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CCH® PENSION — 02/16/12

IRS issues proposed regulations on purchase of longevity annuity contracts by plans

The IRS has issued proposed regulations relating to the purchase of longevity annuity contracts under defined contribution plans, 403(b) plans, IRAs, and eligible governmental section 457 plans. The proposed regulations are designed to open up the 401(k) and IRA market to longevity annuities by providing special relief from the minimum distribution requirements.

CCH 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 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. However, the required minimum distribution (RMD) rules can be an impediment to the utilization of such annuities. Under current rules, prior to annuitization, the value of the annuity must be included in the account balance that is used to determine RMDs. If the remainder of the account has been depleted, the participant might have to begin distributions from the annuity earlier than anticipated in order to satisfy RMD requirements.

Qualifying longevity annuity contracts

The proposed regulations would modify the RMD rules in order to facilitate the purchase of deferred annuities that begin at an advanced age. Prior to annuitization, the value of these contracts, referred to as "qualifying longevity annuity contracts" (QLAC) would be excluded from the account balance used to determine RMDs.

The proposed regulations would apply to contracts that met certain requirements, including the requirement that distributions begin not later than age 85. In addition, the premiums paid for the QLAC could not exceed the lesser of $100,000 or 25% of the participant's account balance on the date of the payment. The only permissible benefit payable after the participant's death would be a life annuity, payable to a designated beneficiary. Thus, a contract that provided for distribution for a certain period, or that provided for a refund of premiums after the participant's death, would not qualify as a QLAC. The proposed regulations provide that if the sole beneficiary of an employee under the contract is the employee's surviving spouse, the only benefit permitted to be paid after the employee's death is a life annuity payable to the spouse that does not exceed 100% of the annuity payable to the employee. If the employee's surviving spouse is not the sole beneficiary, the only benefit permitted to be paid after the employee's death is a life annuity payable to a designated beneficiary, the amount of which is not to exceed certain limits.

The definition of QLAC would also exclude certain other types of arrangements, such as a variable contract under Code Sec. 817, an equity-indexed contract, or a similar contract. The contract would not be allowed to provide any commutation benefit, cash surrender value, or other similar feature.

Specific rules would apply to QLACs purchased under IRAs, 403(b) plans, and 457(b) plans. Disclosure and annual reporting requirements would also apply to all QLACs.

Proposed effective date

The proposed regulations regarding reporting and disclosure requirements would be effective when the regulations are finalized. Otherwise, the regulations are proposed to be effective for contracts purchase on or after the date that final regulations are adopted and for determining RMDs for distribution calendar years beginning on or after January 1, 2013. The IRS advises that, until final rules are issued, taxpayers may rely on the proposed regulations and the existing rules under Code Sec. 401(a)(9) continue to apply.

Comments and hearings

Written or electronic comments on the proposed regulations are due by May 3, 2012. A public hearing has been scheduled for June 1, 2012.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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