Are you worried about outliving your retirement benefits? It may be a real fear as life expectancies continue to rise. Fewer Americans have lifetime pension benefits other than Social Security. Wouldn’t it be nice to be able to insure against the possibility of outliving your retirement account?

The federal government has expanded the availability of a product that has been offered in IRAs to qualified retirement plans. Defined contribution retirement plans, including 403(b) plans, can now be amended to allow for investments called Qualifying Longevity Annuity Contracts, or QLACs. A QLAC is a contract that may be purchased by a plan participant to provide a guaranteed benefit that commences payments as late as age 85.

TAX ADVANTAGE

The value of the participant’s QLAC investment is excluded from the account balance when determining the Required Minimum Distribution (RMD) commencing at age 70 ½. The concept here is that since the benefits under the QLAC will be paid after age 70 ½, the RMD should not include the value of the QLAC.

BUYING A QLAC

The purchase of a QLAC is a decision made by the employee. There are limits as to how much of the account balance may be used toward the purchase of a contract. QLAC premiums cannot exceed the lesser of:

• $125,000, or
• 25% of the employee’s account balance on the date of payment

All prior QLAC premium payments must be accumulated to determine the current premium available.

In the event that payments exceed the QLAC limits, excess premium payments may be returned to the non-QLAC portion of the employee’s retirement account. This correction must take place by the end of the calendar year following the calendar year in which the excess premium was paid. If the excess is not corrected, then the contract will fail to be a QLAC, and the value must be included in the RMD calculation.

QLAC DISTRIBUTION RULES

Distributions under the QLAC must commence to the participant not later than the first day of the month following the participant’s attainment of age 85. This age may be adjusted to reflect changes in mortality. The QLAC benefit cannot be commuted or converted to cash.

No benefits are provided after death with the following exceptions:

1. If the employee dies on or after the starting date of payments under the QLAC, then the spouse will continue to receive benefits as a life annuity equal to 100% of the benefit payable to the employee.
2. If the beneficiary is not the surviving spouse, then the only benefit that may be paid is a life annuity payable to the beneficiary. The percentage of the benefit may be adjusted based on a table comparing the age differential of the employee to the beneficiary. (This table ranges from a 2 years difference in age which provides 100% benefit, and 25 years or more age difference provides a 20% benefit).
3. If the employee dies before the starting date of payments under the QLAC, then the spouse is eligible to receive 100% of the benefit that would have been payable to the employee as of the date of death. The amount of the annuity may be adjusted to satisfy other benefits paid to the surviving spouse if necessary. The spouse must start receiving benefits no later than the date the employee would have begun to receive the benefits had the employee not died.
4. Payments to a non-spouse beneficiary must commence no later than the last day of the calendar year following the year of the employee’s death.
5. The QLAC may provide to the beneficiary a cash benefit instead of an annuity equal to the excess of premium payments made to the QLAC less benefits already paid.

SUMMARY

Retirement benefits in general and QLACs in particular are benefits for tomorrow. But as with all retirement planning, these needs have to be addressed today. Are you interested in looking into offering QLACs for your retirement plan? Do your participants express concerns about their retirement funds lasting their lifetime? At Benefit Resources, we want to offer the most options available to our clients, and educate them about their choices. If you would like to discuss QLACs or any other progressive plan design, just click here to contact one of our pension consultants today.

Stay tuned for part two, coming next Wednesday!

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