IRS Hearing on Qualified Longevity Annuity Contracts
Key Topic: Practitioners offer suggestions for making qualified
longevity annuity contracts more attractive to plan sponsors.
Key Takeaway: Plan sponsors may be reluctant to offer QLACs without a
specific endorsement from DOL.
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.
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
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.”
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
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.”
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
“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.
“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.
Texts of oral testimonies are available for Jay Haines, on behalf of the
American Benefits Council, http://op.bna.com/pen.nsf/r?Open=foln-8uxsgx;
Seth Safra, on behalf of the ERISA Industry Committee, http://op.bna.com/pen.nsf/r?Open=foln-8uxseq;
Michael Oleske, on behalf of the Insured Retirement Institute, http://op.bna.com/pen.nsf/r?Open=foln-8uxshy;
and James Szostek http://op.bna.com/pen.nsf/r?Open=foln-8uxslb,
American Council of Life Insurers. Other testimony from the June 1 hearing will
be posted at www.regulations.gov.