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The 403(b) QLAC

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.

Here’s how it works: a participant can use up to 25% (or, if less, $125,000) of their 403(b) account balance to purchase a straight life annuity which becomes payable no later than age 85. If that annuity qualifies as a QLAC, the participant will not have to use the value of the annuity (which will effectively be the premium paid for it) in computing the required minimum distribution payments which may otherwise payable under the 403(b) contract after age 70½ (or after the later of the year of severance of employment, or age 70½ for non-grandfathered values).
A QLAC can be purchased and held within a plan, or it can be purchased by a plan and distributed to the participant, depending on plan design. The QLAC is really intended to be used in conjunction with a systematic withdrawal program from a participant’s account balance: the systematic withdrawal program will cover the retirement needs until the date the QLAC’s annuity payments begin.
There are some very specific rules governing the QLAC:
  • 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. 
    The QLAC seems to be in the 403(b) “sweet spot,” considering that 403(b) annuities were originally designed to provide lifetime income in the first place. As with all things 403(b), however, there are a few unusual twists when trying to put a QLAC in a 403(b) arrangement. Here are a few of the things to consider:
    • 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.
    QLACs can also be purchased as an IRA. It currently appears that this is where vendors are going with their initial products: to really do a QLAC, you will need to rollover funds into an IRA QLAC, as we are yet to see a 403(b) QLAC program.
    This really is just the first step in providing lifetime income from defined contribution plans. We should expect to see a number of further actions by the Treasury Department and the Department of Labor to encourage lifetime income.

    Robert J. Toth, Jr., is Principal at Toth Law.