QUALIFYING LONGEVITY ANNUITY CONTRACTS – “QLACS” Brought to you by the Nationwide® Advanced Consulting Group Some Things You Need To Know • • This presentation is for educational purposes only and is not intended to be a solicitation or sale of a specific product or service. The presentation is designed to provide accurate and authoritative information in regard to the subject matter covered. The general information in this presentation is not intended to be nor should it be treated as tax, legal, accounting or other professional advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. The Employee Retirement Income Security Act of 1974 (“ERISA”) and the federal tax laws are complex and subject to change. Any information contained herein referencing ERISA or the federal tax laws is not intended to be, nor is it to be construed as, tax or legal advice. Neither Nationwide nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions . NFM-13353AO FOR USE WITH THE PUBLIC 2 Agenda • The “Problem” • New Type of Annuity Product • RMD Rules Summary • IRS Regulations Affecting QLACs • Death Benefit Payments • Administrative Rules • Reporting Obligations of Issuers of QLACs • Planning Considerations with QLACs • Summary of Decision Factors NFM-13353AO FOR USE WITH THE PUBLIC 3 THE “PROBLEM” • Structure of today’s typical retirement plan • Retirement income, not assets, is the key to a successful retirement • Increasing longevity of retirees • Traditional focus of participant education is on the accumulation phase; not enough attention being paid to the decumulation phase • Fear of outliving one’s retirement income NFM-13353AO FOR USE WITH THE PUBLIC 4 A New Type of Annuity Contract – Deferred Income Annuity (“DIA”) • DIA is designed to provide a source of retirement income that cannot be outlived • Lump sum purchase payment • No cash surrender value • Income commences at a future date, usually NLT age 85 • Optional benefits (riders) • Inflation protection • Death benefits • Alternative approaches to secure future retirement income • #1. Invest current assets and purchase a single premium immediate annuity at a future retirement age • #2. Purchase a DIA with today’s dollars to guarantee future retirement income commencing at retirement age (or later) NFM-13353AO FOR USE WITH THE PUBLIC 5 Required Minimum Distribution Requirements • Code sec. 401(a)(9) RMD applicability – • • • • Code sec. 401(a) plans Code sec. 403(b) contracts by virtue of 403(b)(10) Code sec. 408 IRAs by virtue of 408(a)(6) Code sec. 457(b) plans by virtue of 457(d)(2) • Required beginning date (“RBD”) – April 1 of calendar year following later of: • Calendar year in which employee attains age 70 ½ • Calendar year in which employee retires (unless employee is a 5% or more owner or an IRA owner) • RBD distribution options – • Distribute entire amount • Lifetime distributions over lives of employee and beneficiary NFM-13353AO FOR USE WITH THE PUBLIC 6 Qualifying Longevity Annuity Contract (“QLAC”) • Special type of DIA created by IRS regulations effective July 2, 2014 • Guarantees lifetime income to a participant in a 401(a) defined contribution plan, a 403(b) contract, an IRA, and a governmental 457(b) plan • Income stream from the QLAC must commence NLT age 85 • Within limits, amounts used to purchase the QLAC not part of the RMD amount; two major benefits – • Reduces the amount subject to the RMD requirements • Guarantees an income stream that commences far into retirement NFM-13353AO FOR USE WITH THE PUBLIC 7 Summary of “QLAC” Requirements • Certain premium limitations • Distribution commencement date NLT first day of month next following 85th birthday • Annuity form of distribution • No commutation benefit, cash surrender value, or similar feature • Limited death benefit options • Contract (or rider) must specifically state that it is a QLAC • Contract may not be a variable or indexed annuity NFM-13353AO FOR USE WITH THE PUBLIC 8 QLAC – Limitation on Premiums • Premiums may not exceed the lesser of dollar limitation or percentage limitation • Dollar Limitation – as of any date, excess of $125,000 (as adjusted) over sum of: (i) premiums