—Subsection (d) of section 
101 of such Code (relating to payment of life insur-
ance proceeds at a date later than death) is amend-
ed by redesignating paragraph (3) as paragraph (4) 
and inserting after paragraph (2) the following new 
paragraph: 
‘‘(3) EXCLUSION FOR LIFETIME INCOME PAY-
MENTS.— 
‘‘(A) 
IN
GENERAL.—In 
the 
case 
of 
amounts to which this subsection applies, gross 
income shall not include the lesser of— 
‘‘(i) 50 percent of the portion of life-
time income payments (within the meaning 
of section 72(c)(5), applied with the substi-
tutions described in subparagraph (B)) 
otherwise includible in gross income under 
this section (determined without regard to 
this paragraph), or 
‘‘(ii) the amount in effect under sec-
tion 72(b)(5)(A).