Prop. Regs. Would Ease Required Minimum Distribution Rules for Older Retirees Who Purchase Certain Annuities

The IRS issued proposed rules (REG-115809-11) that would permit IRA participants to enter into contracts for annuities that begin at an advanced age (often called longevity annuities), using a certain amount of their account balances without having these amounts count for calculating required minimum distributions from the IRAs under Regs. Sec. 401(a)(9)-6. The rules would allow participants in 403(b) and eligible governmental 457 plans as well as IRAs (but not Roth IRAs or defined benefit plans) to purchase these contracts, which would be called “qualifying longevity annuity contracts” (QLACs).

QLACs would allow participants to hedge against the risk of outliving their retirement savings. QLACs would be required to begin distributions no later than the month after the participant’s 85th birthday, but could provide for an earlier starting date. Participants would be permitted to exclude the value of the QLAC from the account balance that is used to determine required minimum distributions.

The premiums paid for the QLACs would be limited to the lesser of $100,000 (adjusted for inflation) or 25% of the participant’s account balance at the date of payment. If the premiums (which are added together if multiple contracts are purchased) exceed these amounts, the contracts would cease to be QLACs.

QLACs would be permitted to pay benefits after the death of the participant, but those benefits would be limited. If the sole beneficiary is a surviving spouse, the spouse is permitted to receive a life annuity, provided it does not exceed 100% of the annuity the participant received. If the surviving spouse is not the sole beneficiary, the payments are limited to an amount determined under Sec. 401(a)(9)(G).

Because a QLAC would often be purchased many years before its payments would begin, the proposed rules contain a reporting requirement not to the IRS, but to the participant. The reports must begin in the calendar year in which the premiums are first paid and end with the earlier of the year the individual for whom the contract was purchased turns 85 or dies. However, if the individual who dies has a surviving spouse as the sole beneficiary, reporting must continue until the year the spouse’s distributions commence or the spouse dies, if earlier.

The rules will apply only after they are published as final in the Federal Register. Until then, the existing rules under Sec. 401(a)(9) governing required minimum distributions continue to apply.