IRS Releases Special Rule to Allow Plans To Include Deferred Annuities in TDFs


The Internal Revenue Service added another piece to the lifetime income puzzle by releasing guidance enabling defined contribution plans to offer target date funds that include deferred annuities among their assets.         

Notice 2014-66, issued Oct. 24, is another part of the lifetime income project that the Treasury and Labor Departments have undertaken and is designed to expand the use of income annuities in 401(k) plans.         

“Treasury is working to expand the availability of retirement income options for working families. By encouraging the use of income annuities, today's guidance can help retirees protect themselves from outliving their savings,” J. Mark Iwry, Treasury Department deputy assistant secretary for retirement and health policy, said in a news release about the notice.         

In July, the IRS and Treasury issued final regulations (T.D. 9673, RIN 1545-BK23) allowing for the purchase of deferred annuities that start at an advanced age, such as 80 or 85, by modifying the required minimum distribution rules.         

The DOL has been developing guidance that would require that pension benefit statements for defined contribution plans include lifetime income illustrations.         

The new guidance sets out four conditions plans must meet if they want to provide target date funds “restricted to participants in particular age-bands,” while also satisfying nondiscrimination requirements.         

“The importance of the lifetime income in our view stems from the fact that we have had in our pension system, as we know, a shift over time toward lump sum payments. People are getting more and more cash payouts and we don't see the prevalence of lifetime income or annuities that we once had in our system,” a senior Treasury official said on a call with reporters about the new guidance.

Jan Jacobson, senior counsel for retirement policy at the American Benefits Council in Washington, said Oct. 24, “The guidance will certainly make it easier to provide this for plan sponsors and we are hearing of some interest.” 

Excerpted from a story that ran in Pension & Benefits Daily (10/24/2014).