The Insured Retirement Institute (IRI) testified before the Internal Revenue Service during a public hearing today on proposed regulations related to purchasing longevity annuity contracts under tax-qualified defined contribution plans.
Michael Oleske, chief tax counsel for New York Life Insurance Company, speaking on behalf of the IRI, said that the organization and its members support the proposed regulations and the additional guidance that accompanied them.
The IRI supports the proposed regulations because of what they would mean for retirement security. According to Oleske’s testimony, 79 million baby boomers have reached or are nearing retirement and the nation as a whole is facing a potential retirement crisis. The number of retirees over the next couple of decades will tax Social Security and Medicare because there will be fewer workers to support those retirees’ benefits.
“A longevity annuity contract provides meaningful help in dealing with these challenges: If a retiree has such a contract, she knows that she will start receiving income payments at a later age, say at age 80,” Oleske said in his testimony. “As a result, her time horizon for managing her remaining assets is changed from an indefinite date to a fixed one. We believe that the proposed guidance will help Americans achieve a more financially secure retirement.”
The IRI is concerned with one of the requirements that applies to QLACS—the limitation on contributions to 25 percent of a participant’s account value.
Oleske said in his testimony that they understood the limitation was grounded in a concern that the major part of a participant’s account remain available for distributions on or after age 70 ½. The IRI believes the rules may be difficult for participants to satisfy.
“We are concerned that it may present a trap for the unwary and that a failure to meet the test may cause an entire contract to lose its status as a QLAC.
IRI believes the premium limit will present a recordkeeping problem for participants because they will need to track their cumulative premiums and their account balances on the dates the premiums were paid.
Second, for participants who are paying QLAC premiums over a period of years or after retirement, the 25 percent of account balance limitation could restrict the ability to purchase this coverage.
“If a participant is withdrawing funds to pay for everyday living expenses, but paying longevity premiums to provide future income, the account balance may eventually fall to a level where the cumulative QLAC premiums exceed 25 percent of the account balance. We suggest that some flexibility be included in the proposed rule to address these types of situations,” he said.
IRI, in its comment letter, recommended changes to the required terms that a contract must have to be treated as a QLAC. First, the proposed regulations require that a longevity contract expressly provide, at the time it is issued, that it is intended to be a QLAC.
IRI believes this would be expensive to put into effect. Insurance companies would need to endorse their existing annuity contracts in every state in which they do business.
The organization also believes that there should be a refund of premium feature offered as a death benefit payable under a QLAC. The regulation currently makes a lifetime annuity the only form of death benefit payable under a QLAC.