The American Society of Pension Professionals & Actuaries sent a letter to the Internal Revenue Service concerning its proposed changes to the rules regarding purchase of Qualifying Longevity Annuity Contracts (QLACs) under defined contribution plans.
The organization, which represents more than 8,500 retirement plan professionals, stated that it supported what the IRS was trying to do but felt the rules needed greater flexibility. ASPPA believes that demand for longevity annuity contracts and use of these products may be limited because of the narrow scope of the current proposal and the restrictions on contracts that will qualify.
It used as an example that participants may be reluctant to purchase QLACs with fixed interest rates, which will lock in the current low rates.
“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 percent limitation, the amount ultimately needed to purchase the contract may exceed 25 percent 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 percent 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 percent as a QLAC,” the ASPPA stated.
ASPPA recommended that the percentage limitation be increased to 35 percent or 40 percent to allow greater flexibility for participants. It believes that 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 the later years, will not have the ability to secure a significant income stream through a QLAC and may not take advantage of this opportunity,” the letter said.
The organization also believes that increasing the dollar limitation would provide greater flexibility by allowing participants to secure larger income streams for later retirement years and start payments under a QLAC earlier. ASPPA recommends the dollar limitation be increased to $150,000 to $200,000.
It also recommends that the final rules clarify that premiums paid under a contract that fails or ceases to be a QLAC will not be counted against the dollar limitation or percentage limitation going forward.