Treasury Rolls Out Annuity Package

The Department of the Treasury and the Internal Revenue Service announced a package of four regulatory actions designed to encourage annuitization of defined contribution plan assets on February 2.  The actions are the result of a multi-year study that followed a joint Treasury-DOL request for information on lifetime income products.

The Department issued a proposed rule amending the minimum required distribution rules under I.R.C. Section 409 to greatly enhance the attractiveness of “longevity insurance.”  Longevity insurance is a plan investment in which an individual participant in an employer plan or an IRA invests in an annuity that does not begin payment for several years, until the participant reaches age 80 or 85, for example.  Under current law, the investment is subject to the minimum distribution rules, generally applicable on April 1 of the year after the participant reaches age 70 1/2, unless they are still working.  Therefore, required minimum distributions are required on an investment that the participant will not realize if they die before the annuity starting date.  

Under the proposal, an investment in a “qualified longevity annuity contract” or QLAC, is disregarded for purposes of calculating required minimum distributions.  QLAC premiums, in aggregate, cannot exceed the lesser of 25% or $100,000 of aggregate assets in plans and IRAs.  A QLAC must begin payments not later than age 85.  Payments are restricted to life annuities to the participant and any named beneficiary.  PSCA has long supported this effort.

In Revenue Ruling 2012-3 the IRS discusses how the joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA) rules apply when a deferred annuity contract investment is purchased in a defined contribution plan.  Under a general rule, the vast majority of defined contribution plans are not subject to these rules.  However, they do apply if a participant elects a payment of benefits in the form of life annuity.  In the situation described in the ruling, a participant invests in a deferred annuity contract that pays benefits in the form of life annuity on the annuity starting date, but the participant can elect, at any time before the starting date, to have a lump sum payment instead of the annuity payment.  The annuity payment includes a 50% joint and survivor provision. 

Under the ruling, the participant does not elect a life annuity as long as he or she can elect another form of payment, regardless of the annuity default payment in the deferred annuity.  The plan is not subject to the QJSA and QPSA rules until the participant “elects” the annuity by default at the annuity starting date.  

A proposed rule will facilitate partial annuitization in defined benefit plans.  Currently, partial annuities must be calculated using actuarial standards prescribed in section 417 of the I.R.C.  The rule will permit the plan to use its own standards.  

Finally, Revenue Ruling 2012-4 addresses a rollover from a defined contribution plan to defined benefit plan, for sponsors who offer both types of plans, where the rollover amount is annuitized.  The ruling sets out rules for calculating the annuity payment.  

Further Actions

Treasury Department officials stated that additional guidance should be expected this year.  One subject to be addressed is the treatment of guaranteed minimum withdrawal benefit products.  The Department of Labor, as part of the joint RFI on lifetime income products, plans to propose guidance on the provision of “annuity equivalents” for DC plan assets later this year.

What’s not on the agenda is fiduciary relief for plan fiduciaries when selecting annuity investments.  Failure to act on that front will continue to retard the willingness of plan sponsors to adopt these new products.