paid before that date with respect to the contract; and (ii) premiums paid with respect to any other QLAC contract under the affected plan or any other plan • Single dollar limit regardless of number of plans • Percentage Limitation – as of any date, excess of 25% of account balance over sum of: (i) premiums paid before that date with respect to the contract; and (ii) premiums paid before that date with respect to any other QLAC contract under the affected plan NFM-13353AO FOR USE WITH THE PUBLIC 9 Example of Premium Limit Calculations – Initial Purchase of a QLAC • Facts – • August 1, 2014 account balance - $300,000 • EE allocates $100,000 from the account toward the purchase of a QLAC • No other QLACs have been purchased • Dollar Limit Test – passes because $100,000 is less than $125,000 and this is a first-time purchase • Percentage Limit Test – fails because 25% of $300,000 is $75,000 • Maximum amount that can be used to purchase the QLAC is $75,000; i.e., lesser of dollar limit or percentage limit NFM-13353AO FOR USE WITH THE PUBLIC 10 Example of Premium Limit Calculations – Subsequent Purchase of a QLAC • Facts – • August 1, 2017 account balance - $400,000 • EE previously allocated $75,000 from the account toward the purchase of a QLAC • What additional purchasing capacity does the EE have? • Dollar Limit Capacity = $50,000 ($125,000 - $75,000) • Percentage Limit Capacity = $25,000 • $400,000 x 25% = $100,000 • Minus $75,000 (Premiums previously paid) • Additional capacity = $25,000 • EE may allocate up to $25,000 from the account to purchase an additional QLAC NFM-13353AO FOR USE WITH THE PUBLIC 11 Death Benefit Payments – Surviving Spouse Is the Sole Beneficiary • Availability of any death benefit determined by the contract • Death on or after the annuity starting date – • Only benefit payable to spouse is life annuity not in excess of 100% of periodic payment payable to deceased employee • Death before the annuity starting date – • Only benefit payable to the spouse is a life annuity not in excess of 100% of periodic annuity that would have been payable to deceased employee as of the date benefits to spouse commence • Possible QPSA/QJSA considerations for plans subject to those rules NFM-13353AO FOR USE WITH THE PUBLIC 12 Death Benefit Payments – Surviving Spouse is Not the Sole Beneficiary • Availability of any death benefit determined by the contract • Death on or after the annuity starting date – • Life annuity payable to designated beneficiary, not in excess of the “applicable percentage” of annuity payment to the employee • “Applicable percentage” is taken from tables in the regulations and the greater the age difference between the deceased employee and the beneficiary, the less the “applicable percentage” • Death before the annuity starting date – • Life annuity payable to designated beneficiary, not in excess of the “applicable percentage” of the annuity payments that would have been payable to the employee as of the date benefit payments to the designated beneficiary commence • “Applicable percentage” – similar concept but different table NFM-13353AO FOR USE WITH THE PUBLIC 13 Death Benefit – Return of Premiums • Return of premiums may be offered as a contract feature in lieu of life annuity payable to a designated beneficiary after death of employee • Amount – excess of: • Premium payments made with respect to the QLAC, over • Payments already made under the QLAC • Contract may also provide for a return of premiums after deaths of both the employee and the spouse • Excess of: (i) premium payments made with respect to the QLAC; over (ii) payments already made under the QLAC to employee and the spouse • Timing of return of premiums – end of calendar year following year in which employee and/or spouse dies NFM-13353AO FOR USE WITH THE PUBLIC 14 Final Regulations – Administrative Rules • Plan administrator may rely on representations of employee concerning amount of premiums under a QLAC • Consequences of excess premiums – contract no longer considered to be a QLAC unless excess amount returned to non-QLAC portion of the account within time limit set forth in the regulations • Adjustments to dollar and age limitations • Annuity contract not treated as a variable or indexed contract merely because it pays dividends or has a COLA feature • QLAC may not be used with Roth IRAs NFM-13353AO FOR USE WITH THE PUBLIC 15 Reporting Obligations of Contract Issuers – To Purchasers • Dollar and percentage limitations on premiums • Annuity starting date under the contract • Amount of periodic annuity payment payable as a single life annuity • Statement of any death benefit under the contract • Description of the administrative procedures associated with individual’s elections under the contract • Such other information as IRS may require • Not filed with IRS • Statement to be furnished at time of contract purchase NFM-13353AO FOR USE WITH THE PUBLIC 16 Reporting Obligations of Contract Issuers – To the IRS • Annual calendar-year reports on form to be prescribed by IRS • Name, address, and identifying number of purchaser • If contract purchased under a plan, name of plan, plan number, and EIN of plan sponsor • Annuity starting date, amount of periodic annuity, and whether starting date may be accelerated • Amount of each premium paid for the contract, along with date of premium payment • Such other information as IRS may require NFM-13353AO FOR USE WITH THE PUBLIC 17 Planning Considerations for the Use of QLACs - IRAs • Trustee, custodian, or issuer of an IRA must permit the purchase of a QLAC in its contract or agreement • IRA owner will be responsible for complying with the dollar and percentage limitations applicable to the QLAC • Amount used to purchase the QLAC cannot exceed the lesser of the two limitations • Permitted delay in setting beneficiary designation in the case of a contract rolled over from a plan to an IRA before the required beginning date under the plan • Roth rollovers or conversions NFM-13353AO FOR USE WITH THE PUBLIC 18 Planning Considerations for the Use of QLACs – 401(a) Qualified Plans • Only defined contribution plans are eligible • Recommended only for participant-directed investment plans • Fiduciary decisions in connection with purchase of QLAC • 408(b)(2) disclosures; reasonableness of compensation • “Best available safe annuity” considerations • Consider the ERISA section 404(c) regulations • QPSA/QJSA Considerations • Plans subject to funding standards of Code sec. 412 • Profit-sharing plans • Informed spousal consent • Plan administrator [ERISA 3(16)] responsibilities NFM-13353AO FOR USE WITH THE PUBLIC 19 Planning Considerations for the Use of QLACs – 403(b) Annuities and Accounts • ERISA vs. non-ERISA 403(b) • Fiduciary decisions in connection with purchase of QLAC for arrangements subject to ERISA • 408(b)(2) disclosures; reasonableness of compensation • “Best available safe annuity” considerations • Consider the ERISA section 404(c) regulations • QPSA/QJSA Considerations • No provisions in the Code; parallel provisions in ERISA apply QPSA/QJSA rules to employee pension benefit plans • If 403(b) arrangement exempt under Title I, QPSA/QJSA are N/A • Informed spousal consent • Effect on 403(b) plan document requirement NFM-13353AO FOR USE WITH THE PUBLIC 20 Planning Considerations for the Use of QLACs – Governmental 457(b) • Only works with a governmental 457(b) plan • As a governmental plan, there are no ERISA issues • Unlike some other plans utilizing QLACs, there are no QPSA/QJSA concerns • Trust requirement for governmental 457(b) plans NFM-13353AO FOR USE WITH THE PUBLIC 21 SUMMARY OF DECISION FACTORS IN THE USE OF QLACs • Individual Retirement Arrangements • No plan sponsor or ERISA considerations • Financial planning decision on the part of the IRA owner • Compare QLAC strategy vs. invest now and purchase an immediate annuity later to guarantee future retirement income • Employer-Sponsored Plans • • • • Is the plan subject to ERISA? Is the plan subject to QPSA/QJSA requirements? Does the plan allow for participants to direct their investments? Fiduciary aspects of QLAC selection and monitoring • Major benefit of the QLAC – reduces current amount subject to RMDs and guarantees an income later in life NFM-13353AO FOR USE WITH THE PUBLIC 22