SEC. 321. TREATMENT OF LONG-TERM CARE INSURANCE.
Title[ Title III\Subtitle C Contents
Subtitle C--Long-Term Care Services and Contracts
PART I--GENERAL PROVISIONS
SEC. 321. TREATMENT OF LONG-TERM CARE INSURANCE.
(a) General Rule.--Chapter 79 (relating to definitions) is amended
by inserting after section 7702A the following new section:
``SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE.
``(a) In General.--For purposes of this title--
``(1) a qualified long-term care insurance contract shall be
treated as an accident and health insurance contract,
``(2) amounts (other than policyholder dividends, as defined
in section 808, or premium refunds) received under a qualified
long-term care insurance contract shall be treated as amounts
received for personal injuries and sickness and shall be treated
as reimbursement for expenses actually incurred for medical care
(as defined in section 213(d)),
``(3) any plan of an employer providing coverage under a
qualified long-term care insurance contract shall be treated as
an accident and health plan with respect to such coverage,
``(4) except as provided in subsection (e)(3), amounts paid
for a qualified long-term care insurance contract providing the
benefits described in subsection (b)(2)(A) shall be treated as
payments made for insurance for purposes of section
213(d)(1)(D), and
``(5) a qualified long-term care insurance contract shall be
treated as a guaranteed renewable contract subject to the rules
of section 816(e).
``(b) Qualified Long-Term Care Insurance Contract.--For purposes of
this title--
``(1) In general.--The term `qualified long-term care
insurance contract' means any insurance contract if--
``(A) the only insurance protection provided under
such contract is coverage of qualified long-term care
services,
``(B) such contract does not pay or reimburse
expenses incurred for services or items to the extent
that such expenses are reimbursable under title XVIII of
the Social Security Act or would be so reimbursable but
for the application of a deductible or coinsurance
amount,
``(C) such contract is guaranteed renewable,
``(D) such contract does not provide for a cash
surrender value or other money that can be--
``(i) paid, assigned, or pledged as collateral
for a loan, or
``(ii) borrowed,
other than as provided in subparagraph (E) or paragraph
(2)(C),
``(E) all refunds of premiums, and all policyholder
dividends or similar amounts, under such contract are to
be applied as a reduction in future premiums or to
increase future benefits, and
``(F) such contract meets the requirements of
subsection (g).
``(2) Special rules.--
``(A) Per diem, etc. payments permitted.--A contract
shall not fail to be described in subparagraph (A) or
(B) of paragraph (1) by reason of payments being made on
a per diem or other periodic basis without regard to the
expenses incurred during the period to which the
payments relate.
``(B) Special rules relating to medicare.--
``(i) Paragraph (1)(B) shall not apply to
expenses which are reimbursable under title XVIII
of the Social Security Act only as a secondary
payor.
``(ii) No provision of law shall be construed
or applied so as to prohibit the offering of a
qualified long-term care insurance contract on the
basis that the contract coordinates its benefits
with those provided under such title.
``(C) Refunds of premiums.--Paragraph (1)(E) shall
not apply to any refund on the death of the insured, or
on a complete surrender or cancellation of the contract,
which cannot exceed the aggregate premiums paid under
the contract. Any refund on a complete surrender or
cancellation of the contract shall be includible in
gross income to the extent that any deduction or
exclusion was allowable with respect to the premiums.
``(c) Qualified Long-Term Care Services.--For purposes of this
section--
``(1) In general.--The term `qualified long-term care
services' means necessary diagnostic, preventive, therapeutic,
curing, treating, mitigating, and rehabilitative services, and
maintenance or personal care services, which--
``(A) are required by a chronically ill individual,
and
``(B) are provided pursuant to a plan of care
prescribed by a licensed health care practitioner.
