The news you're not supposed to know...

Austrian Economics: Understand Economics, Understand the World
The Century of the Self: The Untold History of Controlling the Masses Through the Manipulation of Unconscious Desires
The Disappearing Male: From Virility to Sterility

The Obama Deception: The Mask Comes Off
Operation Gladio: The Hidden History of U.S. Sponsored False Flag Terrorism in EuropeThe New American Century: The Untold History of The Project for the New American Century
Article posted Apr 02 2010, 8:04 PM Category: Economy Source: DailyFinance Print

The Health Care Reform Law Contains a Hidden Tax on Annuities


The Obama administration is trying to encourage people to buy annuities to ensure that they don't outlive their savings. But a little-noticed provision of the new health care reform law will slap a 3.8% tax on payouts from annuities purchased by high-income earners outside their workplace. And, not surprisingly, the life insurance industry isn't happy about that.

Life insurers, which have sold approximately 15 million so-called "nonqualified" policies containing some $710 billion in assets, hope to get this particular provision of the Health Care and Education Reconciliation Act of 2010 repealed. The health care reconciliation bill made amendments that House wanted for the Patient Protection & Affordable Care Act, which President Obama signed into law on March 23.

"This is a countermand to all that this administration has been doing since they took office in encouraging saving for retirement and using annuities as guaranteed lifetime income," says Catherine Weatherford, president and chief executive officer of the Insured Retirement Institute (IRI), a Washington, D.C., trade association that represents the annuity industry.

A Plea Fell on Deaf Ears

To help pay for the $940 billion health care reform measure, the administration and congressional Democrats included a 3.8% Medicare payroll tax on single people who earn more than $200,000 a year and couples earning over $250,000 a year. Starting in 2013, the tax will be applied to annuity distributions, interest, dividends, capital gains, rents and royalties. While there are no estimates of how much the annuity portion of the tax may raise, all of the investment taxes are expected to contribute $210 billion over the next 10 years to Treasury's coffers.

"We've got a retirement spike coming," Weatherford says. "Saving for retirement using this vehicle will give them that paycheck for life."

The IRI along with the American Council of Life Insurers, the National Association of Insurance and Financial Advisors and the National Association for Fixed Annuities co-signed a March 24 letter that urged the Senate in vain to leave the annuity provision out of the bill. As defined-benefit pensions continue to vanish from the workplace, "Individual annuities are an important tool used by millions of Americans to accumulate retirement savings and to secure lifetime retirement income," the letter said, noting that 78 million working Americans lack access to a workplace retirement plan.

The 3.8% Medicare tax on income received from individual annuities "would serve as a disincentive to save in a product that uniquely allows an individual to accumulate retirement savings and to guarantee that savings can never be outlived," the letter said, and it concluded: "In today's savings-poor environment, policy-makers need to create incentives for retirement planning."

An Inconsistent Strategy

Insurers also point out that the Obama administration has taken steps to try to promote annuities in other areas. The administration's Middle Class Task Force report issued in January included a call for "promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that . . . retirees' living standards will be eroded by investment losses or inflation."

The Labor and Treasury Departments have issued a request for information to look at possible impediments to the use of annuities and other types of lifetime guaranteed income in employer-sponsored plans and Individual Retirement Accounts. In his fiscal 2011 budget, President Obama also included a provision that would make it easier for holders of nonqualified annuities to take partial payouts without having to exchange their annuity contracts.

"The inclusion of annuities in the [Medicare] tax flies in the face of what we're trying to achieve here on lifetime security," comments Alane Dent, vice president of federal affairs for the American Council of Life Insurers.

Maintaining "Favorable Tax Treatment" The administration disagrees that the tax will discourage people from choosing annuities. In a March 23 letter to the IRI, Michael Mundaca, acting assistant Treasury secretary for tax policy, said the tax is "not a proposal that is designed to or should discourage individuals from saving through purchasing annuities." The tax "does nothing to alter the favorable tax treatment of annuities inherent in deferring taxation of annuity earnings until annuity payments are made and then treating a portion of each payment as a return of the previously taxed funds used to purchase the annuity," he wrote.

