IRS finalizes regulations on use of QLACs.

• Author: Dell, Michael
• Position: Qualifying longevity annuity contracts

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 (RIVID) 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.

Background

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 701/2 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 R1VIHD 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 RIVIDs 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...