This article originally ran on June 2, 2015.
By Robert J. Toth, Jr.
The Treasury Department took a huge step into lifetime income when it issued it regulations creating qualified longevity annuity contracts (QLACs) to be provided by 401(a) plans, 403(b) plans, 457(b) governmental plans and IRAs.
What the QLAC does is remove a logistical problem caused when you purchase an annuity to provide lifetime income, while creating a minor tax break for participants electing to annuitize.
- It must be an annuity contract. Though a participant can take systematic withdrawals from their custodial account until the lifetime annuity kicks in, the QLAC itself can’t be the custodial account.
- The annuity contract itself must state that it’s a QLAC, beginning Jan. 1, 2016.
- There can be no account balance or surrender value (other than the return of premium), and the only death benefit is a lifetime annuity in favor of the joint annuitant. This means there can be no guaranteed minimum withdrawal benefits in a QLAC program; and that a 403(b) account balance — even if in a 403(b) contract-will need to be transferred to a QLAC for it to work.
- Payments must start no later than age 85, though earlier payment can be elected.
- The insurer must act as the administrator, and comply with “IRA-like” annual reporting obligations. The employer doesn’t have these reporting obligations. The annual report to the participant includes:
- information about the issuer, including contact information;
- information on the individual for who contract is purchased;
- if still part of the plan, plan information;
- starting date of annuity, if not yet commenced;
- for the year purchased, the amount of premium and date paid;
- total premiums paid for contract over time; and
- the fair market value of the QLAC at close of year.
- No Roth funds can be used to purchase the contract.
- For existing 403(b) individual annuity contracts, or certificates under a group contract, it does not appear that a new contract will actually need to be issued. It seems like the insurer can issue a rider to an existing contract which provides that a portion of the account balance can be used to partially annuitize the contract. This, however, will be the choice of the vendor.
- Where the vendor will require a rollover to another contract, there can be issues for those 403(b) contracts which have been distributed from a plan: a vendor may be reluctant to do so for these contracts, given the 403(b) tax regulation requirements of employer control. If there is no employer, the vendor may not be willing to arrange for a QLAC.
- An employer’s approval of a 403(b) QLAC may trigger ERISA status for a non-governmental, non-ERISA plan.
- The 403(b) plan document will need to provide for a QLAC, to the extent that the 403(b) contract still is in the plan.
Robert J. Toth, Jr., is Principal at Toth Law.