[Federal Register Volume 77, Number 23 (Friday, February 3, 2012)]
[Proposed Rules]
[Pages 5443-5454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-2340]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-115809-11]
RIN 1545-BK23
Longevity Annuity Contracts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
purchase of longevity annuity contracts under tax-qualified defined
contribution plans under section 401(a) of the Internal Revenue Code
(Code), section 403(b) plans, individual retirement annuities and
accounts (IRAs) under section 408, and eligible governmental section
457 plans. These regulations will provide the public with guidance
necessary to comply with the required minimum distribution rules under
section 401(a)(9). The regulations will affect individuals for whom a
longevity annuity contract is purchased under these plans and IRAs (and
their beneficiaries), sponsors and administrators of these plans,
trustees and custodians of these IRAs, and insurance companies that
issue longevity annuity contracts under these plans and IRAs. This
document also provides a notice of a public hearing on these proposed
regulations.
DATES: Written or electronic comments must be received by May 3, 2012.
Outlines of topics to be discussed at the public hearing scheduled for
June 1, 2012 must be received by May 11, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (Reg-115809-11), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (Reg-
115809-11), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-115809-11).
The public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jamie
Dvoretzky at (202) 622-6060; concerning submission of comments, the
hearing, and/or being placed on the building access list to attend the
hearing, Oluwafunmilayo (Funmi) Taylor) at (202) 622-7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). The collection of information in these proposed
regulations is in Sec. 1.401(a)(9)-6, A-17(a)(6) (disclosure that a
contract is intended to be a qualifying longevity annuity contract) and
Sec. 1.6047-2 (an initial report must be prepared and an initial
disclosure statement must be furnished to qualifying longevity annuity
contract owners, and an annual statement must be provided to qualifying
longevity annuity contract owners and their surviving spouses
containing information required to be furnished to the IRS). The
information in Sec. 1.401(a)(9)-6, A-17(a)(6), is required in order to
notify participants and beneficiaries, plan sponsors, and the IRS that
the proposed regulations apply to a contract. The information in the
annual statement in Sec. 1.6047-2 is required in order to apply the
dollar and percentage limitations in Sec. 1.401(a)(9)-6, A-17(b) and
Sec. 1.408-8, Q&A-12(b) and to comply with other requirements of the
proposed regulations, and the information in the initial report and
disclosure statement in Sec. 1.6047-2 is required in order for
individuals to understand the features and limitations of a qualifying
longevity annuity contract. The information would be used by plans and
individuals to comply with the required minimum distribution rules.
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP; Washington, DC
[[Page 5444]]
20224. Comments on the collection of information should be received by
April 3, 2012. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the IRS, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
Estimated total average annual recordkeeping burden: 35,661 hours.
Estimated average annual burden per response: 10 minutes.
Estimated number of responses: 213,966.
Estimated number of recordkeepers: 150.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 401(a)(9), 403(b)(10),
408(a)(6), 408(b)(3), 408A(c)(5), and 6047(d) of the Code.
Section 401(a)(9) prescribes required minimum distribution rules
for a qualified trust under section 401(a). In general, under these
rules, distribution of each participant's entire interest must begin by
the required beginning date. The required beginning date generally is
April 1 of the calendar year following the later of (1) the calendar
year in which the participant attains age 70\1/2\ or (2) the calendar
year in which the participant retires. However, the ability to delay
distribution until the calendar year in which a participant retires
does not apply in the case of a 5-percent owner or an IRA owner.
If the entire interest of the participant is not distributed by the
required beginning date, section 401(a)(9)(A) provides that the entire
interest of the participant must be distributed, beginning not later
than the required beginning date, in accordance with regulations, over
the life of the participant or lives of the participant and a
designated beneficiary (or over a period not extending beyond the life
expectancy of the participant or the life expectancy of the participant
and a designated beneficiary). Section 401(a)(9)(B) prescribes required
minimum distribution rules that apply after the death of the
participant. Section 401(a)(9)(G) provides that any distribution
required to satisfy the incidental death benefit requirement of section
401(a) is treated as a required minimum distribution.
Section 403(b) plans, IRAs described in section 408, and eligible
deferred compensation plans under section 457(b) also are subject to
the required minimum distribution rules of section 401(a)(9) pursuant
to sections 408(a)(6) and (b)(3), 403(b)(10), and 457(d)(2),
respectively, and the regulations under those sections. However,
pursuant to section 408A(c)(5), the minimum distribution and minimum
distribution incidental benefit (MDIB) requirements do not apply to
Roth IRAs during the life of the participant.
Section 408(i) provides that the trustee of an individual
retirement account and the issuer of an endowment contract or an
individual retirement annuity must make reports regarding such account,
contract, or annuity to the Secretary and to the individuals for whom
the account, contract, or annuity is maintained with respect to such
matters as the Secretary may require. Pursuant to this provision, the
IRS prescribes Form 5498 (IRA Contribution Information), which requires
annual reporting with respect to an IRA, including a statement of the
fair market value of the IRA as of the prior December 31. Section
6047(d) states that the Secretary shall by forms or regulations require
that the employer maintaining, or the plan administrator of, a plan
from which designated distributions (as defined in section 3405(e)(1))
may be made, and any person issuing any contract under which designated
distributions may be made, make returns and reports regarding the plan
or contract to the Secretary, to the participants and beneficiaries of
the plan or contract, and to such other persons as the Secretary may by
regulations prescribe. These sections also provide that the Secretary
may, by forms or regulations, prescribe the manner and time for filing
these reports. Section 6693 prescribes monetary penalties for failure
to comply with section 408(i), and sections 6652 and 6704 prescribe
monetary penalties for failure to comply with section 6047(d).
Section 1.401(a)(9)-6 of the Income Tax Regulations sets forth the
minimum distribution rules that apply to a defined benefit plan and to
annuity contracts under a defined contribution plan. Under Sec.
1.401(a)(9)-6, A-12, if an annuity contract held under a defined
contribution plan has not yet been annuitized, the interest of a
participant or beneficiary under that contract is treated as an
individual account for purposes of section 401(a)(9). Thus, the value
of that contract is included in the account balance used to determine
required minimum distributions from the participant's individual
account.
If an annuity contract has been annuitized, the periodic annuity
payments must be nonincreasing, subject to certain exceptions that are
set forth in Sec. 1.401(a)(9)-6, A-14. In addition, annuity payments
must satisfy the MDIB requirement of section 401(a)(9)(G). Under Sec.
