Revenue Code of 1986 is amended by adding at the end 
the following new paragraph: 
‘‘(5) EXCLUSION FOR LIFETIME INCOME PAY-
MENTS.— 
‘‘(A) IN GENERAL.—In the case of lifetime 
income payments received under one or more 
annuity contracts (which are not taken into ac-
count under subparagraph (B)) in any taxable 
year, gross income shall not include 50 percent 
of the portion of such payments which would 
(without regard to this paragraph) be includible 
in gross income under this section. For pur-
poses of the preceding sentence, the amount ex-
cludible from gross income in any taxable year 
shall not exceed $5,000 (twice such amount in 
the case of joint return). 
‘‘(B) LOWER
PERCENTAGE
EXCLUSION 
AND
SEPARATE
LIMITATION
FOR
ANNUITIES 
PROVIDED
UNDER
CERTAIN
RETIREMENT 
PLANS.—In the case of lifetime income pay-
ments received under any qualified retirement 
plan (as defined in section 4974(c)), or any eli-
gible deferred compensation plan (as defined in 
section 457(b)) of an eligible employer de-
scribed in section 457(e)(1)(A), gross income 
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shall not include 25 percent of the portion of 
such payments which would (without regard to 
this paragraph) be includible in gross income 
under this section. For purposes of the pre-
ceding sentence, the amount excludible from 
gross income in any taxable year shall not ex-
ceed $5,000 (twice such amount in the case of 
a joint return). 
‘‘(C) COST-OF-LIVING
ADJUSTMENT.—In 
the case of taxable years beginning after De-
cember 31, 2008, the $5,000 amounts in sub-
paragraphs (A) and (B) shall each be increased 
by an amount equal to— 
‘‘(i) such dollar amount, multiplied by 
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar 
year 2007’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof. 
If any amount as increased under the preceding 
sentence is not a multiple of $100, such amount 
shall be rounded to the next lower multiple of 
$100. 
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‘‘(D) APPLICATION OF PARAGRAPH.—Sub-
paragraphs (A) and (B) shall not apply to— 
‘‘(i) any amount received under a de-
fined benefit plan, 
‘‘(ii) any amount paid under an annu-
ity contract that is received by the bene-
ficiary under the contract— 
‘‘(I) after the death of the annu-
itant in the case of payments de-
scribed in subsection (c)(5)(A)(ii)(III), 
unless the beneficiary is the surviving 
spouse of the annuitant, or 
‘‘(II) after the death of the annu-
itant and joint annuitant in the case 
of payments described in subsection 
(c)(5)(A)(ii)(IV), unless the bene-
ficiary is the surviving spouse of the 
last to die of the annuitant and the 
joint annuitant, or 
‘‘(iii) any annuity contract that is a 
qualified funding asset (as defined in sec-
tion 130(d)), but without regard to wheth-
er there is a qualified assignment. 
‘‘(E) INVESTMENT IN THE CONTRACT.— 
For purposes of this section, the investment in 
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the contract shall be determined without regard 
to this paragraph.’’. 
(b) DEFINITIONS.—Subsection (c) of section 72 of 
such Code is amended by adding at the end the following 
new paragraph: 
‘‘(5) LIFETIME INCOME PAYMENTS.— 
‘‘(A) IN GENERAL.—For purposes of sub-
sections (b) and (x), the term ‘lifetime income 
payment’ means any amount received as an an-
nuity under any portion of an annuity contract, 
but only if— 
‘‘(i) the only person (or persons in the 
case of payments described in subclause 
(II) or (IV) of clause (ii)) legally entitled 
(by operation of the contract, a trust, or 
other legally enforceable means) to receive 
such amount during the life of the annu-
itant or joint annuitant is such annuitant 
or joint annuitant, and 
‘‘(ii) such amount is part of a series 
of substantially equal periodic payments 
made not less frequently than annually 
over— 
‘‘(I) the life of the annuitant, 
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‘‘(II) the lives of the annuitant 
and a joint annuitant, but only to the 
extent that the requirement of sub-
paragraph (D) is met, 
‘‘(III) the life of the annuitant 
with a minimum period of payments 
or with a minimum amount that must 
be paid in any event, or 
‘‘(IV) the lives of the annuitant 
and a joint annuitant with a minimum 
period of payments or with a min-
imum amount that must be paid in 
any event, but only to the extent that 
the requirement of subparagraph (D) 
is met. 
‘‘(iii) EXCEPTIONS.—For purposes of 
clause (ii), annuity payments shall not fail 
to be treated as part of a series of substan-
tially equal periodic payments— 
‘‘(I) because the amount of the 
periodic payments may vary in accord-
ance with investment experience, re-
allocations among investment options, 
actuarial gains or losses, cost of living 
indices, a constant percentage (not 
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less than zero) applied not less fre-
quently than annually, or similar fluc-
tuating criteria, 
‘‘(II) due to the existence of, or 
modification of the duration of, a pro-
vision in the contract permitting a 
lump sum withdrawal after the annu-
ity starting date, 
‘‘(III) because the period between 
each such payment is lengthened or 
shortened, but only if at all times 
such period is no longer than one cal-
endar year, 
‘‘(IV) because the payments are 
reduced on account of a qualified do-
mestic relations order (within the 
meaning of section 414(p)) which be-
comes effective after the commence-
ment of the annuity payments, or 
‘‘(V) because, in the case of an 
annuity payable over the lives of the 
annuitant and a joint annuitant, the 
amounts paid after the death of the 
annuitant or joint annuitant are less 
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than the amounts payable during 
their joint lives. 
