Qualified Long-Term Care Insurance Contracts

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-109333-97]

RIN 1545-AV56

Qualified Long-Term Care Insurance Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to

consumer protection with respect to qualified long-term care insurance

contracts and relating to events that will be considered material

changes with respect to 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: Written comments must be received by April 2, 1998. Outlines of

topics to be discussed at the public hearing scheduled for May 13,

1998, must be received by April 2, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-109333-97), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-109333-97), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC. Alternatively, taxpayers may also submit comments

electronically via the Internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at http://www.irs.ustreas.gov/prod/tax__regs/

comments.html. The public hearing will be held in room 2615, Internal

Revenue Building, 1111 Constitution Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Katherine

A. Hossofsky, (202) 622-3477; concerning submissions and the hearing,

LaNita VanDyke, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax

Regulations (26 CFR part 1) to provide rules under section 7702B of the

Internal Revenue Code of 1986 (the ``Code''). Section 7702B was added

by sections 321 and 325 of the Health Insurance Portability and

Accountability Act of 1996 (Pub. L. 104-191, 110 Stat. 1936, 2054 and

110 Stat. at 2063) (``HIPAA''). Notice 97-31, 1997-21 I.R.B. 5 (May 6,

1997), provides interim guidance on certain provisions of section 7702B

and other provisions of the Code added or amended by HIPAA.

Explanation of Statutory Provisions

Section 7702B establishes the tax treatment for qualified long-term

care insurance contracts. Sections 7702B(a) (1) and (3) 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) provides that amounts (other than policyholder

dividends and premium dividends) 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) was amended by section 322 of HIPAA to provide

that eligible long-term care premiums as defined in section 213(d)(10)

are deductible medical expenses.

Under section 7702B(b)(1)(F), a qualified long-term care insurance

contract must meet the consumer protection provisions of section

7702B(g). In addition, section 4980C 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 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 proposed 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 proposed regulations are based on safe harbors

that were originally set forth in Notice 97-31. They reflect comments

made by consumer representatives, issuers of long-term care insurance,

independent sales agents, State regulators of long-term care insurance,

and others. The proposed regulations are intended to provide clear and

workable rules to assist those who want to ensure that a contract

issued before 1997 retains its status as a qualified long-term care

insurance contract.

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 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.

[[Page 36]]

Consumer Protection Requirements

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 of the model act and 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 proposed regulations reflect the standards that were set forth

in Notice 97-31. 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.

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 proposed 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 the date the contract becomes

effective. For purposes of applying the grandfather rule of section

321(f)(2) 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.

For purposes of applying section 321(f)(2) of HIPAA to long-term

care insurance contracts issued before January 1, 1997, a material

change in the contract generally is considered the issuance of a new

contract. Notice 97-31 provides that a material change includes any

change in the terms of the contract altering the amount or timing of

any item payable by the policyholder (or certificate holder), the

insured, or the insurance company. Notice 97-31 also provides that the

exercise of an option or right granted to a policyholder under a

qualified long-term care insurance contract as in effect on December

31, 1996, does not constitute a material change.\1\

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\1\ The definition of material change in Notice 97-31 is

narrower than the definition of material change for purposes of

other sections of the Code. For example, the exercise of an option

in a life insurance contract results in the loss of grandfathering

under section 7702 if the option only guarantees terms that are

likely to be available when the option is exercised.

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After Notice 97-31 was issued, commentators recommended that

certain common practices should not cause long-term care insurance

contracts issued before January 1, 1997, to lose their grandfathered

status. In response to these comments, the proposed regulations provide

additional exceptions to the general rule that a material change in a

long-term care insurance contract issued before January 1, 1997, will

be considered the issuance of a new contract.

The proposed regulations provide that the exercise of any

right provided to a policyholder (i.e., a right that can be exercised

without the issuer's consent and without other conditions, such as

underwriting) or the addition of any right that is required by State

law to be provided to the policyholder will not be treated as a

material change to a long-term care insurance contract.

In addition, the proposed regulations provide that the

following practices will not be treated as material changes for

purposes of section 7702B: (1) Any change in the mode of premium

payment, such as a change from paying premiums monthly to quarterly;

(2) any 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) any reduction in coverage

(with correspondingly lower premiums) made at the request of a

policyholder; (5) the addition, without an increase in premiums, of

alternative forms of benefits that may be selected by the policyholder;

(6) the purchase of a rider to increase benefits under a pre-1997

contract if the rider would constitute a qualified long-term care

insurance contract if it were a separate contract; \2\ (7) the deletion

of a rider or provision of a contract (called an HHS rider) that

prohibited coordination of benefits with Medicare; and (8) 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.

