Title VII, SEC. 7702. 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 LONG-TERM CARE INSURANCE. ``(a) In General. For purposes of this title ``(1) a qualified long-term care insurance policy (as defined in subsection (b)) 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 policy 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 policy shall be treated as an accident and health plan with respect to such coverage, ``(4) amounts paid for a qualified long-term care insurance policy providing the benefits described in subsection (b)(6)(B) shall be treated as payments made for insurance for purposes of section 213(d)(1)(D), and ``(5) a qualified long-term care insurance policy shall be treated as a guaranteed renewable contract subject to the rules of section 816(e). ``(b) Qualified Long-Term Care Insurance Policy. For purposes of this title ``(1) In general. The term `qualified long-term care insurance policy' means any long-term care insurance policy (as defined in section 2304 of the Health Security Act) that ``(A) satisfies the requirements of subpart B of part 3 of subtitle B of title II of the Health Security Act, ``(B) limits benefits under such policy to individuals who are certified by a licensed professional (as defined in section 213(g)(4)) within the preceding 12-month period as being unable to perform, without substantial assistance from another individual (including assistance involving cueing or substantial supervision), 2 or more activities of daily living (as defined in section 213(g)(3)), or who have a severe cognitive impairment (as defined in section 213(g)(2)(B)), and ``(C) satisfies the requirements of paragraphs (2), (3), (4), (5), and (6). ``(2) Premium requirements. The requirements of this paragraph are met with respect to a policy if such policy provides that premium payments may not be made earlier than the date such payments would have been made if the contract provided for level annual payments over the life expectancy of the insured or 20 years, whichever is shorter. A policy shall not be treated as failing to meet the requirements of the preceding sentence solely by reason of a provision in the policy providing for a waiver of premiums if the insured becomes an individual certified in accordance with paragraph (1)(B). ``(3) Prohibition of cash value. The requirements of this paragraph are met if the policy does not provide for a cash value or other money that can be paid, assigned, pledged as collateral for a loan, or borrowed, other than as provided in paragraph (4). ``(4) Refunds of premiums and dividends. The requirements of this paragraph are met with respect to a policy if such policy provides that ``(A) policyholder dividends are required to be applied as a reduction in future premiums or, to the extent permitted under paragraph (6), to increase benefits described in subsection (a)(2), and ``(B) refunds of premiums upon a partial surrender or a partial cancellation are required to be applied as a reduction in future premiums, and ``(C) any refund on the death of the insured, or on a complete surrender or cancellation of the policy, cannot exceed the aggregate premiums paid under the contract. ``Any refund on a complete surrender or cancellation of the policy shall be includible in gross income to the extent that any deduction or exclusion was allowable with respect to the premiums. ``(5) Coordination with other entitlements. The requirements of this paragraph are met with respect to a policy if such policy does not cover expenses incurred to the extent that such expenses are also covered under title XVIII of the Social Security Act or are covered under comprehensive health coverage described in section 1101 of the Health Security Act. ``(6) Maximum benefit. ``(A) In general. The requirements of this paragraph are met if the benefits payable under the policy for any period (whether on a periodic basis or otherwise) shall not exceed the dollar amount in effect for such period. ``(B) Nonreimbursement payments permitted. Benefits shall include all payments described in subsection (a)(2) to or on behalf of an insured individual without regard to the expenses incurred during the period to which the payments relate. For purposes of section 213(a), such payments shall be treated as compensation for expenses paid for medical care. ``(C) Dollar amount. The dollar amount in effect under this paragraph shall be $150 per day (or the equivalent amount within the calendar year in the case of payments on other than a per diem basis). ``(D) Adjustments for increased costs. ``(i) In general. In the case of any calendar year after 1996, the dollar amount in effect under subparagraph (C) for any period or portion thereof occurring during such calendar year shall be equal to the sum of ``(I) the amount in effect under subparagraph (C) for the preceding calendar year (after application of this subparagraph), plus ``(II) the product of the amount referred to in subclause (I) multiplied by the cost-of-living adjustment for the calendar year of the amount under subclause (I). ``(ii) Cost-of-living adjustment. For purposes of clause (i), the cost-of-living adjustment for any calendar year is the percentage (if any) by which the cost index under clause (iii) for the preceding calendar year exceeds