Treasury, IRS Rules On In-Plan Annuities
September 24, 2014 by Rebecca Moore
On July 1, the Treasury Department and the Internal Revenue Service (IRS) issued final rules to make longevity annuities more accessible to the defined contribution (DC) and individual retirement account (IRA) markets. In short, the final rules ease certain minimum distribution requirements that have made it difficult for retirees to purchase and hold longevity annuity products without potentially jeopardizing the qualified status of their accounts.
Ken Nuss, founder of Annuity-Advantage, a no-load annuity provider in Medford, Oregon, sees the final rules as an opportunity for near-retirees to hedge against the distinct possibility of outliving their retirement savings. “Deferred income annuities function much like an individual pension plan, creating a lifelong and predictable income stream. For those concerned [about] beneficiaries, the final rules allow for a return-of-premium option, should the purchasing retiree die before-or after-the age when the annuity payments begin. Utilizing this option, the premiums he paid but had not yet received as annuity payments would be returned to his account upon death,” Nuss says.
According to AnnuityAdvantage, by codifying longevity annuity contracts in the federal tax regulations, the Treasury Department is signaling that retirement income security is a national priority. The rules permit investors to divert up to 25% or $125,000-whichever is less-of their retirement account balances into these vehicles, referred to as qualified longevity annuity contracts (QLAC).
Because the Treasury Department’s rules are designed to maximize retirement income security, only fixed annuities are approved as QLACs; variable and indexed annuities will continue to be subject to the same minimum withdrawal requirements as typical investment vehicles.
The Defined Contribution Institutional Investment Association (DCIIA) is now encouraging plan sponsors to take steps to provide lifetime income solutions to their retirement plan participants based on the new regulatory guidance. While the DCIIA supports regulators’ efforts to further more robust and broad-based adoption of lifetime income solutions in U.S. retirement plans, it says there is still more work to do. According to an association statement, “There is a real need for innovation in the development of new products and solutions to manage longevity risk.
“Having additional regulatory guidance in this arena would make it both easier and simpler to implement these solutions in qualified plans,” the DCIIA noted. “Such guidance can take many different forms, such as … interpretive guidance or information letters supporting different approaches or examples, without necessarily needing to rely on simplistic safe harbors that can have the unintended consequence of inhibiting innovation by creating fear that other potentially better approaches may be inherently ‘unsafe’ from a fiduciary perspective.”
The association calls on the defined contribution community-sponsors, consultants, Employee Retirement Income Security Act (ERISA) counsel, recordkeepers, investment managers, providers and insurance companies-to embrace the message behind these new regulations and to move toward more widespread adoption of additional tools for participants.