Assurance From DOL Would Be Helpful, Practitioner Says at IRS Hearing on QLACs

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By Florence Olsen  

A Treasury Department proposal to create qualified longevity annuity contacts is necessary but insufficient to get employers to offer workplace retirement savings plans that also provide annuitized retirement income for workers, a representative of the Defined Contribution Institutional Investment Association testified at a June 1 regulatory hearing.

Employers remain concerned by a lack of assurance from the Department of Labor that it fully supports Treasury's proposed regulation, Drew Carrington, chair of DCIIA's Retirement Income Committee, told a panel of Treasury and Internal Revenue Service officials at the hearing.

“Simple clarity that the DOL concurs with the Treasury Department that these options are important and should be adopted in plans would go a long way to encouraging action on the part of plan sponsors,” Carrington said.

Hearing on REG-115809-11.

The focus of the hearing was a Treasury and IRS proposal (REG-115809-11) (22 PBD, 2/3/12; 39 BPR 218, 2/7/12) that would exempt deferred annuity contacts from required minimum distribution (RMD) rules under tax code Section 401(a)(9) if the contracts qualify for the exemption.

Practitioners testifying on behalf of the retirement plan industry asked the government to address portability, premium limits, and other aspects of the proposed regulation. Government officials expressed interest in improving the proposal and protecting individuals who might purchase qualified deferred annuities through Section 408 individual retirement accounts rather than through employer-sponsored Section 401(a) and 403(b) plans and Section 457 eligible governmental plans.

In his testimony, Carrington said it probably is unrealistic to expect DOL to issue safe-harbor guidance under the Employee Retirement Income Security Act as an incentive for employers to offer qualified longevity annuity contracts (QLACs) as described in REG-115809-11. However, he added, “any additional guidance that the adoption of in-plan annuity solutions, such as QLACs, does not entail plan sponsors' taking on some new and dangerous form of fiduciary responsibilities would be very helpful in encouraging them to move forward, with the support of their ERISA counsel.”

Portability Rules.

Carrington also suggested that Treasury and IRS modify the proposed regulation or issue future “portability” rules for lifetime income products that would spell out what should happen if plan sponsors decide to change recordkeepers or annuity investments.

Carrington said DCIIA members proposed that Treasury consider offering “distributable event” guidance that would protect current employees younger than age 591/2 who might want to roll over accumulated annuity purchases to an IRA if a plan sponsor or recordkeeper decided to drop a particular annuity option.

Without portability protections, Carrington said, plan sponsors will be reluctant to offer workplace retirement savings plans that also provide retirement income for workers, lest they “find themselves trapped in a recordkeeping or investment option that they no longer feel is appropriate for their plan.”

Treasury panelist J. Mark Iwry, senior adviser to Treasury Secretary Timothy F. Geithner and deputy assistant treasury secretary for retirement and health policy, questioned Carrington on his distributable-event suggestion.

Carrington said that certain forms of distributions before age 591/2 are permitted under current law and regulations, such as IRA rollovers under qualified domestic relations orders. “There may be a way to do it under the existing rules, but I'm not a lawyer or a legislator,” he said.

In his response, Iwry said that Treasury and IRS “would welcome input on the authority question from legal counsel who might see a path here … where things like QDRO distributions are provided for in the statute already.”

Premium Limit.

In other testimony, Treasury and IRS heard suggestions from practitioners on how the government might modify the regulation to make proposed premium limits for QLACs easier to enforce. Treasury's proposed regulation would cap the value of the premium payment for a QLAC, at the time of purchase, at 25 percent of an individual's aggregated account balance or $100,000, whichever is lower.

“We think a sensible way to approach this is to say that QLAC treatment will be available to the extent the [QLAC] requirements are satisfied,” said Seth J. Safra, a partner at the law firm Covington & Burling in Washington, who testified at the hearing on behalf of the ERISA Industry Committee. The first $100,000 investment would be eligible for special tax treatment as a QLAC, he said, and any dollars in excess of that amount would be included in the balance used to calculate minimum required distributions.

“It's pretty simple, we think, to calculate the part of the annuity that can be eligible for QLAC treatment,” Safra said. “You can take the maximum amount that can be contributed, divided by the amount that was actually invested in the contract, and that percentage of the contract can be treated as the QLAC,” he said.

Over the Limit.

“Are you advocating that, as a correction, if I want to spend $500,000 on my longevity annuity, we should have a rule that allows you to get QLAC treatment for $100,000 of it and non-QLAC treatment for the other $400,000?” Harlan M. Weller, senior actuary in Treasury's Office of Tax Policy, asked Safra.

Yes, ERIC's proposal would preclude the need for correcting premium overpayments, Safra said.

Employers can correct Section 401(a)(9) errors voluntarily under the Employee Plans Compliance Resolution System, so there would be no need for a new correction program for QLACs, said Victoria A. Judson, division counsel/associate chief counsel in IRS's Tax Exempt and Government Entities Division. However, if ERIC is proposing a different correction standard for QLACs, “then there is the question of how do you structure it and communicate it to people,” she said.

IRA Concerns.

“Particularly in the IRA area, where so much of the burden of compliance is placed on individual people who don't have the expertise, it's helpful to think about how that's done,” Judson said. “There already are quite a lot of errors in how people apply the current IRA rules, and we wouldn't want to create another situation” that might result in widespread unintentional errors, she said.

Iwry added that Treasury and IRS would be interested in hearing from the insurance industry about the feasibility of “that kind of continuous bifurcated product,” in which $100,000 would be qualified and amounts in excess of $100,000 would be nonqualified.

“Would that be commercially feasible?” he asked. “Would the foot faults be too risky? Would too many people, particularly in IRAs, really not get the fact that the amount above $100,000 is not exempt from the (a)(9) base, and then find they are not making their (a)(9) RMDs?”

Judson again raised concerns about IRAs in response to testimony that insurance companies should be permitted to use group annuity contract certificates to inform participants that certain annuity contracts are qualified longevity contracts and that IRA service providers could not monitor compliance with premium payment limits for QLACs.

In most contexts, individual IRA owners have the burden of ensuring that they are meeting all the tax rules, Judson said. “When we add a new rule that may have complicated elements and service providers will say, 'We can't monitor those rules because they're based on aggregated IRAs, and we don't know what other IRAs people have,' that then leads us to put in rules that make an individual do that work, and that's a concern for us,” she said.

By Florence Olsen  

Texts of oral testimonies are available for Jay Haines, on behalf of the American Benefits Council,; Seth Safra, on behalf of the ERISA Industry Committee,; Michael Oleske, on behalf of the Insured Retirement Institute,; and James Szostek, American Council of Life Insurers. Other testimony from the June 1 hearing will be posted at