``(2) Chronically ill individual.--
``(A) In general.--The term `chronically ill
individual' means any individual who has been certified
by a licensed health care practitioner as--
``(i) being unable to perform (without
substantial assistance from another individual) at
least 2 activities of daily living for a period of
at least 90 days due to a loss of functional
capacity,
``(ii) having a level of disability similar
(as determined under regulations prescribed by the
Secretary in consultation with the Secretary of
Health and Human Services) to the level of
disability described in clause (i), or
``(iii) requiring substantial supervision to
protect such individual from threats to health and
safety due to severe cognitive impairment.
Such term shall not include any individual otherwise
meeting the requirements of the preceding sentence
unless within the preceding 12-month period a licensed
health care practitioner has certified that such
individual meets such requirements.
``(B) Activities of daily living.--For purposes of
subparagraph (A), each of the following is an activity
of daily living:
``(i) Eating.
``(ii) Toileting.
``(iii) Transferring.
``(iv) Bathing.
``(v) Dressing.
``(vi) Continence.
A contract shall not be treated as a qualified long-term
care insurance contract unless the determination of
whether an individual is a chronically ill individual
takes into account at least 5 of such activities.
``(3) Maintenance or personal care services.--The term
`maintenance or personal care services' means any care the
primary purpose of which is the provision of needed assistance
with any of the disabilities as a result of which the individual
is a chronically ill individual (including the protection from
threats to health and safety due to severe cognitive
impairment).
``(4) Licensed health care practitioner.--The term `licensed
health care practitioner' means any physician (as defined in
section 1861(r)(1) of the Social Security Act) and any
registered professional nurse, licensed social worker, or other
individual who meets such requirements as may be prescribed by
the Secretary.
``(d) Aggregate Payments in Excess of Limits.--
``(1) In general.--If the aggregate of--
``(A) the periodic payments received for any period
under all qualified long-term care insurance contracts
which are treated as made for qualified long-term care
services for an insured, and
``(B) the periodic payments received for such period
which are treated under section 101(g) as paid by reason
of the death of such insured,
exceeds the per diem limitation for such period, such excess
shall be includible in gross income without regard to section
72. A payment shall not be taken into account under subparagraph
(B) if the insured is a terminally ill individual (as defined in
section 101(g)) at the time the payment is received.
``(2) Per diem limitation.--For purposes of paragraph (1),
the per diem limitation for any period is an amount equal to the
excess (if any) of--
``(A) the greater of--
``(i) the dollar amount in effect for such
period under paragraph (4), or
``(ii) the costs incurred for qualified long-
term care services provided for the insured for
such period, over
``(B) the aggregate payments received as
reimbursements (through insurance or otherwise) for
qualified long-term care services provided for the
insured during such period.
``(3) Aggregation rules.--For purposes of this subsection--
``(A) all persons receiving periodic payments
described in paragraph (1) with respect to the same
insured shall be treated as 1 person, and
``(B) the per diem limitation determined under
paragraph (2) shall be allocated first to the insured
and any remaining limitation shall be allocated among
the other such persons in such manner as the Secretary
shall prescribe.
``(4) Dollar amount.--The dollar amount in effect under this
subsection shall be $175 per day (or the equivalent amount in
the case of payments on another periodic basis).
``(5) Inflation adjustment.--In the case of a calendar year
after 1997, the dollar amount contained in paragraph (4) shall
be increased at the same time and in the same manner as amounts
are increased pursuant to section 213(d)(10).
``(6) Periodic payments.--For purposes of this subsection,
the term `periodic payment' means any payment (whether on a
periodic basis or otherwise) made without regard to the extent
of the costs incurred by the payee for qualified long-term care
services.
``(e) Treatment of Coverage Provided as Part of a Life Insurance
Contract.--Except as otherwise provided in regulations prescribed by the
Secretary, in the case of any long-term care insurance coverage (whether
or not qualified) provided by a rider on or as part of a life insurance
contract--
``(1) In general.--This section shall apply as if the
portion of the contract providing such coverage is a separate
contract.
