Health care legislation contains tax on annuities
April 13, 2010 by Karen Mracek
By KAREN MRACEK • kmracek@dmreg.com • April 11, 2010
President Barack Obama has promoted annuities as an effective tool for retirement savings. But a little-noticed tax in the health care reconciliation bill imposes a 3.8 percent tax on annuities purchased by high-income earners.
The tax, which goes into effect in 2013, will cost consumers $210 billion over 10 years. Iowa life insurance and financial service companies, which dominate the annuity market, say the tax is sending the wrong message to Americans and could hurt sales of annuities.
“I think it sends a very mixed message at a time when the country needs to focus on saving and rebuilding some of the damage that has been done in the markets,” said Wendy Waugaman, chief executive of American Equity Investment Life Insurance Co. in West Des Moines. “This goes entirely in the wrong direction.”
American Equity was the third-largest producer of indexed annuity sales in the fourth quarter of 2009, according to AnnuitySpecs.com’s Indexed Sales and Market Report.
Iowa insurers bring in more than one-third of all indexed annuity sales, the report says. Major insurers have annuity operations in Iowa, including ING Financial Solutions, Principal Financial Group, Aegon USA, FBL Financial Group, Midland National and Aviva USA.
“Already, we’re having trouble talking to Americans about getting guaranteed lifetime income … purchasing annuities, so you have income you can never outlive,” said Sheryl Moore, owner of AnnuitySpecs.com in Pleasant Hill, which tracks the indexed annuity industry.
A recent survey by the Employee Benefit Research Institute showed that almost a third of workers haven’t saved anything for retirement, and just over half of workers are confident they will have enough money to retire comfortably.
The tax is the unearned income Medicare contribution. It taxes nonqualified annuity payouts, interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.
Annuities bought through a qualified retirement plan offered by employers would be exempt.
Iowa’s Democratic delegation voted for the reconciliation bill, which was required to get the original $940 billion health care reform bill passed.
“It only applies to income that exceeds $250,000, and annuities from qualified plans — employer-sponsored pension plans and 401(k)s — are not subject to the tax” Sen. Tom Harkin’s staff said in a statement. “So no one’s retirement security will be weakened.”
His staff didn’t say whether it believed this would cause a drop in annuity sales or refer to the conflict between encouraging annuities as retirement vehicles and then taxing them.
Rep. Leonard Boswell’s office didn’t return phone calls seeking comment.
The Obama administration backed the idea of annuities as viable retirement income providers.
A report produced by the Middle Class Task Force, led by Vice President Joe Biden, earlier this year said the administration promotes “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.”
The Congressional Budget Office estimated the overall tax on investment income will generate $210 billion over 10 years to pay for Medicare.
“I think the whole tax is bad for a lot of reasons,” said Joe Kristan, tax shareholder with Roth and Co. in Des Moines.
“Certainly, it’s bad for annuity holders to get this additional tax, but it’s just as bad for people who aren’t active investors and people who get their income from dividends and interest,” he said.”
Kristan said there’s already a tax on annuity returns, if the payout exceeds the original investment.
“It’ll be a consideration” when people go to purchase annuities, Kristan said. “I don’t think it will be fatal because there will still be the deferral until you start withdrawing.”
Life insurance industry associations opposed the tax, saying in a letter to Congress that the “taxation on individual annuity income will have the undesired effect of discouraging Americans from saving for retirement and guaranteeing a source of income today or at any time in the future.”
The groups with leaders signing the letter are:
• National Association for Fixed Annuities of Milwaukee.
• American Council for Life Insurers of Washington, D.C.
• Insured Retirement Institute of Washington, D.C.
• National Association of Health Underwriters of Arlington, Va.
• National Association of Insurance and Financial Advisors of Falls Church, Va.
“Annuities are used by millions of Americans to achieve retirement security,” the groups wrote. “In the wake of the worst economic crisis since the Great Depression, this is not the time to discourage responsible retirement planning.”
Steven Brostoff, spokesman for the American Council for Life Insurers, said the organization is discussing with its members whether to work to repeal the tax.
“I’m certainly willing to put my shoulder behind any effort to get that removed,” said American Equity’s Waugaman. Aviva USA, the nation’s 15th-largest provider of all annuities in terms of sales, said it is too early to determine the impact of the tax on sales.
Rich Cohan, senior vice president for Aviva USA in Des Moines, said: “It’s hard to say right now. Any time taxes are increased, it makes the tax deferral feature of annuities more attractive to consumers,” especially in comparison to investments taxed each year.”
But he’s not ready to support the tax increase on annuity payments.
“Anything that taxes that income ultimately hurts the consumer,” Cohan said.
