IRS Finalizes Regulations on Use of QLACs

By Kristin Norberg, ASA, MAAA, Chicago

Editor: Michael Dell, CPA

Employee Benefits & Pensions

The IRS issued final regulations (T.D. 9673) relating to the use of longevity annuity contracts in tax-qualified contribution plans under Sec. 401(a), Sec. 403(b) plans, individual retirement annuities and accounts (IRAs) under Sec. 408, and eligible governmental plans under Sec. 457(b). The final regulations apply to contracts purchased on or after July 2, 2014.

The final regulations modify the required minimum distribution (RMD) rules to enable qualifying longevity annuity contracts (QLACs) to be used within qualified retirement plans. The new rules provide that longevity annuity payments will not be required to begin prematurely, thus adding flexibility to retirement planning and helping to protect individuals from outliving their savings.


The final regulations amend regulations under Secs. 401(a)(9), 403(b)(10), 408(a)(6), 408(b)(3), 408A(c)(5), and 6047(d). Generally, an employee must begin to draw on a qualified retirement plan by April 1 of the calendar year following the later of the year he or she reaches age 70½ or the year he or she retires (Sec. 401(a)(9)). If distribution of the entire interest has not occurred by such required beginning date, the participant's entire interest must be distributed over the life of the participant or over the lives of the participant and a designated beneficiary (Sec. 401(a)(9)(A)).

The RMD rules applicable to defined benefit plans and to annuity contracts under defined contribution plans are found in Regs. Sec. 1.401(a)(9)-6. Under paragraph A-12, the regulations required that if an annuity contract held under a defined contribution plan has not yet been annuitized, the interest of the employee or beneficiary under that contract is treated as an individual account for purposes of Sec. 401(a)(9) and, therefore, the value of the contract is included in the account balance used to determine RMDs from the employee's account. Generally, for contracts that have been annuitized, the periodic annuity payments may not increase over time and must satisfy the minimum distribution incidental benefit requirement under Sec. 401(a)(9)(G).

The RMD rules generally also apply to other types of retirement plans and accounts in accordance with regulations under Secs. 403(b), 408(a)(6), 408(b)(3), 408A(c)(5), and 457(d)(2), with certain modifications.

In its preamble to the new final regulations, the IRS explains that the underlying proposed regulations (REG-115809-11) issued in early 2012 were published in response to public comments urging the IRS to facilitate the purchase of deferred annuities that begin at an advanced age. Those regulations proposed to exempt QLACs from the RMD rules. Public comments on REG-115809-11 led the IRS to make certain changes now reflected in the final regulations.

Final Regulations

Incorporating in the final regulations some of the recommendations from comment letters, the IRS has expanded several aspects of the permitted longevity annuities. Key changes made in the final regulations include:

  • Increasing the maximum permitted investment in a QLAC: Plan participants and IRA owners will be able to use up to the lesser of (1) 25% of their account balance, or (2) $125,000 (increased from $100,000 as set forth in the proposed regulations) to purchase QLACs. The dollar limit will be adjusted for cost-of-living increases in $10,000 increments (rather than $25,000 increments under the proposed regulations). As in the proposed regulations, the IRA premium limitations are applied in aggregate across all IRAs (other than Roth IRAs) held by the individual.
  • Allowing "return of premium" death benefit: A longevity annuity in a qualified plan or IRA can now provide that, when the retiree who purchased the longevity annuity dies, any premiums he or she has paid but not yet received as annuity payments will be paid to his or her designated beneficiary. This return-of-premium death benefit may apply whether or not the retiree had begun receiving annuity payments. (The earlier regulations proposed, instead, that a beneficiary would be permitted to inherit only a life annuity after the retiree's death.)
  • Providing corrective procedures for inadvertently exceeding premium limits: Individuals who inadvertently exceed the 25% or $125,000 limits on premium payments may now correct the excess without disqualifying the annuity purchase. (The proposed regulations would have treated the entire contract as not being a QLAC if the premium payments had exceeded the limits.)
  • Allowing QLAC language to be included by rider or endorsement: A QLAC now may be issued by adding to an existing contract an insurance certificate, rider, or endorsement expressly stating that the contract is intended to be a QLAC. (Under the proposed regulations, longevity annuity contracts would have qualified only if they were originally created as QLACs.)

The final regulations also require that QLACs commence distributions no later than when the retiree reaches age 85; this maximum age may be adjusted via published guidance to reflect changes in mortality. Prior to annuitization, the value of the QLAC is excluded from the account balance used to determine RMDs.

The IRS asserts in the preamble that "because the purpose of a QLAC is to provide an employee with a predictable stream of lifetime income a contract should be eligible for QLAC treatment only if the income under the contract is primarily derived from contractual guarantees." Thus, a QLAC does not include a variable contract, equity-indexed contract, or similar contract because "variable annuities and indexed contracts provide a substantially unpredictable level of income to the employee."

The final regulations also prescribe annual reporting requirements under Sec. 6047(d), requiring anyone who issues a contract that is intended to be a QLAC to file annual reports with the IRS. These annual reports will be used to inform plan administrators and employees that the contract is intended to be a QLAC, so that appropriate dollar and percentage limitations may be applied and to help the IRS administer the QLAC exception to the RMD rules. An issuer must comply with these reporting requirements beginning with the year in which premiums are first paid and ending with the year in which the employee reaches age 85 or dies. The requirement applies to contracts purchased on or after July 2, 2014.


In the Treasury news release accompanying the final regulations, J. Mark Iwry, Treasury deputy assistant secretary for retirement and health policy, was quoted as saying that "all Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings" and that "longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live."

The issuance of the final regulations should enable individuals to make greater use of QLACs as part of a retirement plan, providing longevity protection at an affordable price. Additionally, insurers will now have greater certainty about the individual tax treatment of QLACs and will be much more likely to offer the product to both IRA owners and institutional clients. (For more on QLACs and a discussion of the new regulations, see "Retiree Tax Planning With Qualified Longevity Annuity Contracts," (The Tax Adviser, November 2014).)


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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