``(2) Application of 7702.--Section 7702(c)(2) (relating to
the guideline premium limitation) shall be applied by increasing
the guideline premium limitation with respect to a life
insurance contract, as of any date--
``(A) by the sum of any charges (but not premium
payments) against the life insurance contract's cash
surrender value (within the meaning of section
7702(f)(2)(A)) for such coverage made to that date under
the contract, less
``(B) any such charges the imposition of which
reduces the premiums paid for the contract (within the
meaning of section 7702(f)(1)).
``(3) Application of section 213.--No deduction shall be
allowed under section 213(a) for charges against the life
insurance contract's cash surrender value described in paragraph
(2), unless such charges are includible in income as a result of
the application of section 72(e)(10) and the rider is a
qualified long-term care insurance contract under subsection
(b).
``(4) Portion defined.--For purposes of this subsection, the
term `portion' means only the terms and benefits under a life
insurance contract that are in addition to the terms and
benefits under the contract without regard to long-term care
insurance coverage.
``(f) Treatment of Certain State-Maintained Plans.--
``(1) In general.--If--
``(A) an individual receives coverage for qualified
long-term care services under a State long-term care
plan, and
``(B) the terms of such plan would satisfy the
requirements of subsection (b) were such plan an
insurance contract,
such plan shall be treated as a qualified long-term care
insurance contract for purposes of this title.
``(2) State long-term care plan.--For purposes of paragraph
(1), the term `State long-term care plan' means any plan--
``(A) which is established and maintained by a State
or an instrumentality of a State,
``(B) which provides coverage only for qualified
long-term care services, and
``(C) under which such coverage is provided only
to--
``(i) employees and former employees of a
State (or any political subdivision or
instrumentality of a State),
``(ii) the spouses of such employees, and
``(iii) individuals bearing a relationship to
such employees or spouses which is described in
any of paragraphs (1) through (8) of section
152(a).''.
(b) Reserve Method.--Clause (iii) of section 807(d)(3)(A) is amended
by inserting ``(other than a qualified long-term care insurance
contract, as defined in section 7702B(b))'' after ``insurance
contract''.
(c) Long-Term Care Insurance Not Permitted Under Cafeteria Plans or
Flexible Spending Arrangements.--
(1) Cafeteria plans.--Section 125(f) is amended by adding at
the end the following new sentence: ``Such term shall not
include any product which is advertised, marketed, or offered as
long-term care insurance.''.
(2) Flexible spending arrangements.--Section 106 (relating
to contributions by employer to accident and health plans), as
amended by section 301(c), is amended by adding at the end the
following new subsection:
``(c) Inclusion of Long-Term Care Benefits Provided Through Flexible
Spending Arrangements.--
``(1) In general.--Effective on and after January 1, 1997,
gross income of an employee shall include employer-provided
coverage for qualified long-term care services (as defined in
section 7702B(c)) to the extent that such coverage is provided
through a flexible spending or similar arrangement.
``(2) Flexible spending arrangement.--For purposes of this
subsection, a flexible spending arrangement is a benefit program
which provides employees with coverage under which--
``(A) specified incurred expenses may be reimbursed
(subject to reimbursement maximums and other reasonable
conditions), and
``(B) the maximum amount of reimbursement which is
reasonably available to a participant for such coverage
is less than 500 percent of the value of such coverage.
In the case of an insured plan, the maximum amount reasonably
available shall be determined on the basis of the underlying
coverage.''
(d) Continuation Coverage Rules Not To Apply.--
(1) Paragraph (2) of section 4980B(g) is amended by adding
at the end the following new sentence: ``Such term shall not
include any plan substantially all of the coverage under which
is for qualified long-term care services (as defined in section
7702B(c)).''
(2) Paragraph (1) of section 607 of the Employee Retirement
Income Security Act of 1974 <<NOTE: 29 USC 1167.>> is amended
by adding at the end the following new sentence: ``Such term
shall not include any plan substantially all of the coverage
under which is for qualified long-term care services (as defined
in section 7702B(c) of such Code).''
