QUALIFYING
LONGEVITY ANNUITY
CONTRACTS –
“QLACS”
Brought to you by the
Nationwide® Advanced Consulting Group
Some Things You Need To Know
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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 .
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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
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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
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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)
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Required Minimum Distribution
Requirements
• Code sec. 401(a)(9) RMD applicability –
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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