The federal government helped broaden the choices for those shopping for lifetime income options in retirement by modifying the required minimum distribution rules for various types of plans in newly released final regulations on qualifying longevity annuity contracts.
The final rules (T.D. 9673, RIN 1545-BK23), issued July 1 by the Treasury Department and Internal Revenue Service, modify the required minimum distribution rules to allow for the purchase of deferred annuities that start at an advanced age, such as 80 or 85.
“We've amended these required minimum distribution rules to make room for longevity annuities, deeply deferred income annuities, by providing that if the annuity is payable not later than age 85, meets certain conditions, it gets to be taken out of the equation for calculating the required minimum distribution rules,” J. Mark Iwry, senior adviser to the Treasury secretary and deputy assistant secretary for retirement and health policy, said July 1 while unveiling the final rules during the Insured Retirement Institute Government, Legal & Regulatory Conference 2014.
The change will make it easier for retirees to consider using lifetime income options, Treasury said in a July 1 news release on the final rules.
“Instead of having to devote all of their account balance to annuities, retirees who wish to follow a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments will be able to do so,” Treasury said.
The rules largely are similar to the proposed rules issued Feb. 2, 2012, but are expanded in several areas in response to public comments, Treasury said in the release.
The final rules apply to plans covered by tax code Section 401(a), as well as Section 403(b) plans, individual retirement annuities and individual retirement accounts under Section 408, and eligible governmental plans under Section 457(b).
Under the final rules, the maximum permitted investment individuals can use to purchase qualifying longevity annuity contracts without worrying about noncompliance with the age 70-1/2 minimum distribution requirements is 25 percent of their account balance, or $125,000, whichever is less, Treasury said. The $125,000 limit is up from $100,000 in the proposed rules. The $125,000 limit will increase with inflation in $10,000 increments, unlike the $25,000 increments set out in the proposal.
The final rules also provide that if excess premiums are made to a QLAC, it won't fail to be a QLAC if the excess premiums are returned to the non-QLAC portion of the employee's account by the end of the calendar year that the excess premiums were paid, Treasury said.
In addition, longevity annuities or IRAs are permitted to provide a “return of premium” feature that would return to a retiree's account premiums paid but not received as annuity payments if a retiree purchasing an annuity dies before or after the age that an annuity begins, the rules said.
This feature “may appeal to individuals seeking peace of mind that if they die before receiving the annuity, their initial investment can go to their heirs,” Treasury's statement said.
Iwry said this provision is a direct response to comments that told Treasury it would be easier to sell annuities to people “if we can deal with the getting-hit-by-the-bus problem.”
In addition, the final rules broaden how those selling annuities can meet the requirement of informing employees that a contract is intended to be a QLAC. In the proposed rules, that requirement had to be met in the contract. Under the final rules, it can be met through such alternatives as a statement in an insurance certificate, a rider or an endorsement related to the contract, Treasury said.
Excerpted from a story that ran in Pension & Benefits Daily (07/02/2014).
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)