1.401(a)(9)-6, A-2(b), if a participant's sole beneficiary, as of the
annuity starting date, is his or her spouse and the distributions
satisfy section 401(a)(9) without regard to the MDIB requirement, the
distributions to the participant are deemed to satisfy the MDIB
requirement. However, if distributions are in the form of a joint and
survivor annuity for a participant and a non-spouse beneficiary, the
MDIB requirement is not satisfied unless the periodic annuity payment
payable to the survivor does not exceed an applicable percentage of the
amount that is payable to the participant, with the applicable
percentage to be determined using the table in Sec. 1.401(a)(9)-6, A-
2(c).
The regulations under sections 403(b)(10), 408(a)(6), 408(b)(3),
408A(c)(5), and 457(d)(2) prescribe how the required minimum
distribution rules apply to other types of retirement plans and
accounts. Section 1.403(b)-6(e)(1) provides that a section 403(b)
contract must meet the requirements of section 401(a)(9). Section
1.403(b)-6(e)(2) provides, with certain exceptions, that the section
401(a)(9) required minimum distribution rules are applied to section
403(b) contracts in accordance with the provisions in Sec. 1.408-8.
Section 1.408-8, Q&A-1, provides, with certain modifications, that an
IRA is subject to the rules of Sec. Sec. 1.401(a)(9)-1 through
1.401(a)(9)-9. One such modification is set forth in
[[Page 5445]]
Sec. 1.408-8, Q&A-9, which prescribes a rule under which an IRA
generally does not fail to satisfy section 401(a)(9) merely because the
required minimum distribution with respect to the IRA is distributed
instead from another IRA. Section 1.408A-6, Q&A-14(a), provides that no
minimum distributions are required to be made from a Roth IRA during
the life of the participant. Section 1.408A-6, Q&A-15, provides that a
participant who is required to receive minimum distributions from his
or her traditional IRA cannot choose to take the amount of the required
minimum distributions from a Roth IRA. Section 1.457-6(d) provides that
a section 457(b) eligible plan must meet the requirements of section
401(a)(9) and the regulations under that section.
On February 2, 2010, the Department of Labor, the IRS, and the
Department of the Treasury issued a Request for Information Regarding
Lifetime Income Options for Participants and Beneficiaries in
Retirement Plans in the Federal Register (75 FR 5253). That Request for
Information included questions relating to how the required minimum
distribution rules affect defined contribution plan sponsors' and
participants' interest in the offering and use of lifetime income. In
particular, the Request for Information asked whether there were
changes to the rules that could or should be considered to encourage
arrangements under which participants can purchase deferred annuities
that begin at an advanced age (sometimes referred to as longevity
annuities or longevity insurance).
A number of commentators identified the required minimum
distribution rules as an impediment to the utilization of these types
of annuities. One such impediment that they noted is the requirement
that, prior to annuitization, the value of the annuity be included in
the account balance that is used to determine required minimum
distributions. This requirement raises the risk that, if the remainder
of the account has been depleted, the participant would have to
commence distributions from the annuity earlier than anticipated in
order to satisfy the required minimum distribution rules. Some
commentators stated that if the deferred annuity permits a participant
to accelerate the commencement of benefits, then, in order to take that
contingency into account, the premium would be higher for a given level
of annuity income regardless of whether the participant actually
commences benefits at an earlier date. Some commentators also noted
that longevity annuities often do not provide a commutation benefit,
cash surrender value, or other similar feature.
The Treasury Department and the IRS have concluded that there are
substantial advantages to modifying the required minimum distribution
rules in order to facilitate a participant's purchase of a deferred
annuity that is scheduled to commence at an advanced age--such as age
80 or 85--using a portion of his or her account. Under the proposed
amendments to these rules, prior to annuitization, the participant
would be permitted to exclude the value of a longevity annuity contract
that meets certain requirements from the account balance used to
determine required minimum distributions. Thus, a participant would
never need to commence distributions from the annuity contract before
the advanced age in order to satisfy the required minimum distribution
rules and, accordingly, the contract could be designed with a fixed
annuity starting date at the advanced age (and would not need to
provide an option to accelerate commencement of the annuity).
Purchasing longevity annuity contracts could help participants
hedge the risk of drawing down their benefits too quickly and thereby
outliving their retirement savings. This risk is of particular import
because of the substantial, and unpredictable, possibility of living
beyond one's life expectancy. Purchasing a longevity annuity contract
would also help avoid the opposite concern that participants may live
beneath their means in order to avoid outliving their retirement
savings. If the longevity annuity provides a predictable stream of
adequate income commencing at a fixed date in the future, the
participant would still face the task of managing retirement income
over that fixed period until the annuity commences, but that task
generally is far less challenging than managing retirement income over
an uncertain period.
The Treasury Department and the IRS have concluded that any special
treatment under the required minimum distribution rules to facilitate
the purchase of such a longevity annuity contract should be limited to
a portion of a participant's account balance, such as 25 percent. A
percentage limit is necessary in order to be consistent with section
401(a)(9)(A), which requires the entire interest of each participant to
be distributed, beginning by the required beginning date, in accordance
with regulations, over the life or life expectancy of the participant
(or the participant and a designated beneficiary). The pattern of
required minimum payments implemented in the existing regulations under
section 401(a)(9) limits the extent to which tax-favored retirement
savings can be used for purposes other than retirement income (such as
transmitting accumulated wealth to a participant's heirs). Limiting the
special treatment for a longevity annuity to those contracts purchased
with no more than 25 percent of the account balance is consistent with
the intent of section 401(a)(9)(A) because, for a typical participant
who will need to draw down the entire account balance during the period
prior to commencement of the annuity, the overall pattern of payments
would not provide more deferral than would otherwise normally be
available for lifetime payments under the section 401(a)(9)(A) rules.
However, because a participant is required to receive only required
minimum distributions during the period before the annuity begins (and
would not under these proposed regulations be required to draw down the
entire remaining balance on an accelerated basis), the Treasury
Department and the IRS have concluded that, in addition to the
percentage limitation, the amount used to purchase an annuity for which
the minimum distribution requirements would be eased should be subject
to a dollar limitation, such as $100,000. This dollar limitation would
be applied in order to constrain the extent to which the combination of
payments from the account balance (determined by excluding the value of
the annuity before the annuity commences) and later payments from the
annuity contract might result in an overall pattern of payouts from the
plan that permits undue deferral of distribution of the participant's
entire interest.
