Last year we wrote about qualified longevity annuity contracts, sometimes referred to as QLACs. On July 19, 2024, the IRS issued final regulations covering how the contracts will be treated. The regulations are summarized as follows:
In 2014, the Treasury Department and the IRS amended the regulations under section 401(a)(9) to provide special rules that apply if a deferred annuity that commences annuity payments at an advanced age is purchased with a portion of the employee’s interest under a defined contribution plan. See 79 FR 37633. Under those rules, if the annuity contract satisfies certain requirements, then the contract is a QLAC and the value of that QLAC is excluded from the account balance under the plan. Those requirements include that: (1) distributions commence not later than age 85; (2) the premiums paid with respect to all contracts intended to be QLACs not exceed an inflation-adjusted $125,000 (dollar limitation) or 25 percent of the employee’s account balance (percentage limitation); and (3) the contract not make available any commutation benefit, cash surrender value, or other similar feature.
The proposed regulations retained these premium limitations for QLAC status. However, in accordance with section 202(a)(1) and (2) of the SECURE 2.0 Act, the final regulations eliminate the percentage limitation and increase the initial amount of the inflation-adjusted dollar limitation from $125,000 to $200,000. These higher limits apply to an annuity contract that was purchased before December 29, 2022, and that satisfied the requirements to be a QLAC as of that date. Thus, the contract need not be exchanged for another annuity contract on or after that date in order for the employee to take advantage of the higher premium limits under section 202(a)(1) and (2) of the SECURE 2.0 Act.
The proposed regulations included an exception to the requirement that the contract not include any commutation benefit, cash surrender value, or similar feature by permitting such a feature before the required beginning date. This change was proposed so that if a plan’s investment options include a series of target date funds to which the relief under Notice 2014-66, 2014-46 IRB 820, applies, those target date funds could include QLACs among their assets. Commenters observed that some State laws prohibit the purchase of an annuity contract that does not provide for a right to rescind the contract within a specified short period of time and requested that such a rescission right be accommodated for a QLAC. Consistent with this comment and as instructed by section 202(a)(4) of the SECURE 2.0 Act, the final regulations add an exception under which the contract may provide a right to rescind the contract within a period not exceeding 90 days after purchase.
The proposed regulations provided that, for purposes of applying the limitation on premiums used to purchase a QLAC, if another insurance contract is exchanged for a QLAC then the fair market value of the exchanged contract will be treated as a premium paid for the QLAC. One commenter suggested that if an insurance contract is surrendered for its cash surrender value, the surrender extinguishes all benefits and other characteristics of the contract, and the cash is used to purchase a QLAC, then only the cash from the surrendered contract should be treated as a premium paid for the QLAC. These regulations include that modification to the rule.
One commenter asked for continued treatment of a former spouse as a spouse if the participant and spouse divorce after the QLAC is purchased but before the annuity starting date in the absence of a QDRO providing for this treatment. Consistent with this comment and as instructed in section 202(a)(3) of the SECURE 2.0 Act, these final regulations provide that the payment of survivor benefits to the employee’s former spouse under an annuity contract will not cause the contract to fail to satisfy the requirements to be treated as a QLAC merely because the divorce between the employee and that former spouse occurred after the contract is purchased, provided that a QDRO satisfying certain requirements has been issued in connection with the divorce.
Specifically, the QDRO must: (1) provide that the former spouse is entitled to the survivor benefits under the contract; (2) provide that the former spouse is treated as a surviving spouse for purposes of the contract; (3) not modify the treatment of the former spouse as the beneficiary under the contract who is entitled to the survivor benefits; or (4) not modify the treatment of the former spouse as the measuring life for the survivor benefits under the contract.
Section 202(a)(3) of the SECURE 2.0 Act provides for a comparable rule in the case of a plan not subject to the QDRO rules of section 414(p) of the Code or section 206(d) of the Employee Retirement Income Security Act of 1974, Public Law 93-406, 88 Stat. 829, as amended (ERISA). These regulations reserve a paragraph for this comparable rule, which is included in a notice of proposed rulemaking (REG-103529-23) in the Proposed Rules section of this issue of the Federal Register.
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