Buried deep inside the over 1000 pages of the Patient Protection & Affordable Care Act (PPACA), otherwise known as the Health Care Act (and in some circles, Obamacare) is a provision for a tax of 3.8% on unearned income, including income from non-qualified annuities, to help ensure the continued viability of Medicare.

Soon after the PPACA was signed into law in March of last year, the life insurance industry through its many trade associations, including the Insured Retirement Institute (IRI), criticized this “Medicare Tax” as running counter to the need to encourage saving for retirement with annuities and the guaranteed income for life they provide. Perhaps the industry rushed to judgment, and should reconsider its position. (I was reminded of this industry viewpoint, just having heard oil executives testify yesterday before Congress about that industry’s tax breaks.)

Keep in mind that this 3.8% tax, due to come into effect in 2013, is only applicable to those annuitants whose adjusted gross income (AGI) is greater than $250,000 for married couples ($200,000 for singles). In a report issued earlier this year, the IRI found that only 20% of annuity buyers have incomes of more than $100,000 annually. So this tax will probably apply only to an even much smaller proportion of older annuity buyers/owners who, while drawing income from non-qualified annuities, will have incomes in excess of this $250,000/$200,000 threshold.

Importantly, a Treasury official has clarified that if the contract owner elects an annuity payout, this tax is only applicable to the amount of income in excess of the excludable amount – that portion of annuity income which is considered a return of the original investment in the contract. That exclusion is both fair and valuable to the annuity buyer/owner.

The IRI also made the following point: (“IRS alert: The tax advantages of annuities” by Daniel Williams, Senior Market Advisor, 4/12/2001), “The tax deferred treatment of the inside build-up within an annuity can amount to a significant sum over a period of many years, often resulting in a higher level of savings available at retirement compared to a similar investment that incurs income taxation every year.”

The life insurance industry has never been accused of viewing the business in a holistic way – but for its own sake should favor a sustainable Medicare. By helping to increase life expectancy, Medicare helps defer the payment of death benefit proceeds – while keeping life insurance premiums flowing.

So, in the words of that famous hamburger commercial many years ago – where’s the beef?

The real point is that there’s a positive message the industry needs to focus on: the value of annuities for individuals trying to create a secure retirement.

Jerry Golden
Golden Retirement, LLC