The IRS issued guidance regarding lifetime income options to help participants structure their retirement plan distributions to help ensure that they don’t run out of money. The guidance includes:
- A revenue ruling clarifying rules for defined contribution plans that offer lifetime income options,
- A revenue ruling clarifying rules that apply to rollovers into defined benefit plans,
- Proposed regulations that would provide guidance for plans offering longevity annuity options, and
- Proposed regulations that make it easier for employers to distribute a partial lump sum payment from a defined benefit plan
At the same time the Council of Economic Advisers to the Executive Office of the President issued a report title Supporting Retirement for American Families.
Impetus for the Guidance
The change in the retirement plan landscape coupled with increased longevity can result in people outliving their assets. Traditional defined benefit plans have been frozen and replaced by account based defined benefit hybrid plans such as, for example, cash balance plans. In some cases, tradition defined benefit plans have been terminated leaving the defined contribution such as a 401(k) plan as the only source of retirement income. Lump sum distributions are a popular participant choice in both the hybrid defined benefit plan and defined contribution plan. Increasing life spans place many participants in the position of potentially running out of money during retirement.
Brief Overview of the Guidance
Qualified longevity annuity contract (QLAC)
First and foremost the QLAC regulations are proposed and cannot be relied upon until final. The IRS is requesting comments by May 3, 2012.
The QLAC would enable a participant to take a portion of their distribution (lesser of $100,000 or 25% of the participant’s account balance less any QLAC premiums previously paid) and purchase an annuity payable at a later age, e.g. 85. The value of the QLAC would be excluded when calculating required minimum distributions.
There are a number of requirements including reporting and disclosure requirements. The concept is interesting but the “devil is in the details”. Employers considering the option should carefully review the proposed regulations, submit comments if desired and stay tuned for the final regulations.
Proposed regulations regarding partial annuity distribution options under defined benefit plans
The proposed regulations aim to simplify the treatment of forms of benefit that are part annuity and part lump sum (or other accelerated form of distribution). The preamble to the proposed regulation provides
“The primary impact of this proposed change would be to make it simpler and easier for a plan to offer an optional form of benefit that is a combination of a single-sum payment and an annuity. Allowing a plan to apply a bifurcated approach would permit the plan to use the section 417(e)(3) assumptions for the single-sum portion of the optional form and its usual annuity equivalence factors for the annuity portion (rather than being required to make a special calculation of the annuity portion using the section 417(e)(3) assumptions).”
The proposed regulations cannot be relied upon by plan sponsors until finalized.
Survivor Annuity requirements related to annuity contracts in defined contribution plans
Revenue Ruling 2012-3 discusses how the QJSA and QPSA rules apply to a deferred annuity contract purchased under a profit sharing plan in three different situations. Of note, the Revenue Ruling indicates that in all three situations because the plan separately accounts for the deferred annuity contract, the remainder of the plan is not subject to the QJSA and QPSA rules.
Rollovers from defined contribution plans into defined benefit plans
Revenue Ruling 2012-4 discusses issues relating to a rollover from a qualified defined contribution plan to a qualified defined benefit plan to obtain an additional annuity. The benefit paid from the amount rolled into the defined benefit plan is determined as the actuarial equivalent of the amount rolled from the defined contribution plan using the applicable interest rate and mortality table under §417(e).
What should Plan Sponsor do now?
Carefully review the guidance and work with your consultant/attorney and determine if it works for your situation. As you study guidance you may want to consider commenting on any open or unclear issues.
You may want to check our new blog periodically for quick updates on compliance issues.
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
