The IRS proposed relief from the minimum distribution rules to provide exceptions for premiums to purchase qualified longevity annuity contracts (QLACs). (See “U.S. Treasury Proposal to Reduce Regulatory Burdens for Retirees.”) ASPPA believes increasing the percentage limitation would provide greater flexibility and encouragement for participants to utilize longevity annuity options.
“As proposed, only participants with account balances of $400,000 or larger would be able to pay premiums up to the full dollar limit for a QLAC. The result may be that those participants with smaller account balances, who may be the people most in need of income security in later years, will not have the ability to secure a significant income stream through a QLAC and may not take advantage of this opportunity,” ASPPA wrote in a comment letter sent Tuesday to the IRS.
The ASPPA recommended that the percentage limitation be increased to 35% or 40% to allow greater flexibility for participants, and that the dollar limitation be increased to $150,000 or $200,000 to allow greater flexibility for participants.
ASPPA also recommended that final regulations clarify that premiums paid under a contract that fails or ceases to be a QLAC not be counted against the dollar limitation or percentage limitation.
In its comment letter, ASPPA recommended that the IRS consider future guidance to extend and improve the current proposal and to provide greater flexibility.
“While we believe that the proposed regulations are a good first step, ASPPA encourages the IRS to continue to look at lifetime income issues and to consider allowing greater flexibility in using longevity annuity contracts in the future,” the Society said in its letter. “ASPPA believes that demand for longevity annuity contracts and use of these products may be limited due to the narrow scope of the current proposal and the restrictions on contracts that will qualify. For example, participants may be reluctant to purchase QLACs with fixed interest rates, which will lock in the current low rates. Future guidance might provide for limited use of variable rate contracts.
“There are also practical concerns with the percentage limit. A participant’s account balance may fluctuate between the date an application for an annuity contract is submitted and the date of actual purchase. If the balance goes down and the participant is relying on the 25% limitation, the amount ultimately needed to purchase the contract may exceed 25% of the participant’s account balance. The result would be harsh—the entire contract would not be treated as a QLAC if the premium exceeds 25% of the participant’s account balance. This problem could be addressed in future guidance by either providing that the percentage is determined at the time an application for an annuity contract is submitted, or by creating a de minimis rule that would treat the amount not exceeding 25% as a QLAC.”
The letter is available here.