[Federal Register Volume 63, Number 237 (Thursday, December 10, 1998)]
[Rules and Regulations]
[Pages 68184-68188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32759]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8792]
RIN 1545-AV56
Qualified Long-Term Care Insurance Contracts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final Income Tax Regulations relating
to consumer protection with respect to qualified long-term care
insurance contracts and relating to events that will result in the loss
of grandfathered status for long-term care insurance contracts issued
prior to January 1, 1997. Changes to the applicable law were made by
the Health Insurance Portability and Accountability Act of 1996. The
regulations affect issuers of long-term care insurance contracts and
individuals entitled to receive payments under these contracts. The
regulations are necessary to provide these taxpayers with guidance
needed to comply with these changes.
DATES: Effective date. These regulations are effective December 10,
1998.
Applicability date. Section 1.7702B-1 (concerning consumer
protection provisions) of the regulations applies with respect to
contracts issued after December 10, 1999. Section 1.7702B-2 (concerning
special rules for pre-1997 contracts) of the regulations is applicable
January 1, 1999.
FOR FURTHER INFORMATION CONTACT: Katherine A. Hossofsky, (202) 622-3477
(not a toll free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) to provide rules relating to consumer protection with
respect to qualified long-term care insurance contracts and relating to
events that will result in the loss of grandfathered status for long-
term care insurance contracts issued prior to January 1, 1997.
A notice of proposed rulemaking (REG-109333-97) under section 7702B
of the Code was published in the Federal Register on January 2, 1998
(63 FR 35). Written comments were received from the public, and a
public hearing was held on May 13, 1998. After consideration of all the
comments, the regulations proposed by REG-109333-97 are adopted as
revised by this Treasury decision.
Explanation of Statutory Provisions
The Health Insurance Portability and Accountability Act of 1996
(Public Law 104-191, 110 Stat. 1936, 2054 and 2063) (HIPAA) added
section 7702B to the Internal Revenue Code of 1986 (the Code). Section
7702B establishes the tax treatment for qualified long-term care
insurance contracts. Section 7702B(a)(1) and (3) of the Code provide
that a qualified long-term care insurance contract is treated as an
accident and health insurance contract and that any employer plan
providing coverage under a qualified long-term care insurance contract
is treated as an accident or health plan with respect to that coverage.
Section 7702B(a)(2) of the Code provides that amounts (other than
policyholder dividends and premium refunds) received under a qualified
long-term care insurance contract are generally excludable from gross
income as amounts received for personal injuries and sickness.
Section 213(d)(1)(D) of the Code was amended by section 322 of
HIPAA to provide that eligible long-term care insurance premiums, as
defined in section 213(d)(10) of the Code, are medical care expenses.
Under section 7702B(b)(1)(F) of the Code, a qualified long-term
care insurance contract must meet the consumer protection provisions of
section 7702B(g) of the Code. In addition, section 4980C of the Code
imposes an excise tax on issuers of qualified long-term care insurance
contracts that do not provide further consumer protections.
Section 7702B of the Code applies to contracts issued after
December 31, 1996. Section 321(f)(2) of HIPAA treats a contract issued
before January 1, 1997, as a qualified long-term care insurance
contract under section 7702B(b) of the Code, and services provided or
reimbursed under such a contract as qualified long-term care services
under section 7702B(c) of the Code, provided the contract met the long-
term care insurance requirements of the State in which the contract was
sitused at the time the contract was issued. Section 321(f)(2) of HIPAA
also provides that in the case of an individual covered on December 31,
1996, by a State long-term care plan under section 7702B(f) of the
Code, the terms of the plan on that date are treated as a contract
meeting the long-term care insurance requirements of that State.
Section 321(f)(4) of HIPAA provides that for purposes of applying
sections 101(f), 7702, and 7702A of the Code, neither the issuance of a
rider that is treated as a qualified long-term care insurance contract
nor the addition of any provision required to conform any other long-
term care rider to the requirements applicable to a qualified long-term
care insurance contract is treated as a modification or material change
of the contract.
