Over the past couple of years, regulations have made it easier to use QLACs in qualified retirement plans. The IRS offers greater tax breaks and consumers can guarantee lifetime income from part of their retirement savings. But Qualified Longevity Annuity Contract use in retirement plans has not taken off like some experts forecasted that it would. In a recent article for Plan Sponsor, Rebecca Moore discussed how “Groups Ask for More Guidance About QLACs.” A number of groups worked together to send a letter to the IRS asking them to clarify some of the details regarding QLAC use in qualified retirement plans. The eight groups, led by the American Benefits Council, also included The Insured Retirement Institute, Morningstar, Inc., State Street Global Advisors, Committee on Investment of Employee Benefit Assets, Hueler Companies, Inc., Committee of Annuity Insurers, and NISA Investment Advisors LLC.
The groups asked the IRS for two specific things to be included in their 2016-2017 Priority Guidance Plan. The first is in regards to how the premium limitations apply if someone is buying their QLAC through a direct rollover from a qualified retirement plan because their plan doesn’t actually offer a QLAC option. The second clarification the groups requested is in regards to what happens if a QLAC is purchased with spousal benefits but the owner gets a divorce. The groups say that the regulations are not clear about what happens in these specific scenarios and they would the like the IRS to specifically address them this year.
Studies have shown that QLACs help increase retirement readiness for Americans that live long. Unfortunately, most defined contribution retirement plans still don’t offer QLAC options. That means that the employees in the DC plans have to rollover their money into an IRA in order to purchase a QLAC. These products are easy to find in the IRA marketplace. Many people are choosing to do this so that they can guarantee lifetime income with part of their retirement savings from a Qualified Longevity Annuity Contract. The IRS limitations from the 2014 regulations are 25% of the total value or $125,000, whichever is higher. That is the amount that will not be subject to required minimum distributions starting at age 70 1/2. The eight groups questioned the IRS about whether the limitations apply to the total balance in the defined contribution plan or in the IRA after the money is rolled over. They said that if the limitations are based on the IRA account balance, the overall transaction would be more complicated and delayed. An example is given in the Plan Sponsor article. The groups are asking the IRS to simply clarify that the limits are based on the DC plan balance, not the IRA the money could be rolled into in order to purchase a QLAC.
In regards to the beneficiary issue that arises in the case of the divorce, the groups are asking for additional clarification. It is unclear whether the beneficiary status of spouse applies to whether the person was a spouse upon the purchase of the QLAC or when the payments begin or the owner dies. The reason this matters is because the beneficiary could be deemed impermissable, which would cause great tax consequences. The groups hope the IRS will clarify that the beneficiary will still be permissable even if a divorce occurs after the initial contract is issued. They say that this is the same way divorce is treated with minimum distribution regulations and would keep QLAC guidelines in line with other product guidelines.
The 2014 regulations making it more beneficial to use QLACs to create a guaranteed income stream from your defined contribution plans were meant to help consumers create a successful retirement plan. Eight industry groups are seeking additional clarification regarding the use of QLACs within retirement plans.
Written by Rachel Summit