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\2\ Thus for example, the only coverage provided under the rider

must be coverage for qualified long-term care services and the

purchase must satisfy the consumer protection requirements of

section 7702B(g) of the Code. (This would not include protections

that apply only the first time a contract is purchased, i.e.,

subsections (g)(2)(A)(i)(III), (V), (VII) (other than section 6B of

the NAIC model regulation), and (X), (g)(3), and (g)(4) of section

7702B. Similarly, subsections (c)(1)(A)(i) and (c)(2) of section

4980C would apply only the first time a contract is purchased.)

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The proposed regulations include examples illustrating certain of

these standards. The exceptions to the general rule that a material

change results in the issuance of a new contract apply solely for

purposes of determining whether a pre-1997 insurance contract is

treated as a qualified long-term care insurance contract under section

7702B.\3\

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\3\ The exceptions depart from the definition of material change

that would apply for purposes of other sections of the Code,

including sections 7702, 7702A, 101(f), and 264. These exceptions

are consistent with the purpose of section 7702B, which has the

effect of expanding the tax benefits for certain long-term care

insurance contracts. By contrast, sections 7702, 7702A, 101(f), and

264, for example, limit the tax benefits associated with certain

insurance products and, unlike pre-1997 long-term care insurance

contracts, apply to contracts with a substantial investment

orientation.

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Comments are requested on these standards, including (1) whether

the material change rules in the proposed regulations should be limited

to pre-1997 long-term care insurance contracts that cannot have cash

surrender value; (2) whether there are any conditions under which the

expansion of coverage under a group long-term care insurance contract

in connection with a corporate merger, acquisition or similar

transaction should not constitute a material change; and (3) whether

the extension of a group long-term care contract to a collective

bargaining unit is a material change in all cases. For

[[Page 37]]

example, should the extension of a group long-term care contract to a

bargaining unit after 1997 be treated as a material change if the

bargaining agreement for the unit has not been renewed since before the

group contract was first adopted?

Comments also are requested on what the effective date of the final

regulations should be. It is intended that the regulations will not be

effective until after the end of a specified period following adoption

of the final regulations. Taxpayers may rely on these proposed

regulations for guidance pending the issuance of final regulations. If,

and to the extent, future guidance is more restrictive than the

guidance in these proposed regulations, the future guidance will be

applied without retroactive effect. In addition, until further notice,

taxpayers may continue to rely on Notice 97-31.

Special Analyses

It has been determined that this notice of proposed rulemaking 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, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any comments that are submitted timely

to the IRS (a signed original and eight (8) copies). All comments will

be available for public inspection and copying.

A public hearing has been scheduled for May 13, 1998, at 10 a.m.,

in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW,

Washington, DC. Because of access restrictions, visitors will not be

admitted beyond the Internal Revenue Building lobby more than 15

minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments by April 2, 1998 and submit an outline of the

topics to be discussed and the time to be devoted to each topic by

April 2, 1998.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be 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 through 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 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

sections 7702B(b)(1)(F) and 7702B(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.

[[Page 38]]

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.

(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. The issue date of a

contract is the issue date assigned to the contract by the insurance

company, but in no event is the issue date earlier than the date the

policyholder submitted a signed application for coverage to the

insurance company. However, if the period between the date the signed

application is submitted to the insurance company and the date coverage

under the contract actually becomes effective is substantially longer

than under the insurance company's usual business practice, then the

issue date is the date coverage under the contract becomes effective

(if this is later than 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 material change 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 material change (as defined in paragraph (b)(4) of this

section) in a contract is treated as the issuance of a new contract

with an issue date no earlier than the date the material change goes

into effect; and

(C) If a material change 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) Material change. (i) In general. For purposes of paragraph

(b)(3) of this section, except as provided in paragraph (b)(4)(ii) of

this section, a material change means--

(A) A change in the terms of a contract that alters the amount or

timing of an item payable by the 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 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 a material change:

(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) The addition, without an increase in premiums, of alternative

forms of benefits that may be selected by the policyholder;

(G) 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);

(H) The deletion of a rider or provision of a contract (often

referred to as an HHS rider) that prohibited coordination of benefits

with Medicare; and

(I) The effectuation of a continuation or conversion of coverage

right provided under a group contract following an individual's

ineligibility for continued coverage under the group contract.

(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.

[[Page 39]]

(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 a material

change in the 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 protection 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 protection provision does not

constitute a material change in the 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.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 97-33986 Filed 12-31-97; 8:45 am]

BILLING CODE 4830-01-U