Such a limit would still allow significant income to be provided
beginning at age 85. For example, if at age 70 a participant used
$100,000 of his or her account balance to purchase an annuity that will
commence at age 85, the annuity could provide an annual income that is
estimated to range between $26,000 and $42,000 (depending on the
actuarial assumptions used by the issuer and the form of the annuity
elected by the participant, such as whether the form elected is a
straight life annuity or a joint and survivor annuity). These
illustrations assume a three-percent interest rate, no pre-annuity-
starting-date death benefit, use of the Annuity 2000 Mortality Table
for males and
[[Page 5446]]
females,\1\ no indexation for inflation, and no load for expenses.
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\1\ If the annuity is provided under an employer plan, unisex
mortality assumptions would be required.
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These amounts would be higher if the interest rate used by the
issuer to determine the annuity amount were higher. For example, the
$42,000 amount would be increased to approximately $50,000 if the
annuity were purchased assuming a four-percent interest rate, rather
than a three-percent rate.
In addition, a participant who purchases a contract before age 70
could obtain the same income with a lower premium or could obtain
larger income with the same premium. For example, even assuming a
three-percent interest rate, the $42,000 amount would be approximately
$51,000 if the annuity were purchased at age 65 rather than age 70.
Furthermore, a participant who purchases increments of annuities over
his or her career could hedge the risk of interest-rate fluctuation by
purchasing these increments in different interest rate environments and
effectively averaging annuity purchase rates over time.
To facilitate compliance with the dollar and percentage limitations
and other requirements that longevity annuity contracts must satisfy in
order to qualify for the special treatment, certain disclosure and
reporting requirements would apply for the issuers of these contracts.
Because longevity annuities would not begin until contract owners reach
an advanced age, annual statements would also serve as an important
reminder to those owners (and persons assisting them with their
financial affairs) of their right to receive the annuities.
Explanation of Provisions
These proposed regulations would modify the required minimum
distribution rules in order to facilitate the purchase of deferred
annuities that begin at an advanced age. The proposed regulations would
apply to contracts that satisfy certain requirements, including the
requirement that distributions commence not later than age 85. Prior to
annuitization, the value of these contracts, referred to as
``qualifying longevity annuity contracts'' (QLACs), would be excluded
from the account balance used to determine required minimum
distributions.
I. Definition of QLAC
A. Limitations on Premiums
The proposed regulations provide that, in order to constitute a
QLAC, the amount of the premiums paid for the contract under the plan
on a given date may not exceed the lesser of a dollar or a percentage
limitation. The proposed regulations prescribe rules for applying these
limitations to participants who purchase multiple contracts or make
multiple premium payments for the same contract.
Under the dollar limitation, the amount of the premiums paid for a
contract under the plan may not exceed $100,000. If, on or before the
date of a premium payment, an employee has paid premiums for the same
contract or for any other contract that is intended to be a QLAC and
that is purchased for the employee under the plan or under any other
plan, annuity or account, the $100,000 limit is reduced by the amount
of those other premium payments.\2\
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\2\ As discussed under the heading ``II. IRAs,'' a contract that
is purchased or held under a Roth IRA is not treated as a contract
that is intended to be a QLAC (even if it otherwise meets the
requirements to be a QLAC).
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Under the percentage limitation, the amount of the premiums paid
for a contract under the plan may not exceed an amount equal to 25
percent of the employee's account balance on the date of payment. If,
on or before the date of a premium payment, an employee has paid
premiums for the same contract or for any other contract that is
intended to be a QLAC and that is held or purchased for the employee
under the plan, the maximum amount under the 25-percent limit is
reduced by the amount of those other payments.
For purposes of determining whether premiums for a contract exceed
the dollar or percentage limitation, unless the plan administrator has
actual knowledge to the contrary, the plan administrator would
generally be permitted to rely on an employee's representation of the
amount of premiums paid on or before that date under any other contract
that is intended to be a QLAC and that is purchased for an employee
under any other plan, annuity, or account. However, this reliance is
not available with respect to a plan, annuity, or account that is
maintained by an employer (or an entity that is treated as a single
employer with the employer under section 414(b), (c), (m), or (o)) with
respect to purchases for an employee under any other plan, annuity, or
account maintained by that employer.
If a premium for a contract causes the total premiums to exceed
either the dollar or percentage limitation, the contract would fail to
be a QLAC as of the date on which the excess premiums were paid. Thus,
beginning on that date, the value of the contract would no longer be
excluded from the account balance used to determine required minimum
distributions.
For calendar years beginning on or after January 1, 2014, the
dollar limitation would be adjusted at the same time and in the same
manner as under section 415(d), except that (1) the base period would
be the calendar year quarter beginning July 1, 2012, and (2) any
increase that is not a multiple of $25,000 would be rounded to the next
lowest multiple of $25,000. If a contract failed to be a QLAC
immediately before an adjustment because the premiums exceeded the
dollar limitation, an adjustment of the dollar limitation would not
cause the contract to become a QLAC.
B. Maximum Age at Commencement
The proposed regulations provide that, in order to constitute a
QLAC, the contract must provide that distributions under the contract
commence not later than a specified annuity starting date set forth in
the contract. The specified annuity starting date must be no later than
the first day of the month coincident with or next following the
employee's attainment of age 85. This age reflects the approximate life
expectancy of an employee at retirement, and was recommended in a
number of the comments received in response to the Request for
Information. Any contract for which premiums are paid after the latest
permissible specified annuity starting date would not be a QLAC,
because such a contract could not require distributions to commence by
that date.
The proposed regulations would permit a QLAC to allow a participant
to elect an earlier annuity starting date than the specified annuity
starting date. For example, if the specified annuity starting date
under a contract were the date on which a participant attains age 85,
the contract would not fail to be a QLAC solely because it allows the
participant to commence distributions at an earlier date. On the other
hand, these rules would not require a QLAC to provide an option to
commence distributions before the specified annuity starting date, so
that a QLAC could provide that distributions must commence only at the
specified annuity starting date. For a given premium, such a contract
could provide a substantially higher periodic annuity payment beginning
on the specified annuity starting date than a contract with an
acceleration option. Similarly, premiums could be lower for a given
level of periodic annuity payment, leaving a larger portion of the
remaining
[[Page 5447]]
account balance for the participant to use for living expenses before
the specified annuity starting date.
The proposed regulations provide that the maximum age may also be
adjusted to reflect changes in mortality. The adjusted age (if any)
would be prescribed by the Commissioner in revenue rulings, notices, or
other guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)(b)). The Treasury Department and the IRS anticipate
that such changes will not occur more frequently than the adjustment of
the $100,000 limit described in subheading I.A. ``Limitations on
premiums.'' If a contract failed to be a QLAC immediately before an
adjustment because it failed to provide that distributions must
commence by the requisite age, an adjustment of the age would not cause
the contract to become a QLAC.