Explanation of Provisions
The final regulations provide guidance concerning
The consumer protection requirements that apply to
qualified long-term care insurance contracts under sections 7702B(g),
7702B(b)(1)(F), and 4980C of the Code; and
The grandfather provisions of section 321(f)(2) of HIPAA
under which pre-1997 contracts are treated as qualified long-term care
insurance contracts if certain conditions are met.
The standards in the final regulations are based on safe harbors
that were originally set forth in Notice 97-31 (1997-1 C.B. 417), and
in the regulations proposed in REG-109333-97.
Notice 97-31
Notice 97-31 was issued to provide interim standards for taxpayers
to use in interpreting the new long-term care provisions and to
facilitate operation of the insurance market by avoiding the
[[Page 68185]]
need to amend contracts. For example, Notice 97-31 includes interim
guidance on the determination of whether an individual is a chronically
ill individual, including safe harbor definitions of the terms
substantial assistance, hands-on assistance, standby assistance, severe
cognitive impairment, and substantial supervision. The standards
contained in Notice 97-31 include interim guidance on both the consumer
protection provisions and the scope of the statutory grandfather
provisions that apply to long-term care insurance contracts issued
before 1997.
Consumer Protection Requirements
Under sections 7702B(b)(1)(F), 7702B(g), and 4980C of the Code,
qualified long-term care insurance contracts and issuers of those
contracts are required to satisfy certain provisions of the Long-Term
Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model
Regulation (Model Regulation) promulgated by the National Association
of Insurance Commissioners (NAIC) for long-term care insurance as of
January 1993. The requirements relate to guaranteed renewability,
unintentional lapse, disclosure, prohibitions against post-claims
underwriting, inflation protection, and prohibitions against pre-
existing conditions exclusions and probationary periods. Section 4980C
imposes an excise tax on an issuer of a qualified long-term care
insurance contract if, after 1996, the issuer fails to satisfy certain
requirements, including requirements relating to application forms,
reporting, marketing, appropriateness of recommended purchase, standard
format outline of coverage, delivery of a shopper's guide, right to
return, outline of coverage, and incontestability. Most of these
requirements are based on the NAIC Model Act and Regulation.
The final regulations reflect the standards that were set forth in
Notice 97-31 and in the regulations proposed in REG-109333-97. For
example, the consumer protection requirements will be considered
satisfied if a contract complies with State law in a State that has
adopted the related NAIC model or a more stringent version of the
model.
Commentators generally approved of the consumer protection
provisions of the proposed regulations. Some commentators suggested
that the provisions should be applied on a prospective basis, such as
for long-term care insurance contracts issued more than one year after
publication of the final regulations. Consistent with this suggestion,
the final regulations apply to contracts issued after December 10,
1999.
Commentators suggested that if any State has adopted a Model Act or
Model Regulation requirement, such State's interpretation of that
requirement should be considered probative but not controlling of the
meaning of the analogous requirements for purposes of applying sections
7702B(g) and 4980C of the Code to a contract sitused in another State.
This suggestion was not adopted. If a particular State has adopted a
Model Act or Model Regulation requirement, that State's interpretation
should apply to determine whether the contract meets that State's
requirement. If a State has not adopted a particular requirement, the
determination of what interpretation should apply for purposes of
section 7702B(g) and 4980C of the Code is more appropriately made on a
case-by-case basis.