Mundaca also noted that the tax applies only when an annuitant's income exceeds the $200,000 or $250,000 annual threshold.

But nonqualified annuities aren't typically sold to low-income people, say Diane Boyle, director of federal government relations for the National Association of Insurance Financial Advisors. Such plans usually aren't suitable for lower-income earners, who may not have the funds to purchase annuities, she says. Moreover, the income threshold "isn't that high for areas like Washington, New York and [Philadelphia]," where two-earner middle-income couples easily make that much, she adds.

"The financing of health care reform should not be paid for on the backs of individuals who are planning their retirement," Boyle says. Even if it affects only high-income people, "It does have a chilling effect any time you begin taxing lifetime income," the IRI's Weatherford says.

Coming Back for More?

Complicating the tax is that while it's fashioned as a tax primarily on annuity payouts from nonqualified plans, income from employer-sponsored plans such as 401(k)s will also be hit. While annuity income on qualified plans above the threshold amounts won't be subject to the 3.8% tax, all annuity income, including income from qualified plans, is considered in calculating income to meet the tax threshold, Dent of the American Council of Life Insurers explains.

And the insurance industry fears that this won't be the last time it's eyed for new tax proposals. "We're concerned this is a Congress that is looking for ways to finance different initiatives and programs," Boyle says. "They're looking at all areas of the tax code to find revenue. It's concerning that they're finding it in investments and programs that are designed to assist people with their long-term financing for retirement."

Weatherford pledges to try to get the tax repealed: "We think this is so important, we are going to continue to work with this administration and Congress to see if we can look toward repeal of this provision."

Latest Economy
- Tax Freedom Day, 2015
- The Bankster War on Cash; JPMorganChase Begins to Prohibit the Storage of Cash in Its Safety Deposit Boxes
- Faber: The Biggest Bubble Is Belief In Central Bankers
- The Unconventional Ideas Of Marc Faber
- EPA and CA Drought: State Flushed Over 1.2M Acre-Feet Of Water Into SF Bay To Help 'Endangered' Fish
- There Is No Real Increase In Insured Under Obamacare
- Americans Will Spend More On Taxes In 2015 Than They Will On Housing, Food, and Clothes [Pic]
- The Six Too Big To Fail Banks In The U.S. Have 278 TRILLION Dollars Of Exposure To Derivatives

No Comments Posted Add Comment

Add Comment


Verification *
Please Enter the Verification Code Seen Below

Please see our About Page, our Disclaimer, and our Comments Policy.

This site contains copyrighted material the use of which in some cases has not been specifically authorized by the copyright owner. Such material is made available for the purposes of news reporting, education, research, comment, and criticism, which constitutes a 'fair use' of such copyrighted material in accordance with Title 17 U.S.C. Section 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. It is our policy to respond to notices of alleged infringement that comply with the DMCA and other applicable intellectual property laws. It is our policy to remove material from public view that we believe in good faith to be copyrighted material that has been illegally copied and distributed by any of our members or users.

About Us - Disclaimer - Privacy Policy

Advanced Search


Remember Me
Forgot Password?

"F*ck This Court": Woman Who Took AK-47 To Jailbreak Pens Epic Rant Against Judge - 04/26Police Cadet Turns in Cop for Turning Body Cam Off Just Before Pummeling his Victim - 04/26Student Accused of Rape By 'Mattress Girl' Sues Columbia U., Publishes Dozens of Damning Texts - 04/26Innocent Man Convicted After FBI 'Expert' Analysts Confused his Hair with the Hair of a DOG - 04/26Dashcam Video Shows Cop Shoot Man 'Armed' With Cell Phone - 04/24Average Americans Finding Out They Live In A Police State - 04/26Cop In Wrong-Way Fatal Crash Had Blood-Alcohol Level 3 Times Legal Limit, Report Says - 04/26Cop Ruptures Man's Spleen, Fellow Cops Laugh, Take Pics, As He Lays Dying, Begging For Help - 04/24