C. Benefits Payable After Death of the Employee
Under a QLAC, the only benefit permitted to be paid after the
employee's death is a life annuity, payable to a designated
beneficiary, that meets certain requirements. Thus, for example, a
contract that provides a distribution form with a period certain or a
refund of premiums in the case of an employee's death would not be a
QLAC. These types of payments are inconsistent with the purpose of
providing lifetime income to employees and their beneficiaries, as
described in the Background section of this preamble. A contract that
provides a given lifetime periodic annuity payment to an employee would
be less expensive if it provided for a life annuity payable to a
designated beneficiary upon the employee's death rather than additional
features such as an optional single-sum death benefit. After paying a
lower premium for such a life annuity, the employee would be able to
retain a larger portion of his or her account, maximizing the
employee's lifetime benefits, while also leaving larger death benefits
for a beneficiary, from the remaining amount of the account.
The proposed regulations provide that if the sole beneficiary of an
employee under the contract is the employee's surviving spouse, the
only benefit permitted to be paid after the employee's death is a life
annuity payable to the surviving spouse that does not exceed 100
percent of the annuity payment payable to the employee. The proposed
regulations include a special exception that would allow a plan to
comply with any applicable requirement to provide a qualified
preretirement survivor annuity \3\ (which would have an effect only if
the employee has a substantially older spouse).
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\3\ A qualified preretirement survivor annuity is defined in
section 417(c)(2) as an annuity for the life of the surviving spouse
the actuarial equivalent of which is not less than 50 percent of the
portion of the account balance of the participant (as of the date of
death) to which the participant had a nonforfeitable right (within
the meaning of section 411(a) of the Code). Section 205(e)(2) of the
Employee Retirement Income Security Act of 1974, Public Law 93-406
(88 Stat. 829 (1974)), as amended (ERISA), includes a parallel
definition. See Rev. Rul. 2012-3 for rules relating to qualified
preretirement survivor annuities.
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If the employee's surviving spouse is not the sole beneficiary
under the contract,\4\ the only benefit permitted to be paid after the
employee's death is a life annuity payable to a designated beneficiary.
In order to satisfy the MDIB requirements of section 401(a)(9)(G), the
life annuity is not permitted to exceed an applicable percentage of the
annuity payment payable to the employee. The applicable percentage is
determined under one of two alternative tables, and the determination
of which table applies depends on the different types of death benefits
that are payable to the designated beneficiary.
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\4\ If the surviving spouse is one of the designated
beneficiaries, this rule is applied as if the contract were a
separate contract for the surviving beneficiary, but only if certain
conditions are satisfied, including a separate account requirement.
See Sec. 1.401(a)(9)-8, A-2(a) and A-3.
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Under the first alternative, the applicable percentage is the
percentage described in the existing table in Sec. 1.401(a)(9)-6, A-
2(c). Because the existing applicable percentage table does not take
into account the potential for a death benefit to be paid to the non-
spouse designated beneficiary during the period between the required
beginning date and the annuity starting date, this table is available
only if, under the contract, no death benefits are payable to such a
beneficiary if the employee dies before the specified annuity starting
date. Furthermore, in order to address the possibility that an employee
with a shortened life expectancy could accelerate the annuity starting
date in order to avoid this rule, this table is available only if,
under the contract, no benefits are payable in any case in which the
employee selects an annuity starting date that is earlier than the
specified annuity starting date under the contract and the employee
dies less than 90 days after making that election, even if the
employee's death occurs after his or her selected annuity starting
date.
Under the second alternative, the applicable percentage is the
percentage described in a new table set forth in the proposed
regulations. The table is available for use when the contract provides
a pre-annuity-starting-date death benefit to the non-spouse designated
beneficiary. The table takes into account that a significant portion of
the premium is used to provide death benefits to a designated
beneficiary if death occurs during the deferral period between age
70\1/2\ and age 85. In order to limit the portion of the premium that
is used to provide death benefits to a designated beneficiary, use of
the table is limited to contracts under which any non-spouse designated
beneficiary must be irrevocably selected as of the required beginning
date. Accordingly, the applicable percentages in the table are based on
the expected longevity for the designated beneficiary, determined as of
the employee's required beginning date.
The Treasury Department and the IRS considered whether to prescribe
a special rule under which a QLAC could provide for a pre-annuity-
starting-date death benefit to a non-spouse designated beneficiary and
also allow the designated beneficiary to be changed at any time before
the annuity starting date. However, in order to satisfy the MDIB
requirements in such a case, the applicable percentages would need to
be much smaller than the percentages set forth in the special table.
This is because a larger portion of the cost of the contract would be
allocable to death benefits if, after the required beginning date and
before the annuity starting date, the participant were able to replace
a designated beneficiary who has died (or to replace a designated
beneficiary who has a short life expectancy with one who has a longer
life expectancy). Comments are requested on whether the proposed
regulations should be modified to permit alternative death benefits
that would be subject to such lower applicable percentages.
If the employee dies before the specified annuity starting date
under the contract, the date by which benefits must commence to the
designated beneficiary depends on whether the beneficiary is the
employee's surviving spouse. If the sole beneficiary under the contract
is the employee's surviving spouse, the life annuity is not required to
commence until the employee's specified annuity starting date under the
contract (in lieu of the otherwise applicable rule that would require
distributions to commence by the later of the end of the calendar year
following the calendar year in which the employee died or the end of
the calendar year in which the employee would have attained age 70\1/
2\). If the
[[Page 5448]]
employee's sole beneficiary under the contract is not the surviving
spouse, the life annuity payable to the designated beneficiary must
commence by the last day of the calendar year immediately following the
calendar year of the employee's death.
The proposed regulations include a rule for applying the
limitations on amounts payable to a surviving spouse or a designated
beneficiary in the event the employee dies before the annuity starting
date. Under this rule, if the contract does not allow an employee to
select an annuity starting date that is earlier than the date on which
the annuity payable to the employee would have commenced under the
contract if the employee had not died, the contract must nonetheless
provide a way to determine the periodic annuity payments that would
have been payable if payments to the employee had commenced immediately
prior to the date on which benefit payments to the designated
beneficiary commence.