Pre-1997 Long-Term Care Insurance Contracts
Section 321(f)(2) of HIPAA provides that a contract issued before
January 1, 1997, is treated as a qualified long-term care insurance
contract if the contract met the ``long-term care insurance
requirements of the State'' in which the contract was sitused at the
time it was issued. Under the final regulations, the date on which a
long-term care insurance contract other than a group long-term care
insurance contract is issued is generally the date assigned to the
contract by the insurance company. In no event is the issue date
earlier than the date on which the policyholder submitted a signed
application for coverage to the insurance company. In addition, if the
period between the date of application and the date on which the long-
term care insurance contract actually becomes effective is
substantially longer than under the insurance company's usual business
practice, then the issue date is generally the date the contract
becomes effective. For purposes of applying the grandfather rule of
section 321(f)(2) of HIPAA to a group long-term care insurance
contract, the issue date of the contract is the date the group contract
was issued. As a result, coverage for an individual who joins a
grandfathered group long-term care insurance contract on or after
January 1, 1997, is accorded the same treatment under section 321(f)(2)
as is accorded coverage for those who joined the group before that
date.
Notice 97-31 and the proposed regulations use the term material
change to identify those changes to pre-1997 long-term care insurance
contracts that are treated as the issuance of a new contract and,
therefore, result in the loss of grandfathered status under section
7702B. The use of the term material may have caused some confusion in
light of the bright line standards that the regulations are generally
intended to provide. For this reason, the final regulations do not use
the term material in this context. No substantive change is intended by
this modification.
The final regulations generally adopt the standards set forth in
the proposed regulations for purposes of determining whether a change
to a pre-1997 long-term care insurance contract is considered the
issuance of a new contract.\1\ For example, the final regulations
provide that the exercise of any right provided to a policyholder or
the addition of any right that is required by State law to be provided
to the policyholder will not be treated as the issuance of a new
contract. Thus, as illustrated in an example in the regulations, the
exercise of a right set forth in a pre-1997 contract, without
underwriting, does not result in the loss of grandfathered status.
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\1\ These standards are different from those that apply for
purposes of determining the grandfathered status of other types of
insurance contracts under the Code (including sections 7702, 7702A,
101(f), and 264). Those other provisions limit the tax benefits
associated with the purchase of insurance products that, unlike pre-
1997 long-term care insurance contracts, have a substantial
investment orientation.
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The final regulations also provide that the following practices
will not be treated as the issuance of a new contract for purposes of
the grandfathering provision of section 321(f)(2) of HIPAA: (1) A
change in the mode of premium payment, such as a change from paying
premiums monthly to quarterly; (2) a classwide increase or decrease in
premiums for contracts that have been issued on a guaranteed renewable
basis; (3) a reduction in premiums due to the purchase of a long-term
care insurance policy by a member of the policyholder's family; (4) a
reduction in coverage (with correspondingly lower premiums) made at the
request of a policyholder; (5) a reduction in premiums that occurs
because the policyholder becomes entitled to a discount under the
issuer's pre-1997 premium rate structure (such as when a policyholder
becomes a member of a group entitled to a group discount, or changes
from smoker to nonsmoker status); (6) the addition, without an increase
in premiums, of alternative forms of benefits that may be selected by
the policyholder; (7) the addition of a rider to increase benefits
under a pre-1997 contract if the rider would
[[Page 68186]]
constitute a qualified long-term care insurance contract if it were a
separate contract; (8) the deletion of a rider or provision of a
contract (called an HHS (Health and Human Services) rider) that
prohibited coordination of benefits with Medicare; (9) the effectuation
of a continuation or conversion of coverage right under a group
contract following an individual's ineligibility for continued coverage
under the group contract; and (10) the substitution of one insurer for
another in an assumption reinsurance transaction. These exceptions are
generally similar to those listed in the proposed regulations. In
response to comments, however, the exceptions have been broadened to
permit certain premium reductions and to clarify that a change in
insurer pursuant to an assumption reinsurance transaction is not
treated as the issuance of a new contract (assuming that the contract
would not otherwise be treated as newly issued, such as by reason of a
change in the amount or timing of benefits or premiums).
