The Internal Revenue Service (the “IRS”) has issued final regulations which will allow participants in a qualified defined contribution plan (e.g., profit sharing or 401(k))to purchase and hold qualified longevity annuity contracts (“QLACs”) in their accounts. A QLAC will pay lifetime benefits starting as late as age 85. It will thus will help the participant to defer funds and begin to receive a stream of income at a late age, and hopefully to not outlive his or her retirement income. The final regulations also provide rules for holding QLACs in traditional IRAs, 403(b) plans, and eligible government 457(b), although those rules are beyond the scope of today’s blog. The rules for QLACs do NOT apply to defined benefit plans. For a qualified defined contribution plan, the rules are as follows:
In General. A QLAC is an annuity contract which is purchased from an insurance company for a participant, and which meets the requirements set forth below:
Limitation On Premiums. The amount of the premiums paid for the QLAC under the plan on a given date cannot exceed the lesser of $125,000 or 25% of the employee’s account balance on the payment date.
Required Commencement Date. Distributions must begin by not later than the first day of the month next following the participant’s 85th birthday.
After Distributions Begin. After distributions begin, they must satisfy the requirements of Internal Revenue Code section 401(a)(9)(other than the requirement that annuity payments commence on or before the participant’s required beginning date) which apply to annuity contracts, such as the limitation on increasing payments.
No Cash-Out. The QLAC does not make available any commutation benefit, cash surrender right, or other similar feature, except it may allow a premium refund to a beneficiary.
Limited Death Benefits. No benefits are provided by the QLAC after the participant’s death, except benefits specifically permitted under the regulations, such as a life annuity payable to a beneficiary.
Statement Of QLAC Status. When the QLAC is issued, the QLAC contract (or a rider or endorsement) states that the contract is intended to be a QLAC.
Prohibited Features. The QLAC is not a variable contract under section 817 of the Internal Revenue Code, an indexed contract, or a similar contract, except as permitted by the IRS.
RMD Calculation. While not technically a requirement for being a QLAC, in determining the amount of a minimum required distribution from the plan, the participant’s account balance does not include the value of any LAC purchased on or after July 2, 2014 (the effective date of the regulations).