D. Other QLAC Requirements
Under the proposed regulations, a QLAC would not include a variable
contract under section 817, equity-indexed contract, or similar
contract, because the purpose of a QLAC is to provide a participant
with a predictable stream of lifetime income. In addition, exposure to
equity-based returns is available through control over the remaining
portion of the account balance so that a participant can achieve
adequate diversification.
The proposed regulations also provide that, in order to be a QLAC,
the contract is not permitted to make available any commutation
benefit, cash surrender value, or other similar feature. As in the case
of the limitations on benefits payable after death, these limitations
would allow an annuity contract to maximize the annuity payments that
are made while a participant or beneficiary is alive. In addition,
having a limited set of options available to purchasers would make
these contracts more readily understandable and enhance purchasers'
ability to compare products across providers. Ease of comparison will
be particularly important to the extent that contracts provided under
plans are priced on a unisex basis, while contracts offered under IRAs
generally take gender into account in establishing premiums.
The proposed regulations provide that a contract is not a QLAC
unless it states, when issued, that it is intended to be a ``qualifying
longevity annuity contract'' or a ``QLAC.'' This rule would ensure that
the issuer, participant, plan sponsor, and IRS know that the rules
applicable to QLACs apply to this contract.
The proposed regulations provide that distributions under a QLAC
must satisfy the generally applicable section 401(a)(9) requirements
relating to annuities at Sec. 1.401(a)(9)-6, other than the
requirement that annuity payments commence on or before the employee's
required beginning date. Thus, for example, the limitation on
increasing payments under Sec. 1.401(a)(9)-6, A-1(a), applies to the
contract.
II. IRAs
The proposed regulations provide that, in order to constitute a
QLAC, the amount of the premiums paid for the contract under an IRA on
a given date may not exceed $100,000. If, on or before the date of a
premium payment, a participant has paid premiums for the same contract
or for any other contract that is intended to be a QLAC and that is
purchased for the participant under the IRA or under any other IRA,
plan, or annuity, the $100,000 limit is reduced by the amount of those
other premium payments.
The proposed regulations also provide that in order to constitute a
QLAC, the amount of the premiums paid for the contract under an IRA on
a given date generally may not exceed 25 percent of a participant's IRA
account balances. Consistent with the rule under which a required
minimum distribution from an IRA could be satisfied by a distribution
from another IRA (applied separately to traditional IRAs and Roth
IRAs), the proposed regulations would allow a QLAC that could be
purchased under an IRA within these limitations to be purchased instead
under another IRA. Specifically, the amount of the premiums paid for
the contract under an IRA may not exceed an amount equal to 25 percent
of the sum of the account balances (as of December 31 of the calendar
year before the calendar year in which a premium is paid) of the IRAs
(other than Roth IRAs) that an individual holds as the IRA owner. If,
on or before the date of a premium payment, an individual has paid
other premiums for the same contract or for any other contract that is
intended to be a QLAC and that is held or purchased for the individual
under his or her IRAs, the premium payment cannot exceed the amount
determined to be 25 percent of the individual's IRA account balances,
reduced by the amount of those other premiums.
The proposed regulations provide that, for purposes of both the
dollar and percentage limitations, unless the trustee, custodian, or
issuer of an IRA has actual knowledge to the contrary, the trustee,
custodian, or issuer may rely on the IRA owner's representations of the
amount of the premiums (other than the premiums paid under the IRA)
and, for purposes of applying the percentage limitation, the amount of
the individual's account balances (other than the account balance under
the IRA).
Under the proposed regulations, an annuity purchased under a Roth
IRA would not be treated as a QLAC. This is because a Roth IRA (unlike
a designated Roth account under a plan, as described in section 402(A)
is not subject to the section 401(a)(9)(A) requirement that the
individual's benefits commence and be paid over the lives or life
expectancy of the individual and a designated beneficiary (but, after
the death of the individual, benefits must be paid under the same
section 401(a)(9)(B) rules that apply to traditional IRAs). Because the
rules of section 401(a)(9)(A) do not apply to a Roth IRA owner, a
longevity annuity contract purchased using a portion of the
individual's Roth IRA would not need to provide the right to accelerate
payments in order to ensure compliance with those rules. Thus, there is
no need to permit the value of a longevity annuity contract to be
excluded from the account balance that is used to determine required
minimum distributions during the life of a Roth IRA owner. Accordingly,
the proposed regulations would not apply the rules regarding QLACs to
Roth IRAs.
The proposed regulations would not preclude the use of assets in a
Roth IRA to purchase a longevity annuity contract, nor would such a
contract be subject to the same restrictions as a QLAC. For example, a
longevity annuity contract purchased using assets of a Roth IRA could
have an annuity starting date that is later than age 85 and offer
features, such as a cash surrender right, that are not permitted under
a QLAC. Although such a contract could not be excluded from the account
balance used to determine required minimum distributions, this
exclusion is not necessary because the required minimum distribution
rules do not apply during the life of a Roth IRA owner.
In addition, the dollar and percentage limitations on premiums that
apply to a QLAC would not take into account premiums paid for a
contract that is purchased or held under a Roth IRA, even if the
contract satisfies the requirements to be a QLAC. If a QLAC is
purchased or held under a plan, annuity, contract, or traditional IRA
that is later rolled over or converted to a Roth IRA, the QLAC would
cease to be
[[Page 5449]]
a QLAC (and would cease to be treated as intended to be a QLAC) after
the date of the rollover or conversion. In that case, the premiums
would then be disregarded in applying the dollar and percentage
limitations to premiums paid for other contracts after the date of the
rollover or conversion.\5\
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\5\ Section 1.408A-4, Q&A-14, describes the amount includible in
gross income when part or all of a traditional IRA that is an
individual retirement annuity described in section 408(b) is
converted to a Roth IRA, or when a traditional IRA that is an
individual retirement account described in section 408(a) holds an
annuity contract as an account asset and the traditional IRA is
converted to a Roth IRA. Those rules would also apply when a
contract is rolled over from a plan into a Roth IRA.
---------------------------------------------------------------------------
Comments are requested on whether the regulations should be
modified to apply the QLAC rules to a Roth IRA or to reduce the
availability of the section 401(a)(9) relief for purchases of QLACs by
the amount of assets that the individual holds in a Roth IRA. Comments
are also requested as to whether any special rules should apply where a
QLAC is purchased using assets of a Roth IRA, such as special
disclosure in order to minimize any potential confusion.