Some commentators suggested that the regulations include a
parenthetical to the effect that some changes in the amount or timing
of items (such as de minimis changes in premiums) are not treated as
the issuance of a new contract, even if no specific exception applies
under the regulation. An important purpose of these regulations is to
provide certainty as to the qualification of pre-1997 long-term care
insurance contracts, and the exceptions enumerated in the proposed
regulations provide broad relief from treatment as the issuance of a
new contract resulting in the loss of grandfathered status.
Accordingly, the final regulations do not contain this additional
parenthetical.
Some commentators identified additional circumstances under which
expansion of coverage under a group long-term care insurance contract
should not be treated as the issuance of a new contract. For example,
some requested that the addition of a spouse, dependent children, or
others should not be treated as the issuance of a new contract. Other
commentators suggested that no loss of grandfathering should result
from the expansion of coverage under a group contract by reason of a
corporate merger or acquisition, or the extension of coverage to
collectively bargained employees, or the addition of former employees.
The final regulations clarify that such expansion is not treated as the
issuance of a new contract, provided that the addition is without
underwriting and is pursuant to the terms of the contract and the plan
under which the contract was issued as in effect on December 31, 1996.
Thus, the addition of a business's assets and related employees by a
company with a pre-1997 group contract is not treated as the issuance
of a new contract if, as of December 31, 1996, the contract and the
plan under which it was issued provided that new employees
automatically are eligible to participate in the group contract. If,
however, a new subsidiary is acquired by the company and the company's
pre-1997 group contract or plan requires that a subsidiary be
designated by the company in order for its employees to be eligible to
participate, then the designation of the new subsidiary would be a
change in the terms of the contract or in the plan relating to
eligibility. Although the final regulations were not modified to
accommodate further expansion, a new qualified long-term care insurance
contract could be entered into to expand coverage under these
circumstances. Alternatively, the final regulations permit coverage
under the pre-1997 contract to be expanded by a rider to the pre-1997
contract if the rider would constitute a qualified long-term care
insurance contract if it were issued as a separate contract.\2\
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\2\ As was indicated in the preamble to the proposed
regulations, certain of the consumer protection requirements would
not apply to such a rider. Specifically, sections
7702B(g)(2)(A)(i)(III), 7702B(g)(2)(A)(i)(V), 7702B(g)(2)(A)(i)(VII)
(other than section 9B of the NAIC Model regulation),
7702B(g)(2)(A)(i)(X), 7702B(g)(3), 7702B(g)(4), 4980C(c)(1)(A)(I),
and 4980C(c)(2) of the Internal Revenue Code would apply only the
first time a contract is purchased, and would not apply to the
purchase of a rider.
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Finally, it was suggested that the grandfather provisions of the
final regulations should be effective immediately. The final
regulations with respect to contracts issued before 1997 are effective
January 1, 1999.
Standards Before the Effective Date of the Final Regulations
The consumer protection provisions in the final regulations apply
with respect to contracts issued after December 10, 1999. Taxpayers may
continue to rely on Notice 97-31 with respect to contracts issued on or
before that date. In addition, a contract issued on or before December
10, 1999 will not be treated as failing to satisfy the consumer
protection requirements of section 7702B(g) or 4980C of the Code if the
contract satisfies the requirements of the final regulations. Taxpayers
may not rely on Notice 97-31 with respect to contracts issued after
December 10, 1999.
The final regulations are effective January 1, 1999, with respect
to pre-1997 long-term care insurance contracts. Taxpayers may continue
to rely on Notice 97-31 for the purpose of determining whether a change
made before January 1, 1999, to a pre-1997 contract is treated as the
issuance of a new contract. In addition, a change made before that date
to a pre-1997 contract will not be treated as the issuance of a new
contract if the change is not treated as the issuance of a new contract
under the final regulations. Taxpayers may not rely on Notice 97-31
with respect to changes made on or after January 1, 1999.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because the regulations do not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Drafting information. The principal author of these regulations is
Katherine A. Hossofsky, Office of Assistant Chief Counsel (Financial
Institutions & Products). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 1.7702B-1 and 1.7702B-2 are added to read as
follows:
Sec. 1.7702B-1 Consumer protection provisions.
