Expert Explains Five Issues Raised by IRS’ Guidance on Lifetime Annuity Contracts

In this post, we reported on new IRS proposed rules on purchasing qualified lifetime annuity contracts (QLACs) under certain retirement plans. Recently in his blog, an industry expert provided more details on the guidance’s significance.

In his blog the Business of Benefits, Attorney Robert Toth Jr., explains how:

With just a relatively short regulation and a Revenue Ruling, Treasury simply and in a very straightforward way laid out the definitive structure for defined contribution plans (like 401(k) plans) to start providing lifetime income in a market friendly manner.

Here’s a brief overview of what Toth says are the five significant issues that the IRS regulation, as well as the related Revenue Ruling, 2012-3 on spousal consent, raise:

1. Lifetime income as an investment. The QLAC and revenue ruling “both confirmed a critical point: that the annuity contract can be treated as a plan investment, rather than a plan benefit. They both made it clear that the purchase of the product could be a plan investment, rather than as for funding a benefit feature under a plan design. It is a critical distinction.”
2. Spousal rights. “Though the annuity purchase may be an investment, and not a benefit structure, [the revenue ruling] and QLAC clarified that spousal rights will still apply on distribution of funds from the annuity (even if the annuity is distributed from the plan) and described the manner in which those rights will be applied.”
3. Annuity starting date. “In outlining spousal rights, [the revenue ruling] -3 also provided us with a sensible definition of annuity starting date. Effectively, it is the payment date on which a contract payment can neither accelerated or commuted. … This will serve the plan in many ways, including making possible sane application of the manner in which QDROs and the like will apply, as well as the manner in which a required minimum distribution is computed.”
4. Forfeiture. “[T]reasury and the IRS made it clear that, once the benefits are purchased, they can only be forfeited by death (and, then, only if the spouse is protected or given the right to waive), and otherwise subject to the 401(k) rules. This may create portability issues but there are better ways to address that issue than allowing forfeiture. …”
5. Reporting and disclosure. “A QLAC requires IRA type of reporting, and a new participant disclosure. This is probably the most striking of the new rules: the concept actually enables structural solutions to a number of other problems,” including the ability to enable contract consolidation after leaving the plan.

Toth’s full post on the subject can be found here. Toth will also provide a detailed analysis on the guidance as a contributing editor to The 403(b)/457 Plan Requirements Handbook, published by Thompson Publishing Group.