such index for the second preceding calendar year. ``(iii) Cost index. The Secretary, in consultation with the Secretary of Health and Human Services, shall before January 1, 1997, establish a cost index to measure increases in costs of nursing home and similar facilities. The Secretary may from time to time revise such index to the extent necessary to accurately measure increases or decreases in such costs. ``(iv) Special rule for calendar year 1997. Notwithstanding clause (ii), for purposes of clause (i), the cost-of-living adjustment for calendar year 1997 is the sum of 1 \1/2\ percent plus the percentage by which the CPI for calendar year 1996 (as defined in section 1(f)(4)) exceeds the CPI for calendar year 1995 (as so defined). ``(E) Period. For purposes of this paragraph, a period begins on the date that an individual has a condition which would qualify for certification under subsection (b)(1)(B) and ends on the earlier of the date upon which ``(i) such individual has not been so certified within the preceding 12-months, or ``(ii) the individual's condition ceases to be such as to qualify for certification under subsection (b)(1)(B). ``(F) Aggregation rule. For purposes of this paragraph, all policies issued with respect to the same insured shall be treated as one policy. ``(c) Treatment of Long-Term Care Insurance Policies. For purposes of this title, any amount received or coverage provided under a long-term care insurance policy that is not a qualified long-term care insurance policy shall not be treated as an amount received for personal injuries or sickness or provided under an accident and health plan and shall not be treated as excludible from gross income under any provision of this title. ``(d) 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 rider on 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 or policy. ``(2) Premiums and charges for long-term care coverage. Premium payments for coverage under a long-term care insurance policy and charges against the life insurance contract's cash surrender value (within the meaning of section 7702(f)(2)(A)) for such coverage shall be treated as premiums for purposes of subsection (b)(2). ``(3) 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) described in paragraph (2) 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)). ``(4) 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 coverage provided by the rider is a qualified long-term care insurance policy under subsection (b). ``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 the coverage under a long-term care insurance policy. ``(e) Prohibition of Discrimination. ``(1) In general. Notwithstanding subsection (a)(3), any plan of an employer providing coverage under a qualified long-term care insurance policy shall qualify as an accident and health plan with respect to such coverage only if ``(A) the plan allows all employees, except as provided in paragraph (2), to participate, and ``(B) the benefits provided under the plan are identical for all employees that choose to participate. ``(2) Exclusion of certain employees. For purposes of paragraph (1), there may be excluded from consideration ``(A) employees who have not completed 3 years of service; ``(B) employees who have not attained age 25; ``(C) part-time or seasonal employees; and ``(D) employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)). ``(f) Regulations. The Secretary shall prescribe such regulations as may be necessary to carry out the requirements of this section, including regulations to prevent the avoidance of this section by providing long-term care insurance coverage under a life insurance contract and to provide for the proper allocation of amounts between the long-term care and life insurance portions of a contract.''. (b) 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 long-term care insurance.''. (c) Effective Date. (1) In general. The amendments made by this section shall apply to policies issued after December 31, 1995. Solely for purposes of the preceding sentence, a policy issued prior to January 1, 1996, that satisfies the requirements of a qualified long-term care insurance policy as set forth in section 7702B(b) shall, on and after January 1, 1996, be treated as being issued after December 31, 1995. (2) Transition rule. If, after the date of enactment of this Act and before January 1, 1996, a policy providing for long-term care insurance coverage is exchanged solely for a qualified long-term care insurance policy (as defined in section 7702B(b)), no gain or loss shall be recognized on the exchange. If, in addition to a qualified long-term care insurance policy, 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 policy providing for long-term care insurance coverage and reinvestment of the cancellation proceeds in a qualified long-term care insurance policy within 60 days thereafter shall be treated as an exchange. (3) Issuance of certain riders permitted. For purposes of determining whether section 7702 or 7702A of the Internal Revenue Code of 1986 applies to any contract, the issuance, whether before, on, or after December 31, 1995, of a rider on a life insurance contract providing long-term care insurance coverage shall not be treated as a modification or material change of such contract.