‘‘(B) MINIMUM PERIOD OF PAYMENTS.— 
For purposes of subparagraph (A), the term 
‘minimum period of payments’ means a guaran-
teed term of payments that does not exceed the 
greater of 10 years or— 
‘‘(i) the life expectancy of the annu-
itant as of the annuity starting date, in the 
case of lifetime income payments described 
in subparagraph (A)(ii)(III), or 
‘‘(ii) the life expectancy of the annu-
itant and joint annuitant as of the annuity 
starting date, in the case of lifetime in-
come payments described in subparagraph 
(A)(ii)(IV). 
For purposes of this subparagraph, life expect-
ancy shall be computed with reference to the ta-
bles prescribed by the Secretary under para-
graph 
(3). 
For 
purposes 
of 
subsection 
(x)(1)(C)(ii), the minimum period of payments 
shall be determined as of the annuity starting 
date and reduced by one for each subsequent 
year. 
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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 (w) 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— 
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‘‘(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. 
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‘‘(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 excess of— 
‘‘(i) the amount excludible from the 
taxpayer’s gross income under subsection 
(b)(5) before the modification or reduction 
described in paragraph (1), over 
‘‘(ii) the amount that would have been 
so excludible if such modification or reduc-
tion had been in effect at all times, 
plus interest for the deferral period at the un-
derpayment rate established 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-
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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 
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this section (determined without regard to 
this paragraph), or 
‘‘(ii) the amount in effect under sec-
tion 72(b)(5)(A). 
‘‘(B) RECAPTURE
AND
OTHER
SPECIAL 
RULES.—For purposes of this paragraph, rules 
similar to the rules of subparagraphs (D) and 
(E) of section 72(b)(5) and section 72(x) shall 
be applied by substituting ‘beneficiary of the 
life insurance contract’ for ‘annuitant’ and ‘life 
insurance contract’ for ‘annuity contract’ there-
in.’’. 
(2) CONFORMING AMENDMENT.—Paragraph (1) 
of section 101(d) of such Code is amended by insert-
ing ‘‘or paragraph (3)’’ after ‘‘to the extent not ex-
cluded by the preceding sentence’’. 
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to amounts received in tax-
able years beginning after the date of the enactment 
of this Act. 
(2) 
SPECIAL
RULE
FOR
EXISTING
CON-
TRACTS.—In the case of a contract in force on the 
date of the enactment of this Act that does not sat-
isfy the requirements of section 72(c)(5)(A) of the 
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Internal Revenue Code of 1986 (as added by this 
section), any modification to such contract (includ-
ing a change in ownership) or to the payments 
thereunder that is made to satisfy the requirements 
of such section shall not result in the recognition of 
any gain or loss, any amount being included in gross 
income, or any addition to tax that otherwise might 
result from such modification, but only if the modi-
fication is completed prior to the date that is 2 years 
after the date of the enactment of this Act. 
SEC. 3. FACILITATING LONGEVITY INSURANCE. 
(a) IN GENERAL.—Paragraph (9) of section 401(a) 
of the Internal Revenue Code of 1986 is amended by in-
serting after subparagraph (G) the following new subpara-
graph: 
‘‘(H) LONGEVITY INSURANCE.— 
‘‘(i) IN
GENERAL.—For purposes of 
this paragraph, any value attributable to 
longevity insurance shall be disregarded in 
determining the value of an employee’s in-
terest under a plan prior to the first date 
that payments are made under the lon-
gevity insurance. 
‘‘(ii) 
LONGEVITY
INSURANCE
DE-
FINED.—For purposes of this subpara-
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case of an employee’s death prior to 
the date that payments commence, the 
value of any death benefits paid may 
not exceed the premiums paid for 
such annuity, plus interest com-
pounded annually at 3 percent. 
‘‘(iii) ADJUSTING AGE.—For purposes 
of clause (ii)(I), the Secretary shall annu-
ally increase age 85 to reflect increases in 
life expectancy (as determined by the Sec-
retary) that occur on or after January 1, 
2006, except that any such increased age 
which is not a whole number shall be 
rounded to the next lower whole number.’’. 
(b) RULES.—Not later than one year after the date 
of enactment of this Act, the Secretary of the Treasury 
shall prescribe rules under which all or a portion of a par-
ticipant’s benefits under any plan described in section 
402(c)(8)(B) of the Internal Revenue Code of 1986 may 
be treated as longevity insurance under the rules of section 
401(a)(9)(H) of such Code. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to years beginning after December 
31, 2008. 
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SEC. 4. SPECIAL RULES FOR ANNUITIES RECEIVED FROM 
ONLY A PORTION OF A CONTRACT. 
(a) IN GENERAL.—Subsection (a) of section 72 of the 
Internal Revenue Code of 1986 is amended to read as fol-
lows: 
‘‘(a) GENERAL
RULE
FOR
ANNUITIES.—If any 
amount is received as an annuity (whether for a period 
certain or during one or more lives) under any portion 
of an annuity, endowment, or life insurance contract— 
‘‘(1) except as otherwise provided in this chap-
ter, gross income includes such amount, 
‘‘(2) such portion shall be treated as a separate 
contract for purposes of this section, 
‘‘(3) for purposes of applying subsections (b), 
(c), and (e), the investment in the contract shall be 
allocated pro rata between each portion of the con-
tract from which amounts are received as an annuity 
and the portion of the contract from which amounts 
are not received as an annuity, and 
‘‘(4) a separate annuity starting date under 
subsection (c)(4) shall be determined with respect to 
each portion of the contract from which amounts are 
received as an annuity.’’. 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to amounts received in tax-
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able years beginning after the date of the enactment 
of this Act. 
(2) NO
INFERENCE
AS
TO
PRIOR
YEARS.— 
Nothing in the amendments made by this section 
shall create an inference as to the treatment of 
amounts received under any portion of an annuity, 
endowment, or life insurance contract in any taxable 
year beginning on or before the date of the enact-
ment of this Act. 
Æ 
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