III. Section 403(b) Plans
The proposed regulations apply the tax-qualified plan rules,
instead of the IRA rules, to the purchase of a QLAC under a section
403(b) plan. For example, the 25-percent limitation on premiums would
be separately determined for each section 403(b) plan in which an
employee participates. The proposed regulations also provide that the
tax-qualified plan rules relating to reliance on representations,
rather than the IRA rules, apply to the purchase of a QLAC under a
section 403(b) plan.
The proposed regulations provide that, if the sole beneficiary of
an employee under a contract is the employee's surviving spouse and the
employee dies before the annuity starting date under the contract, a
life annuity that is payable to the surviving spouse after the
employee's death is permitted to exceed the annuity that would have
been payable to the employee to the extent necessary to satisfy the
requirement to provide a qualified preretirement survivor annuity (as
discussed for qualified plans under subheading I.C. ``Benefits payable
after death of the employee''). A section 403(b) plan may be subject to
this requirement under ERISA, whereas IRAs are generally not subject to
this requirement. See Sec. 1.401(a)-20, Q&A-3(d), and Sec. 1.403(b)-
5(e).
IV. Section 457(b) Plans
Section 1.457-6(d) provides that an eligible section 457(b) plan
must meet the requirements of section 401(a)(9) and the regulations
under section 401(a)(9). Thus, these proposed regulations relating to
the purchase of a QLAC under a tax-qualified defined contribution plan
would automatically apply to an eligible section 457(b) plan. However,
the rule relating to QLACs is limited to eligible governmental section
457(b) plans. Because section 457(b)(6) requires that an eligible
section 457(b) plan that is not a governmental plan be unfunded, the
purchase of an annuity contract under such a plan would be inconsistent
with this requirement.
V. Defined Benefit Plans
Although defined benefit plans are subject to the minimum required
distribution rules, they offer annuities which provide longevity
protection. Because this protection is therefore already available,
these proposed regulations would not apply to defined benefit plans.\6\
---------------------------------------------------------------------------
\6\ See also Rev. Rul. 2012-4 (relating to rollovers to defined
benefit plans).
---------------------------------------------------------------------------
VI. Disclosure and Annual Reporting Requirements
Under the proposed regulations, the issuer of a QLAC would be
required to create a report containing the following information about
the QLAC:
A plain-language description of the dollar and percentage
limitations on premiums;
The annuity starting date under the contract, and, if
applicable, a description of the employee's ability to elect to
commence payments before the annuity starting date;
The amount (or estimated amount) of the periodic annuity
payment that is payable after the annuity starting date as a single
life annuity (including, if an estimated amount, the assumed interest
rate or rates used in making this determination), and a statement that
there is no commutation benefit or right to surrender the contract in
order to receive its cash value;
A statement of any death benefit payable under the
contract, including any differences between benefits payable if the
employee dies before the annuity starting date and benefits payable if
the employee dies on or after the annuity starting date;
A description of the administrative procedures associated
with an employee's elections under the contract, including deadlines,
how to obtain forms, and where to file forms, and the identity and
contact information of a person from whom the employee may obtain
additional information about the contract; and
Such other information that the Commissioner may require.
This report is not required to be filed with the Internal Revenue
Service. Each issuer required to create a report would be required to
furnish to the individual in whose name the contract has been purchased
a statement containing the information in the report. This statement
must be furnished prior to or at the time of purchase. In addition, in
order to avoid duplicating state law disclosure requirements, the
statement would not be required to include information that the issuer
has already provided to the employee in order to satisfy any applicable
state disclosure law. Comments are requested on whether the information
listed is appropriate, and whether (and, if so, the extent to which)
this list would duplicate disclosure requirements under existing state
law. Comments are also requested on whether there is other information
that should be included in the disclosure, such as the special tax
attributes of a QLAC.
The proposed regulations prescribe annual reporting requirements
under section 6047(d) which would require any person issuing any
contract that states that it is intended to be a QLAC to file annual
calendar-year reports and provide a statement to the individual in
whose name the contract has been purchased regarding the status of the
contract. The Commissioner will prescribe an applicable form and
instructions for this purpose, which will contain the filing deadline
and other information.
The report will be required to identify that the contract is
intended to be a QLAC and to include, at a minimum, the following items
of information:
The name, address, and identifying number of the issuer of
the contract, along with information on how to contact the issuer for
more information about the contract;
The name, address, and identifying number of the
individual in whose name the contract has been purchased;
If the contract was purchased under a plan, the name of
the plan, the plan number, and the Employer Identification Number (EIN)
of the plan sponsor;
If payments have not yet commenced, the annuity starting
date on which the annuity is scheduled to commence, the amount of the
periodic annuity payable on that date, and whether that date may be
accelerated; and
[[Page 5450]]
The amount of each premium paid for the contract, along
with the date of payment.\7\
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\7\ For IRAs, the fair market value of the account on December
31 must be provided to the IRA owners by January 31 of the following
year. Trustees, custodians, and issuers are responsible for ensuring
that all IRA assets (including those not traded on an established
securities market or with otherwise readily determinable value) are
valued annually at their fair market value. This includes the value
of a contract that is intended to be a QLAC.
---------------------------------------------------------------------------
Each issuer required to file the report with respect to a contract
would also be required to provide to the individual in whose name the
contract has been purchased a statement containing the information that
is required to be furnished in the report. This requirement may be
satisfied by providing the individual with a copy of the required form,
or in another form that contains the following language: ``This
information is being furnished to the Internal Revenue Service.'' The
statement is required to be furnished to the individual on or before
January 31 following the calendar year for which the report is
required.
An issuer that is subject to these annual reporting requirements
must comply with the requirements for each calendar year beginning with
the year in which premiums are first paid and ending with the earlier
of the year in which the individual for whom the contract has been
purchased attains age 85 (as adjusted in calendar years beginning on or
after January 1, 2014) or dies. However, if the individual dies and the
sole beneficiary under the contract is the individual's spouse (so that
the spouse's annuity might not commence until the individual would have
attained age 85), the annual reporting requirement continues until the
year in which the distributions to the spouse commence.
Proposed Effective Date
The proposed regulations regarding disclosure and reporting will be
effective upon publication in the Federal Register of the Treasury
decision adopting these rules as final regulations. Otherwise, these
regulations are proposed to be effective for contracts purchased on or
after the date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register and for determining
required minimum distributions for distribution calendar years
beginning on or after January 1, 2013. Until regulations finalizing
these proposed regulations are issued, taxpayers may not rely on the
rules set forth in these proposed regulations (and the existing rules
under section 401(a)(9) continue to apply).
