Qualified Longevity Annuity Contracts – Something New Under the Sun

Bruce Resnik, JD, CPA/PFS
Published Date:
Dec 1, 2014

On July 2, 2014, the Internal Revenue Service promulgated new regulations to the Internal Revenue Code which permitted the use of a new type of deferred annuity contract called a “Qualified Longevity Annuity Contract” (QLAC) to be used in conjunction with tax-qualified defined contribution plans and IRA’s. The purpose of the regulations was to make the purchase of lifetime annuities more attractive within retirement plans and help individuals to secure lifetime guaranteed monthly income no matter how long they live. (Federal Register, Vol. 79, No. 127/ Wednesday, July 2, 2014/ Rules and Regulations, pp. 37633 et seq.)

One of the biggest risks for individuals today is outliving their savings. Modern medicine has made our lifetimes longer than we once imagined. This improvement in longevity has a downside in that individuals could exhaust their savings and become indigent while they were still alive.

How can individuals guarantee that they will receive a monthly check for life? There are only three ways to receive such guaranteed income. The first is Social Security retirement benefits, and considering the state of the social security trust fund, that may not be a sure thing. The second is a defined benefit pension, but very few workers are covered by such pensions today. And the third is an annuity.

However, up to now, buying an annuity in a retirement plan or IRA has not been very common. The main reason for that is that the value of any annuity within a plan or IRA had to be included in the retirement plan’s total valuation for the purpose of computing annual required minimum distributions (RMD’s). Once an annuity is purchased, however, the funds are generally not retrievable for any purpose. The owner can only receive a stream of monthly payments which, depending on the annuity contract, either begin immediately or are deferred to the future.

As a result, a retiree might have to make RMD payments but have no liquid assets remaining in the plan or IRA to do so.

In order to encourage the purchase of annuities so that individuals could guarantee themselves income for the life, the Treasury Department developed the concept of a Qualified Longevity Annuity Contract or QLAC. If an annuity contract qualifies as a QLAC, the value of the annuity after it is purchased is not includible in the value of the plan or IRA for the purpose of computing annual RMD’s. However, an annuity must conform to several criteria in order to be classified as a QLAC.

The criteria are as follows:

  1. The premium for the QLAC must not exceed $125,000 or 25% of the value of the plan or IRA account balance (subject to future adjustment). If a retiree owns multiple IRA’s, their value may be aggregated for this calculation. The QLAC could be purchased within a single one of IRA’s held by the retiree.
  2. The annuity contract must begin to make lifetime payments to the retiree no later than the first day of the month next following the employee’s attainment of age 85 (although it could provide for earlier payments, provided they are guaranteed for the life of the retiree).
  3. The QLAC may, but is not required to, provide for a Return of Premium (ROP) feature which can be payable before or after the employee’s annuity starting date. This feature means that if the retiree dies before his monthly annuity payments begin, the premium he paid for the annuity will be paid to a designated beneficiary (if the retiree dies after the commencement of payments, the retiree’s beneficiary would be entitled to the difference between the premium paid for the annuity and the actual amount of the distributions the retiree received while living). While this feature is commonly found in many types of insurance contracts, it has not been common to find it for lifetime annuities. There is similar ROP treatment available if the QLAC provided for a spousal survivor benefit (provided the monthly spousal benefit does not exceed the monthly benefit that was received by the retiree.
  4. The annuity may NOT be a Variable Annuity Contract and may NOT be an Indexed Annuity Contract (but a QLAC can provide for cost of living adjustments)
  5. No access to any “cash value” or “cash surrender value” of a QLAC will be permitted.
  6. On issuance, the annuity must state that it is intended to be a QLAC.
  7. An annuity purchased into a Roth IRA will NOT be treated as a QLAC.
  8. An annuity purchased into a defined benefit plan will NOT be treated as a QLAC.

Because of the recent promulgation of these regulations, annuity companies are still in the planning stages when it comes to registering QLAC contracts with state insurance regulators and it remains to be seen how popular QLAC’s will be with retirees or with annuity companies.

Stay Tuned.

Bruce Resnik, JD, CPA/PFSBruce Resnik, JD, CPA/PFS, is a Senior Financial Advisor at Summit Financial Resources, Inc., an independent financial planning company, who concentrates on advising high net worth individuals and families. He is a member of the AICPA and NYSSCPA and a member of the Personal Financial Planning Committee of the NYSSCPA. He has authored a number of articles on financial planning and annuities for various professional publications. He is member of the bar of the State of New York and a graduate of Columbia Law School and Business School. His office is located in Manhattan and he can be reached at bresnik@sfr1.com or 212-675-7896.

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