The Power of The Pension Protection Act

Today, Americans have amassed over $2 Trillion of assets in annuities, and most are intended to grow tax-deferred until they are needed to supplement retirement income or Social Security.  However, surveys^ show many of these annuities will be left untapped and continue to grow until the annuity owner dies.   Those same surveys also indicate that as annuity owners age, they often view the assets as an “emergency fund” to cover catastrophic illness or Long-Term Care (LTC) expenses during retirement.   Simply put, if the original goal for your annuity has changed over time, it may be time to consider leveraging the power of The Pension Protection Act (PPA). 

Congress enacted the PPA in 2006, and in 2010, provisions became effective, allowing consumers and advisors to leverage applicable annuities for LTC Planning.   While every situation is unique*, the provisions generally allow an annuity owner to (1) upgrade an existing non-qualified annuity to a PPA-compliant non-qualified annuity TAX-FREE and (2) take TAX-FREE distributions from the new annuity to cover qualifying Long-Term Care expenses in the future.

Real-World Implications.....

Perhaps the best way to see the power of the PPA is to look at a real-life example.  Let’s look at Sally Saver, who deposited $100,000 into a fixed-rate, tax-deferred annuity 15 years ago before marrying her current husband, Sam. That annuity is now worth $200,000, and they are seeing friends and relatives need Long-Term Care and know that most of those expenses are excluded by Medicare. As such, the goal of the annuity changes, and they now intend for it to help cover the cost of the couple’s future expenses for “Healthcare in Retirement”. 

There is now an excellent way to “upgrade” annuities to help mitigate the risk associated with future Long-Term Care needs. By using the power of the Pension Protection Act and “upgrading” to a PPA-compliant solution, she can leverage the $200,000 annuity into more than $600,000 of Long-Term Care benefits AND even add her husband to the plan!    This strategy is even better for tax planning purposes!

Turn Taxable Gains Into Tax-Free Benefits.....

Sally’s original investment of $100,000 (her basis) into her annuity has grown to $200,000, and withdrawals from her old annuity would be subject to LIFO (last-in, first-out) accounting rules. This means the taxable earnings would come out first, and distributions for future Long-Term Care expenses will result in reportable income in the year taken.   However, by “upgrading” to a PPA-Compliant solution, the result would be TAX-FREE distributions of the total $600,000 of Long-Term Care benefits rather than taxable distributions of just the $200,000 accumulated cash value.   

Perhaps most importantly, by using the tax code to their advantage, the couple can implement a substantial Long-Term Care plan with ZERO out-of-pocket cost by simply repositioning or reallocating the existing annuity.

* This information is general and may not apply to everyone - Consult a tax advisor or CPA for individual tax implications with this type of solution. 

^ 2022 Survey of Owners of Individual Annuity Contracts by The Gallup Organization; 1,008 owners of individual annuity contracts during Jan and Feb 2022.