Pillsbury Winthrop Shaw Pittman

IRS gives QLACs the green light: final regulations issued

By Peter J Hunt and Amber A Ward

On 1 July 2014, the Internal Revenue Service (IRS) issued final regulations that permit employers and individual retirement account (IRA) providers to offer ‘qualified longevity annuity contracts’ or ‘QLACs’ under defined-contribution plans and IRAs. QLACs allow individuals to manage their retirement income by deferring payment of a portion of their retirement benefits to later in life. Individuals can apply up to the lesser of $125,000 (£73,000) or 25 per cent of their defined contribution or IRA account balances to purchase QLACs. Payments under the QLAC begin at an advanced age (but not later than age 85) and continue through the remainder of the individual’s life. QLACs may become a valued tool in retirement planning, but the new regulations leave unanswered certain key questions about their utility.

The required minimum distribution (RMD) rules under Internal Revenue Code section 401(a)(9) require that distribution of an employee’s qualified plan benefits commence by a required beginning date — generally 1 April of the calendar year following the later of the calendar year in which the employee attains age 70 and a half or retires. The final regulations provide an exception to the RMD rules by allowing participants to defer a portion of their RMD by purchasing QLACs up to specified premium limits. The value of the QLAC is ignored when calculating the participant’s RMD, thereby lowering the amount of the participant’s RMD payments.

Employer-sponsored defined-contribution plans, such as 401(k), 403(b) and eligible governmental deferred compensation plans, and IRAs may offer QLACs and not run afoul of the RMD rules. QLACs are not available under defined-benefit plans or Roth IRAs. Offering QLACs under a plan is optional for a plan sponsor…

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