(a) In general. Under sections 7702B(b)(1)(F), 7702B(g), and 4980C,
qualified long-term care insurance contracts and issuers of those
contracts are required to satisfy certain provisions
[[Page 68187]]
of the Long-Term Care Insurance Model Act (Model Act) and Long-Term
Care Insurance Model Regulation (Model Regulation) promulgated by the
National Association of Insurance Commissioners (NAIC), as adopted as
of January 1993. The requirements for qualified long-term care
insurance contracts under section 7702B(b)(1)(F) and (g) relate to
guaranteed renewal or noncancellability, prohibitions on limitations
and exclusions, extension of benefits, continuation or conversion of
coverage, discontinuance and replacement of policies, unintentional
lapse, disclosure, prohibitions against post-claims underwriting,
minimum standards, inflation protection, prohibitions against pre-
existing conditions exclusions and probationary periods, and prior
hospitalization. The requirements for qualified long-term care
insurance contracts under section 4980C relate to application forms and
replacement coverage, reporting requirements, filing requirements for
marketing, standards for marketing, appropriateness of recommended
purchase, standard format outline of coverage, delivery of a shopper's
guide, right to return, outline of coverage, certificates under group
plans, policy summary, monthly reports on accelerated death benefits,
and incontestability period.
(b) Coordination with State requirements--(1) Contracts issued in a
State that imposes more stringent requirements. If a State imposes a
requirement that is more stringent than the analogous requirement
imposed by section 7702B(g) or 4980C, then, under section 4980C(f),
compliance with the more stringent requirement of State law is
considered compliance with the parallel requirement of section 7702B(g)
or 4980C. The principles of paragraph (b)(3) of this section apply to
any case in which a State imposes a requirement that is more stringent
than the analogous requirement imposed by section 7702B(g) or 4980C (as
described in this paragraph (b)(1)), but in which there has been a
failure to comply with that State requirement.
(2) Contracts issued in a State that has adopted the model
provisions. If a State imposes a requirement that is the same as the
parallel requirement imposed by section 7702B(g) or 4980C, compliance
with that requirement of State law is considered compliance with the
parallel requirement of section 7702B(g) or 4980C, and failure to
comply with that requirement of State law is considered failure to
comply with the parallel requirement of section 7702B(g) or 4980C.
(3) Contracts issued in a State that has not adopted the model
provisions or more stringent requirements. If a State has not adopted
the Model Act, the Model Regulation, or a requirement that is the same
as or more stringent than the analogous requirement imposed by section
7702B(g) or 4980C, then the language, caption, format, and content
requirements imposed by sections 7702B(g) and 4980C with respect to
contracts, applications, outlines of coverage, policy summaries, and
notices will be considered satisfied for a contract subject to the law
of that State if the language, caption, format, and content are
substantially similar to those required under the parallel provision of
the Model Act or Model Regulation. Only nonsubstantive deviations are
permitted in order for language, caption, format, and content to be
considered substantially similar to the requirements of the Model Act
or Model Regulation.
(c) Effective date. This section applies with respect to contracts
issued after December 10, 1999.
Sec. 1.7702B-2 Special rules for pre-1997 long-term care insurance
contracts.
(a) Scope. The definitions and special provisions of this section
apply solely for purposes of determining whether an insurance contract
(other than a qualified long-term care insurance contract described in
section 7702B(b) and any regulations issued thereunder) is treated as a
qualified long-term care insurance contract for purposes of the
Internal Revenue Code under section 321(f)(2) of the Health Insurance
Portability and Accountability Act of 1996 (Public Law 104-191).
(b) Pre-1997 long-term care insurance contracts--(1) In general. A
pre-1997 long-term care insurance contract is treated as a qualified
long-term care insurance contract, regardless of whether the contract
satisfies section 7702B(b) and any regulations issued thereunder.