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that the collection of information in these proposed
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based upon
the fact that an insubstantial number of entities of any size will be
impacted by the regulation. In addition, IRS and Treasury expect that
any burden on small entities will be minimal because required
disclosures are expected to take 10 minutes to prepare. In addition,
the entities that will be impacted will be insurance companies, very
few of which are small entities. Therefore, a regulatory flexibility
analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f) of the Code, this notice of
proposed rulemaking has been submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. Comments are requested on benefits payable to a non-spouse
beneficiary (under the subheading ``C. Benefits payable after death of
the employee''), Roth IRAs (under the heading ``II. IRAs''), and
disclosure (under the heading ``VI. Disclosure and annual reporting
requirements''). Comments are also requested on whether an insurance
product that provides guaranteed lifetime withdrawal benefits could
constitute a QLAC, taking into account the rules precluding the use of
a variable annuity and a commutation of benefits and the rules relating
to the provision of benefits to a designated beneficiary after an
employee's death (under which benefits can be paid only in the form of
a life annuity). The IRS and the Treasury Department further request
comments on all aspects of the proposed rules.
All comments will be available for public inspection and copying at
www.regulations.gov or upon request. A public hearing has been
scheduled for June 1, 2012, beginning at 1 p.m. in the Auditorium,
Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.
Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present
photo identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For
information about having your name placed on the building access list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments by May 3, 2012, and an outline of topics to be
discussed and the amount of time to be devoted to each topic (a signed
original and eight (8) copies) by May 11, 2012. A period of 10 minutes
will be allotted to each person for making comments. An agenda showing
the scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Cathy Pastor and
Jamie Dvoretzky, Office of Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). However, other personnel from the
IRS and the Treasury Department participated in the development of
these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6047-2 is also issued under 26 U.S.C. 6047(d). * * *
Par. 2. Section 1.401(a)(9)-5 is amended by:
1. Revising paragraph A-3(a).
[[Page 5451]]
2. Redesignating paragraph A-3(d) as new paragraph A-3(e) and
revising newly designated paragraph A-3(e).
3. Adding new paragraph A-3(d).
The revisions and addition read as follows:
Sec. 1.401(a)(9)-5 Required minimum distributions from defined
contribution plans.
* * * * *
A-3. (a) In the case of an individual account, the benefit used in
determining the required minimum distribution for a distribution
calendar year is the account balance as of the last valuation date in
the calendar year immediately preceding that distribution calendar year
(valuation calendar year) adjusted in accordance with paragraphs (b),
(c), and (d) of this A-3.
* * * * *
(d) The account balance does not include the value of any
qualifying longevity annuity contract described in A-17 of Sec.
1.401(a)(9)-6 that is held under the plan. This paragraph (d) only
applies for purposes of determining required minimum distributions for
distribution calendar years beginning on or after January 1, 2013.
(e) If an amount is distributed from a plan and rolled over to
another plan (receiving plan), A-2 of Sec. 1.401(a)(9)-7 provides
additional rules for determining the benefit and required minimum
distribution under the receiving plan. If an amount is transferred from
one plan (transferor plan) to another plan (transferee plan) in a
transfer to which section 414(l) applies, A-3 and A-4 of Sec.
1.401(a)(9)-7 provide additional rules for determining the amount of
the required minimum distribution and the benefit under both the
transferor and transferee plans.
* * * * *
Par. 3. Section 1.401(a)(9)-6 is amended by revising the last
sentence in A-12(a) and adding Q&A-17 to read as follows:
Sec. 1.401(a)(9)-6 Required minimum distributions for defined benefit
plans and annuity contracts.
* * * * *
A-12. (a) * * * See A-1(e) of Sec. 1.401(a)(9)-5 for rules
relating to the satisfaction of section 401(a)(9) in the year that
annuity payments commence, A-3(d) of Sec. 1.401(a)(9)-5 for rules
relating to qualifying longevity annuity contracts described in A-17 of
this section, and A-2(a)(3) of Sec. 1.401(a)(9)-8 for rules relating
to the purchase of an annuity contract with a portion of an employee's
account balance.
* * * * *
Q-17. What is a qualifying longevity annuity contract?
A-17. (a) Definition of qualifying longevity annuity contract. A
qualifying longevity annuity contract (QLAC) is an annuity contract
(that is not a variable contract under section 817, equity-indexed
contract, or similar contract) that is purchased from an insurance
company for an employee and that satisfies each of the following
requirements--
(1) Premiums for the contract satisfy the requirements of paragraph
(b) of this A-17;
(2) The contract provides that distributions under the contract
must commence not later than a specified annuity starting date that is
no later than the first day of the month coincident with or next
following the employee's attainment of age 85;
(3) The contract provides that, after distributions under the
contract commence, those distributions must satisfy the requirements of
this section (other than the requirement in A-1(c) of this section that
annuity payments commence on or before the required beginning date);
(4) The contract does not make available any commutation benefit,
cash surrender right, or other similar feature;
(5) No benefits are provided under the contract after the death of
the employee other than the life annuities payable to a designated
beneficiary that are described in paragraph (c) of this A-17; and
(6) The contract, when issued, states that it is intended to be a
QLAC.
(b) Limitations on premium--(1) In general. The premiums paid for
the contract on a date do not exceed the lesser of the dollar
limitation in paragraph (b)(2) of this A-17 or the percentage
limitation in paragraph (b)(3) of this A-17.
(2) Dollar limitation. The dollar limitation is an amount equal to
the excess of--
(i) $100,000, over
(ii) The sum of--
(A) The premiums paid before that date under the contract, and
(B) The premiums paid on or before that date under any other
contract that is intended to be a QLAC and that is purchased for the
employee under the plan, or any other plan, annuity, or account
described in section 401(a), 403(a), 403(b), or 408 or eligible
governmental section 457(b) plan.
(3) Percentage limitation. The percentage limitation is an amount
equal to the excess of--
(i) 25 percent of the employee's account balance under the plan
determined on that date, over
(ii) The sum of--
(A) The premiums paid before that date under the contract, and
(B) The premiums paid on or before that date under any other
contract that is intended to be a QLAC and that is held or was
purchased for the employee under the plan.
(c) Payments after death of the employee--(1) Surviving spouse is
sole beneficiary--(i) In general. Except as provided in paragraph
(c)(1)(ii)(B) of this A-17, if the sole beneficiary of an employee
under the contract is the employee's surviving spouse, the only benefit
permitted to be paid after the employee's death is a life annuity
payable to the surviving spouse where the periodic annuity payment is
not in excess of 100 percent of the periodic annuity payment that is
payable to the employee (or, in the case of the employee's death before
the employee's annuity starting date, the periodic annuity payment that
would have been payable to the employee as of the date that benefits to
the surviving spouse commence under paragraph (c)(1)(ii)(A) of this A-
17).
