The IRS issued proposed rules ( REG-115809-11 ) that would permit IRA participants to enter into contracts for annuities that begin at an advanced age (often called longevity annuities), using a certain amount of their account balances without having these amounts count for calculating required minimum distributions from the IRAs under Regs. Sec. 401(a)(9)-6. The rules would allow participants in 403(b) and eligible governmental 457 plans as well as IRAs (but not Roth IRAs or defined benefit plans) to purchase these contracts, which would be called “qualifying longevity annuity contracts” (QLACs).
The proposed regulations were part of an initiative announced Feb. 2 by the IRS and the Department of Labor to broaden options and increase transparency in retirement plans. The initiative also includes a second set of proposed regulations (REG-110980-10) and two revenue rulings released simultaneously with the longevity annuity regulations.
The proposals are designed to make it easier for retirees to manage the risk that they will outlive their retirement savings and to receive their benefits in regular payments for as long as they live. A Treasury fact sheet says the nation’s private pension system is shifting from lifetime retirement income to lump-sum cash payments. Just 21% of the $11.2 trillion in private pension assets in 2011 was maintained in defined benefit plans; the rest was held in defined contribution plans and IRAs.
QLACs would allow participants to hedge against the risk of outliving their retirement savings. QLACs would be required to begin distributions no later than the month after the participant’s 85th birthday but could provide for an earlier starting date. Participants would be permitted to exclude the QLAC’s value from the account balance that is used to determine required minimum distributions.
The premiums paid for the QLACs would be limited to the lesser of $100,000 (adjusted for inflation) or 25% of the participant’s account balance at the date of payment. If the premiums (which are added together if multiple contracts are purchased) exceed these amounts, the contracts would cease to be QLACs.
QLACs would be permitted to pay benefits after the participant’s death, but those benefits would be limited. If the sole beneficiary is a surviving spouse, the spouse is permitted to receive a life annuity, provided it does not exceed 100% of the annuity the participant received. If the surviving spouse is not the sole beneficiary, the payments are limited to an amount determined under Sec. 401(a)(9)(G).
Because a QLAC would often be purchased many years before its payments would begin, the proposed rules contain a reporting requirement not to the IRS, but to the participant. The reports must begin in the calendar year in which the premiums are first paid and end with the earlier of the year the individual for whom the contract was purchased turns 85 or dies. However, if the individual who dies has a surviving spouse as the sole beneficiary, reporting must continue until the year the spouse’s distributions commence or the spouse dies, if earlier.
The rules will apply only after they are published as final in the Federal Register. Until then, the existing rules under Sec. 401(a)(9) governing required minimum distributions continue to apply.
Split options. The changes proposed in REG-110980-10 are designed to enable individuals to receive a portion of the plan benefit as a stream of monthly payments while taking the remainder in a single, lump-sum cash payment. The proposed regulations would encourage such “split options” by changing the minimum present value requirements for defined benefit plan distributions to permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form. Defined benefit plans would be allowed to apply actuarial assumptions on interest rates and mortality benefits only to the portion of the distribution being paid as a lump sum. The partial annuity portion of the benefit could be determined using the plan’s regular conversion factors.
These changes are proposed to become effective when finalized and would apply to distributions with annuity starting dates in plan years beginning after that date.
Rollovers and survivor beneficiaries. Rev. Rul. 2012-4 will allow employees receiving lump-sum cash payments from their employer’s defined contribution plan to roll over some or all of those amounts to the employer’s defined benefit pension plan, if the employer will allow it, in order to receive an annuity from that plan.
Rev. Rul. 2012-3 is designed to eliminate uncertainty about how 401(k) spousal protection rules apply when employees purchase deferred annuities from their plans. It describes how the Sec. 411(a) qualified joint and survivor annuity and Sec. 417 qualified preretirement survivor annuity rules apply when a deferred annuity contract is purchased under a profit sharing plan in certain specified situations.
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