(3) Paragraph (1) of section 2208 of the Public Health
Service Act <<NOTE: 42 USC 300bb-8.>> is amended by adding at
the end the following new sentence: ``Such term shall not
include any plan substantially all of the coverage under which
is for qualified long-term care services (as defined in section
7702B(c) of such Code).''
(e) Clerical Amendment.--The table of sections for chapter 79 is
amended by inserting after the item relating to section 7702A the
following new item:
``Sec. 7702B. Treatment of qualified long-term care insurance.''.
(f) Effective <<NOTE: 26 USC 1702B note.>> Dates.--
(1) General effective date.--
(A) In general.--Except as provided in subparagraph
(B), the amendments made by this section shall apply to
contracts issued after December 31, 1996.
(B) Reserve method.--The amendment made by
subsection (b) shall apply to contracts issued after
December 31, 1997.
(2) Continuation of existing policies.--In the case of any
contract issued before January 1, 1997, which met the long-term
care insurance requirements of the State in which the contract
was sitused at the time the contract was issued--
(A) such contract shall be treated for purposes of
the Internal Revenue Code of 1986 as a qualified long-
term care insurance contract (as defined in section
7702B(b) of such Code), and
(B) services provided under, or reimbursed by, such
contract shall be treated for such purposes as qualified
long-term care services (as defined in section 7702B(c)
of such Code).
In the case of an individual who is covered on December 31,
1996, under a State long-term care plan (as defined in section
7702B(f)(2) of such Code), the terms of such plan on such date
shall be treated for purposes of the preceding sentence as a
contract issued on such date which met the long-term care
insurance requirements of such State.
(3) Exchanges of existing policies.--If, after the date of
enactment of this Act and before January 1, 1998, a contract
providing for long-term care insurance coverage is exchanged
solely for a qualified long-term care insurance
contract (as defined in section 7702B(b) of such Code), no gain or loss
shall be recognized on the exchange. If, in addition to a qualified
long-term care insurance contract, money or other property is received
in the exchange, then any gain shall be recognized to the extent of the
sum of the money and the fair market value of the other property
received. For purposes of this paragraph, the cancellation of a contract
providing for long-term care insurance coverage and reinvestment of the
cancellation proceeds in a qualified long-term care insurance contract
within 60 days thereafter shall be treated as an exchange.
(4) Issuance of certain riders permitted.--For purposes of
applying sections 101(f), 7702, and 7702A of the Internal
Revenue Code of 1986 to any contract--
(A) the issuance of a rider which is treated as a
qualified long-term care insurance contract under
section 7702B, and
(B) the addition of any provision required to
conform any other long-term care rider to be so treated,
shall not be treated as a modification or material change of
such contract.
(5) Application of per diem limitation to existing
contracts.--The amount of per diem payments made under a
contract issued on or before July 31, 1996, with respect to an
insured which are excludable from gross income by reason of
section 7702B of the Internal Revenue Code of 1986 (as added by
this section) shall not be reduced under subsection (d)(2)(B)
thereof by reason of reimbursements received under a contract
issued on or before such date. The preceding sentence shall
cease to apply as of the date (after July 31, 1996) such
contract is exchanged or there is any contract modification
which results in an increase in the amount of such per diem
payments or the amount of such reimbursements.
(g) Long-Term <<NOTE: 26 USC 7702B note.>> Care Study Request.--The
Chairman of the Committee on Ways and Means of the House of
Representatives and the Chairman of the Committee on Finance of the
Senate shall jointly request the National Association of Insurance
Commissioners, in consultation with representatives of the insurance
industry and consumer organizations, to formulate, develop, and conduct
a study to determine the marketing and other effects of per diem limits
on certain types of long-term care policies. <<NOTE: Reports.>> If the
National Association of Insurance Commissioners agrees to the study
request, the National Association of Insurance Commissioners shall
report the results of its study to such committees not later than 2
years after accepting the request.
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