(2) Pre-1997 long-term care insurance contract defined. A pre-1997
long-term care insurance contract is any insurance contract with an
issue date before January 1, 1997, that met the long-term care
insurance requirements of the State in which the contract was sitused
on the issue date. For this purpose, the long-term care insurance
requirements of the State are the State laws (including statutory and
administrative law) that are intended to regulate insurance coverage
that constitutes ``long-term care insurance'' (as defined in section 4
of the National Association of Insurance Commissioners (NAIC) Long-Term
Care Insurance Model Act, as in effect on August 21, 1996), regardless
of the terminology used by the State in describing the insurance
coverage.
(3) Issue date of a contract--(i) In general. Except as otherwise
provided in this paragraph (b)(3), the issue date of a contract is the
issue date assigned to the contract by the insurance company. In no
event is the issue date earlier than the date the policyholder
submitted a signed application for coverage to the insurance company.
If the period between the date the signed application is submitted to
the insurance company and the date coverage under which the contract
actually becomes effective is substantially longer than under the
insurance company's usual business practice, then the issue date is the
later of the date coverage under which the contract becomes effective
or the issue date assigned to the contract by the insurance company. A
policyholder's right to return a contract within a free-look period
following delivery for a full refund of any premiums paid is not taken
into account in determining the contract's issue date.
(ii) Special rule for group contracts. The issue date of a group
contract (including any certificate issued thereunder) is the date on
which coverage under the group contract becomes effective.
(iii) Exchange of contract or certain changes in a contract treated
as a new issuance. For purposes of this paragraph (b)(3)--
(A) A contract issued in exchange for an existing contract after
December 31, 1996, is considered a contract issued after that date;
(B) Any change described in paragraph (b)(4) of this section is
treated as the issuance of a new contract with an issue date no earlier
than the date the change goes into effect; and
(C) If a change described in paragraph (b)(4) of this section
occurs with regard to one or more, but fewer than all, of the
certificates evidencing coverage under a group contract, then the
insurance coverage under the changed certificates is treated as
coverage under a newly issued group contract (and the insurance
coverage provided by any unchanged certificate continues to be treated
as coverage under the original group contract).
(4) Changes treated as the issuance of a new contract--(i) In
general. For purposes of paragraph (b)(3) of this section, except as
provided in paragraph (b)(4)(ii) of this section, the following changes
are treated as the issuance of a new contract--
(A) A change in the terms of a contract that alters the amount or
timing of an item payable by either the
[[Page 68188]]
policyholder (or certificate holder), the insured, or the insurance
company;
(B) A substitution of the insured under an individual contract; or
(C) A change (other than an immaterial change) in the contractual
terms, or in the plan under which the contract was issued, relating to
eligibility for membership in the group covered under a group contract.
(ii) Exceptions. For purposes of this paragraph (b)(4), the
following changes are not treated as the issuance of a new contract--
(A) A policyholder's exercise of any right provided under the terms
of the contract as in effect on December 31, 1996, or a right required
by applicable State law to be provided to the policyholder;
(B) A change in the mode of premium payment (for example, a change
from monthly to quarterly premiums);
(C) In the case of a policy that is guaranteed renewable or
noncancellable, a classwide increase or decrease in premiums;
(D) A reduction in premiums due to the purchase of a long-term care
insurance contract by a family member of the policyholder;
(E) A reduction in coverage (with a corresponding reduction in
premiums) made at the request of a policyholder;
(F) A reduction in premiums as a result of extending to an
individual policyholder a discount applicable to similar categories of
individuals pursuant to a premium rate structure that was in effect on
December 31, 1996, for the issuer's pre-1997 long-term care insurance
contracts of the same type;
(G) The addition, without an increase in premiums, of alternative
forms of benefits that may be selected by the policyholder;
(H) The addition of a rider (including any similarly identifiable
amendment) to a pre-1997 long-term care insurance contract in any case
in which the rider, if issued as a separate contract of insurance,
would itself be a qualified long-term care insurance contract under
section 7702B and any regulations issued thereunder (including the
consumer protection provisions in section 7702B(g) to the extent
applicable to the addition of a rider);
(I) The deletion of a rider or provision of a contract that
prohibited coordination of benefits with Medicare (often referred to as
an HHS (Health and Human Services) rider);
(J) The effectuation of a continuation or conversion of coverage
right that is provided under a pre-1997 group contract and that, in
accordance with the terms of the contract as in effect on December 31,
1996, provides for coverage under an individual contract following an
individual's ineligibility for continued coverage under the group
contract; and
(K) The substitution of one insurer for another insurer in an
assumption reinsurance transaction.
