The IRS on July 2 issued final regulations (T.D. 9673) relating to the purchase of qualified longevity annuity contracts (QLACs) under qualified defined contribution retirement plans, which include plans qualified under section 401(a), section 403(b) plans, individual retirement accounts (IRAs) and eligible government section 457 plans.
A participant in a qualified retirement plan or IRA is required to receive an annual minimum distribution from the plan. Under minimum distribution rules, a plan must begin distributions to a participant by April 1 of the calendar year following the later of the calendar year in which the participant reaches age 70½ or the calendar year in which the participant retires. Under the final regulations, a plan participant is permitted to purchase a QLAC with plan funds, and the value of the longevity contract is excluded from the value of the participant's plan account balance used to determine required minimum distributions.
To qualify for this treatment, certain requirements must be met, including:
- Distributions from the QLAC must begin no later than age 85
- The amount of premiums paid for the contract may not exceed the lesser of $125,000 (increased from $100,000 in the proposed regulations) or an amount equal to 25% of the employee's account balance on the valuation date preceding the date the premium is paid, increased for contribution to, or decreased for distributions from, the account after the valuation date but before the premium payment date
The final regulations include other requirements for QLACs, including special rules for IRAs, section 403(b) plans and eligible government section 457(b) plans.
The final regulations are effective immediately and apply to contracts purchased on or after July 2, 2014. The final regulations also apply to a contract purchased before July 2, 2014, that is exchanged for a new contract on or after July 2, 2014. The exchange date is treated as the purchase date, and the fair market value of the contract that is exchanged for the new contract is treated as a premium payment that counts toward the premium limit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
