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Practice Management

Lifetime Income’s QPDA and the IQPA

Robert Toth

A title like this one was bound to happen; and I was tempted to publish it on April Fool’s Day — except that it’s really not a joke.

Where it comes from is the simple fact that any DC lifetime income program (ok, why not, let’s use the acronym DCLIP while we’re at it) that guarantees lifetime income needs to have the ability to make an “in-kind” distribution of an annuity contract, whether that be a certificate under a group annuity contract or an actual individual annuity contract. This is because the transfer of any actual guaranteed income rights which may have been accumulated under a DCLIP must (currently) involve insurance somewhere in the chain of things, and an insurance company can only embody those rights in an insurance contract. The transfer of these insurance contract rights is accomplished by way of an “in-kind” distribution/transfer from the plan of the contractual rights under the DCLIP to an IRA of some sort, as a rollover; or by a distribution directly to the individual of those contractual rights in the form of an annuity.

These distributed annuities are generally referred to as the qualified plan distributed annuity” (or the QPDA), though they may operate under various other names: Section 109 of SECURE 1.0 refers to them “qualified plan distribution annuity contracts”; 1.401(a)(31)-1 Q17 refers to them as “qualified plan distributed annuity contracts”; Revenue Ruling 2011-7, for 403(b) plans, refer to them as “fully paid annuity contracts.” The keys under the QPDA is that it is not a rollover to an IRA; the distributed contract retains the salient characteristics of the plan from which it was issued; and its distribution is not a taxable distribution from the plan.

Where the annuity contract had been previously purchased and (and held) by the plan as an investment, the subsequent distribution of the annuity as a QPDA is not a typical financial transaction on the books of the insurer. The ownership of the contract is merely transferred from the plan to the former plan participant.

Therein lies the rub for the Independent Qualified Public Accountant (IQPA), which audits the books of the plan: there does not appear to be a well-developed, standardized protocol in the auditing process under which the QPDA distribution can be verified as compliant with auditing standards. It is not that the insurer is not willing to certify that the distribution of the annuity contract has occurred, or that the distribution was appropriate and made in accordance with the plan’s governing documents. Instead, it becomes a point of “discussion” with the auditor as to what is an acceptable confirmation of the process. Especially as these distributions become more common, as I fully expect them to be, I would hope that the auditing profession develops a sensible standard upon which we can all reasonably rely to document the validity of the distribution.

Robert Toth is Principal at Toth Law and Toth Consulting.

Used by Permission. The original is here

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.