There is a growing interest in making annuities available to retirees under defined contribution retirement plans, including 401(k) plans. At some point in the near future, it is possible that we will see the government mandate the availability of annuities in all defined contribution retirement plans. With that in mind, it is worth noting that two rulings were recently published that have a bearing on retirement annuities in qualified retirement plans.
In Revenue Ruling 2012-3, the Internal Revenue Service attempts to clarify how the qualified joint and survivor annuity (QJSA) rules, as well as the qualified preretirement survivor annuity (QPSA) rules, apply when employees purchase deferred annuity contracts under a profit-sharing plan that does not make other annuity options available to participants. The ruling considers three scenarios in which the plan offers a deferred annuity contract with varying election options, and analyzes whether each of the scenarios allows the plan to remain exempt from the application of the QJSA and QPSA requirements. In broad terms, the ruling holds that the survivor annuity rules do not apply if, under the plan’s deferred annuity investment option, the participant is able to transfer assets out of the deferred annuity contract at any time before annuitization.
Revenue Ruling 2012-4 provides a roadmap for how employees may be permitted to receive lump-sum cash payments from a defined contribution plan and can then roll over some or all of those amounts to a defined benefit pension plan sponsored by the same employer (assuming the pension plan accepts rollover contributions) as a means of annuitizing the defined contribution plan benefit. This ruling holds Internal Revenue Code (IRC) Sections 411 and 415 are not violated by the defined benefit pension plan if it provides an annuity resulting from the rollover that is determined by converting the amount rolled over into an actuarially equivalent immediate annuity using the applicable interest rate and the applicable mortality table under IRC Section 417(e). The holdings of this ruling do not apply with respect to rollovers made before January 1, 2013. However, employers may rely on the ruling with respect to any rollovers made prior to that date.