Pursuant to its initiative to encourage retirement plans to offer better lifetime income options (see my blog of last Tuesday), the Internal Revenue Service (the “IRS”) has issued proposed regulations relating to the purchase of longevity annuity contracts by tax-qualified defined contribution plans under section 401(a) of the Internal Revenue Code (the “Code”), section 403(b) plans, IRAs under section 408 of the Code, and eligible governmental section 457 plans. What is a longevity annuity contract? It is a contract that allows a plan participant or IRA owner to apply a portion of his or her account balance under the plan or IRA to the acquisition of a life annuity under which payment starts at an advanced age, e.g., age 85 or older, should the participant or owner live to that age.
These proposed regulations are intended to provide guidance necessary in order for a longevity annuity contract to comply with the required minimum distribution (“MRD”) rules under section 401(a)(9) of the Code. The proposed rules say that an annuity which costs no more than 25% of the participant or IRA owner’s account balance (or $100,000, if less), and which will begin at age 85, is disregarded in calculating the annual MRD, until the annuity payment begins.To qualify for this treatment, the annuity must meet certain limits on cash-out options and death benefits in order to ensure that it is used only to protect the participant or IRA owner from outliving his/her assets and to make it as inexpensive as possible.
The regulations would affect individuals for whom a longevity annuity contract is purchased under these plans or IRAs (and their beneficiaries), sponsors and administrators of these plans, trustees and custodians of these IRAs, and insurance companies that issue longevity annuity contracts under these plans and IRAs. However, until the regulations are finalized, taxpayers may not rely on the rules set forth in the proposed regulations.