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Mar 2012
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March 16, 2012

What Was Once Old Is New Again: IRS Encouraging Lifetime Retirement Income


Although defined contribution plans such as 401(k)s have been the dominant form of retirement plan for several decades, some aspects of the nearly extinct pension plan concept are getting a second look. The increasing risk of retirees outliving their retirement income has resulted in the IRS revisiting ways to help retirees enjoy a guaranteed income revenue stream until death, much like defined pension plans that were common before Americans jumped aboard the 401(k) roller coaster.

To encourage lifetime retirement income distribution options, the IRS has issued proposed regulations and additional guidance:
 
  • Longevity Annuity Contracts in a Defined Contribution Plan. The proposed regulations provide relief from the required minimum distribution rules for participants who use a portion of their account balance to purchase a deferred lifetime annuity. The lifetime annuity would begin at a specified advanced age (such as 80 or 85) and guarantee retirement income until death. The value of the annuity would be excluded from the account balance when determining the participant’s required minimum distribution at age 70 1/2.

    And of course, the IRS created a new acronym for this type of annuity. A “QLAC” is a qualified longevity annuity contract and must satisfy numerous requirements specified in the proposed regulations, including the amount of an account that can be used to purchase the QLAC and when payments may begin. A QLAC is not to be confused with a QJSA, QPSA, QOSA, QDRO, QMSCO or QDIA, but who could get those confused, right?
     
  • Partial Annuities in Defined Benefit Plans. The proposed regulations would make it easier for a defined benefit plan to offer distribution partially in an annuity form and partially in a lump-sum payment.
     
  • Defined Benefit Annuities Funded by Defined Contribution Rollovers. The IRS issued a ruling to encourage employers who sponsor both a defined contribution plan and a defined benefit plan to allow participants to roll a distribution from the defined contribution plan into the defined benefit plan to increase the annuity paid from the defined benefit plan. Such a rollover is permitted under current rules, but the IRS provided additional clarification on how this process may work in various situations to eliminate some concerns that the retirement plan community may have regarding these types of rollovers. This ruling is effective for rollovers starting in 2013, but may be relied upon for rollovers made before 2013.
     
  • Spousal Consent and Deferred Annuities. The IRS issued another ruling addressing how the spousal consent rules that typically apply to annuity distributions will apply if a participant purchases a deferred annuity contract under a profit-sharing plan. The IRS provided several scenarios to help plan administrators apply the spousal consent rules in the context of a deferred annuity.

This guidance is just a first step in promoting lifetime retirement income and remember that these are only proposed regulations. Public comments may be made on the proposed regulations until May 3, 2012. Final regulations will then follow at some point depending on the public comments and the IRS’s regulatory priorities. We expect that the regulations will be finalized and that the IRS will issue significantly more guidance on these issues in 2012 and the coming years.

Lifetime retirement income is a very important issue for the retirement security of plan participants. We encourage plan sponsors to monitor these developments and consider whether their retirement plan(s) may be a good fit for any of these methods to provide lifetime retirement income.

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