The IRS has issued final regulations modifying the required minimum distribution rules that apply to defined contribution retirement plans to accommodate the purchase of annuities known as qualifying longevity annuity contracts (QLACs). Although defined contribution plans require minimum distributions on April 1 of the calendar year after the retiree turns 70 ½, QLACs permit tax deferral of account balances up to the first of the month following the retiree’s 85th birthday.
The final regulations, which are substantially similar to the proposed regulations issued in February 2012, permit defined contribution plans to collect “premiums” for QLACs by reducing the account balances that are used to calculate the required minimum distributions after age 70 ½ by the lesser of (i) $125,000 (to be adjusted for inflation every year in increments of $10,000); or (ii) 25% of the account balance. The QLAC premiums are annuitized for distribution no later than age 85. QLACs are also permitted, but not required, to offer a “return of premium” feature, which would permit the beneficiary of a QLAC annuitant to receive any excess premiums that were not distributed before the annuitant’s death.
QLACs must also comply with certain other rules identified in the guidance. Among other requirements, QLACs may not provide increasing payments after the required distribution date (which is applicable to all annuity payments) or contain cash or surrender value, and the contract language must explicitly state that the annuity is intended to be a QLAC. Under transitional relief provided in the guidance, annuities issued before January 1, 2016 that are intended to be QLACs but not explicitly identified as such in the contract language must comply with this requirement (for example, by issuing a rider or endorsement to the contract) no later than December 31, 2016.