By Robert Toth Jr.
Lifetime income for 401(k) plans have been getting a lot of press, driven in large part by efforts by the U.S. Departments of Labor and Treasury to find ways to promote retirement security.
IRS took a substantial step in making these defined contribution lifetime income efforts become a reality with its publication in early July of the final regulations establishing the “Qualified Longevity Annuity Contract,” or QLAC. To even be able to publish this regulation, however, IRS had to resolve a number of technical issues related to the manner in which DC plans could provide lifetime income.
Treasury and IRS staff did just this, and quite practically. The final regulations even addressed some key market concerns, removing a couple of roadblocks that would have made QLACs difficult to provide.
For example, the QLAC can:
- have a return-of-premium feature;
- pay certain gains (which is important for some popular annuity products);
- remove potentially duplicative disclosure requirements; and
- permit insurance companies to use off-the-shelf annuity products without amending them (if the contract otherwise meets the QLAC annuity requirements) until 2016.
Agency staff also kept the QLAC simple (for example, no variable annuity contracts will qualify), thus keeping it very affordable.
The Real Story
Even though the establishment of the QLAC provides a good planning tool, and it does provide a modest tax benefit, that is not the real story here. The true impact of the QLAC regulation, and what makes it so very important, is that it establishes the foundation under tax law by which DC plans can simply annuitize.
So before you dive into the details of the QLAC (and we will do that, as will many others, over the coming months), let’s first turn to the tax rules that actually make lifetime income work in a DC plan.
You will need to understand what it takes to put an annuity into a plan, as well as what it takes to distribute an annuity from the plan. I invite you to read the preamble to the originally proposed QLAC rule, as well as Rev. Rul. 2012-3. Between these two pieces of guidance, you find some very basic instructions on how DC annuitization — even beyond QLACs — will work.
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