IRS issues final regs on purchase of longevity annuity contracts by plans

The IRS has issued final regulations relating to the purchase of longevity annuity contracts under defined contribution plans, 403(b) plans, IRAs, and eligible governmental section 457 plans. The final regulations modify the minimum distribution rules in order to facilitate the purchase of deferred annuities that begin at an advanced age. The regulations apply to contracts purchased on or after July 2, 2014.

Note: A longevity annuity (sometimes referred to as “longevity insurance” or a “deeply deferred annuity”) is an income stream that begins at an advanced age, such as age 80 or 85, and continues as long as the individual lives. Purchasing such annuities can help participants hedge the risk of drawing down their benefits too quickly and thereby outliving their retirement savings. The regulations are designed to make longevity annuities accessible to 401(k) plans and other employer-sponsored individual account plans and IRAs by amending the required minimum distribution rules so that longevity annuity payments will not need to begin prematurely in order to comply with those rules.

“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live,” said J. Mark Iwry, Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy.

Qualifying longevity annuity contracts

The regulations apply to contracts that satisfy certain requirements, including the requirement that distributions commence not later than age 85. Prior to annuitization, the value of these contracts, referred to as “qualifying longevity annuity contracts” (QLAC) is excluded from the account balance used to determine required minimum distributions.

Under the final regulations, the dollar limit on premiums paid for a QLAC is $125,000, an increase from the $100,000 limit specified in the proposed rules. The final regulations continue to provide that no more than 25% of the account balance may be used to pay premiums. Inflation adjustments to the dollar limit are to be made in $10,000 increments (rather than $25,000 as provided in the proposed rules).

The specified annuity starting date must be no later than the first day of the month next following the employee’s attainment of age 85. The final regulations provide that this age maximum may be adjusted to reflect changes in mortality.

The IRS has provided a corrections method for excess premiums. The excess premium must be returned to the non-QLAC portion of the employee’s account by the end of the calendar year following the calendar year in which the excess premium was paid. The excess premium may be returned to the non-QLAC portion of the employee’s account either in cash or in the form of an annuity contract that is not intended to be a QLAC. If a contract at any time fails to be a QLAC for reasons other than exceeding the premium limits, the contract will not be treated as a QLAC beginning on the date of the first premium payment for that contract.

A QLAC may offer a return-of-premium feature that is payable before and after the employee’s annuity starting date.

The final regulations provide that when the contract is issued, an employee must be notified that the contract is intended to be a QLAC. However, this requirement will be satisfied if the language is included in the insurance certificate, rider, or endorsement with respect to the contract.
Specific rules apply to QLACs purchased under IRAs, 403(b) plans, and 457(b) plans. Disclosure and annual reporting requirements also apply to QLACs.

When the regs apply

These regulations apply to contracts purchased on or after July 2, 2014. If on or after July 2, 2014, an existing contract is exchanged for a contract that satisfies the requirements to be a QLAC, the new contract will be treated as purchased on the date of the exchange and therefore may qualify as a QLAC. In such a case the fair market value of the contract that is exchanged for a QLAC is treated as a premium that counts toward the QLAC limit.

Source: 79 FR 37633, July 2, 2014.
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