(5) Examples. The following examples illustrate the principles of
this paragraph (b):
Example 1. (i) On December 3, 1996, A, an individual, submits a
signed application to an insurance company to purchase a nursing
home contract that meets the long-term care insurance requirements
of the State in which the contract is sitused. The insurance company
decides on December 20, 1996, that it will issue the contract, and
assigns December 20, 1996, as the issue date for the contract. Under
the terms of the contract, A's insurance coverage becomes effective
on January 1, 1997. The company delivers the contract to A on
January 3, 1997. A has the right to return the contract within 15
days following delivery for a refund of all premiums paid.
(ii) Under paragraph (b)(3)(i) of this section, the issue date
of the contract is December 20, 1996. Thus, the contract is a pre-
1997 long-term care insurance contract that is treated as a
qualified long-term care insurance contract.
Example 2. (i) The facts are the same as in Example 1, except
that the insurance coverage under the contract does not become
effective until March 1, 1997. Under the insurance company's usual
business practice, the period between the date of the application
and the date the contract becomes effective is 30 days or less.
(ii) Under paragraph (b)(3)(i) of this section, the issue date
of the contract is March 1, 1997. Thus, the contract is not a pre-
1997 long-term care insurance contract, and, accordingly, the
contract must meet the requirements of section 7702B(b) and any
regulations issued thereunder to be a qualified long-term care
insurance contract.
Example 3. (i) B, an individual, is the policyholder under a
long-term care insurance contract purchased in 1995. On June 15,
2000, the insurance coverage and premiums under the contract are
increased by agreement between B and the insurance company.
(ii) Under paragraph (b)(4)(i)(A) of this section, a change in
the terms of a contract that alters the amount or timing of an item
payable by the policyholder or the insurance company is treated as
the issuance of a new contract. Thus, B's coverage is treated as
coverage under a contract issued on June 15, 2000, and, accordingly,
the contract must meet the requirements of section 7702B(b) and any
regulations issued thereunder in order to be a qualified long-term
care insurance contract.
Example 4. (i) C, an individual, is the policyholder under a
long-term care insurance contract purchased in 1994. At that time
and through December 31, 1996, the contract met the long-term care
insurance requirements of the State in which the contract was
sitused. In 1996, the policy was amended to add a provision
requiring the policyholder to be offered the right to increase
dollar limits for inflation every three years (without the
policyholder being required to pass a physical or satisfy any other
underwriting requirements). During 2002, C elects to increase the
amount of insurance coverage (with a resulting premium increase)
pursuant to the inflation provision.
(ii) Under paragraph (b)(4)(ii)(A) of this section, an increase
in the amount of insurance coverage at the election of the
policyholder (without the insurance company's consent and without
underwriting or other limitations on the policyholder's rights)
pursuant to a pre-1997 inflation provision is not treated as the
issuance of a new contract. Thus, C's contract continues to be a
pre-1997 long-term care insurance contract that is treated as a
qualified long-term care insurance contract.
(c) Effective date. This section is applicable January 1, 1999.
David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
Approved: November 24, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-32759 Filed 12-9-98; 8:45 am]
BILLING CODE 4830-01-U