(ii) Death before employee's annuity starting date. If the employee
dies before the employee's annuity starting date and the employee's
surviving spouse is the sole beneficiary under the contract--
(A) The life annuity, if any, payable to the surviving spouse under
paragraph (c)(1)(i) of this A-17 must commence not later than the date
on which the annuity payable to the employee would have commenced under
the contract if the employee had not died; and
(B) The amount of the periodic annuity payment payable to the
surviving spouse is permitted to exceed 100 percent of the periodic
annuity payment that is payable to the employee to the extent necessary
to satisfy the requirement to provide a qualified preretirement
survivor annuity (as defined under section 417(c)(2) of the Internal
Revenue Code (Code) or section 205(e)(2) of the Employee Retirement
Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)),
as amended (ERISA)) pursuant to sections 401(a)(11) and 417 of the Code
or section 205(a)(2) of ERISA.
(2) Surviving spouse is not sole designated beneficiary--(i) In
general. If the employee's surviving spouse is not the sole beneficiary
under the contract, the only benefit permitted to be paid after the
employee's death is a life annuity payable to a designated beneficiary
where the periodic annuity payment is not in excess of the applicable
percentage (determined under paragraph (c)(2)(iv) of this A-17)
[[Page 5452]]
of the periodic annuity payment that is payable to the employee (or, in
the case of the employee's death before the employee's annuity starting
date, the applicable percentage of the periodic annuity payment that
would have been payable to the employee as of the date that benefits to
the designated beneficiary commence under this paragraph (c)(2)(i)). In
addition, no benefit is permitted to be paid after the employee's death
unless the contract satisfies the requirements of either paragraph
(c)(2)(ii) or paragraph (c)(2)(iii) of this A-17. Moreover, except as
provided in paragraph (c)(1)(ii)(A) of this A-17, in any case in which
the employee dies before the employee's annuity starting date, any life
annuity payable to a designated beneficiary must commence by the last
day of the calendar year immediately following the calendar year of the
employee's death.
(ii) No pre-annuity starting date death benefit. The contract
satisfies the requirements of this paragraph (c)(2)(ii) if the contract
provides that no benefit is permitted to be paid to a beneficiary other
than the employee's surviving spouse after the employee's death--
(A) In any case in which the employee dies before the selected
annuity starting date under the contract; and
(B) In any case in which the employee selects an annuity starting
date that is earlier than the specified annuity starting date under the
contract and the employee dies less than 90 days after making that
election.
(iii) Pre-annuity starting date death benefit. The contract
satisfies the requirements of this paragraph (c)(2)(iii) if the
contract provides that in any case in which the beneficiary under the
contract is not the employee's surviving spouse, benefits are payable
to the beneficiary only if the beneficiary was irrevocably selected on
or before the employee's required beginning date.
(iv) Applicable percentage. If the contract is described in
paragraph (c)(2)(ii) of this A-17, the applicable percentage is the
percentage described in the table in paragraph A-2(c) of this section.
If the contract is described in paragraph (c)(2)(iii) (and not in
(c)(2)(ii)) of this A-17, the applicable percentage is the percentage
described in the table set forth in this paragraph (c)(2)(iv). The
applicable percentage is based on the adjusted employee/beneficiary age
difference, determined in the same manner as in paragraph A-2(c) of
this section.
------------------------------------------------------------------------
Applicable
Adjusted employee/ beneficiary age difference percentage
------------------------------------------------------------------------
2 years or less............................................ 100
3.......................................................... 88
4.......................................................... 78
5.......................................................... 70
6.......................................................... 63
7.......................................................... 57
8.......................................................... 52
9.......................................................... 48
10......................................................... 44
11......................................................... 41
12......................................................... 38
13......................................................... 36
14......................................................... 34
15......................................................... 32
16......................................................... 30
17......................................................... 28
18......................................................... 27
19......................................................... 26
20......................................................... 25
21......................................................... 24
22......................................................... 23
23......................................................... 22
24......................................................... 21
25 and greater............................................. 20
------------------------------------------------------------------------
(3) Calculation of early annuity payments. For purposes of
paragraphs (c)(1)(i) and (c)(2)(i) of this A-17, to the extent the
contract does not provide an option for the employee to select an
annuity starting date that is earlier than the date on which the
annuity payable to the employee would have commenced under the contract
if the employee had not died, the contract must provide a way to
determine the periodic annuity payment that would have been payable if
the employee were to have an option to accelerate the payments and the
payments had commenced to the employee immediately prior to the date
that benefit payments to the surviving spouse or designated beneficiary
commence.
(d) Rules of application--(1) Reliance on representations. For
purposes of the limitation on premiums described in paragraphs (b)(2)
and (b)(3) of this A-17, unless the plan administrator has actual
knowledge to the contrary, the plan administrator may rely on an
employee's representation (made in writing or such other form as may be
prescribed by the Commissioner) of the amount of the premiums described
in paragraphs (b)(2)(ii)(B) and (b)(3)(ii)(B) of this A-17, but only
with respect to premiums that are not paid under a plan, annuity, or
contract that is maintained by the employer or an entity that is
treated as a single employer with the employer under section 414(b),
(c), (m), or (o).
(2) Consequences of excess premiums. If a contract fails to be a
QLAC solely because a premium for the contract exceeds the limits under
paragraph (b) of this A-17 on the date of the payment of that premium,
the contract is not a QLAC beginning on that date. In such a case, none
of the value of the contract may be disregarded under Sec.
1.401(a)(9)-5, Q&A-3(d), as of the date on which the contract ceases to
be a QLAC.
(3) Dollar and age limitations subject to adjustments--(i) Dollar
limitation. In the case of calendar years beginning on or after January
1, 2014, the $100,000 amount under paragraph (b)(2)(i) of this A-17
will be adjusted at the same time and in the same manner as under
section 415(d), except that the base period shall be the calendar
quarter beginning July 1, 2012, and any increase under this paragraph
(d)(3)(i) that is not a multiple of $25,000 shall be rounded to the
next lowest multiple of $25,000.
(ii) Age limitation. The maximum age set forth in paragraph (a)(2)
of this A-17 may also be adjusted to reflect changes in mortality, with
any such adjusted age to be prescribed by the Commissioner in revenue
rulings, notices, or other guidance published in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
(iii) Prospective application of adjustments. If a contract fails
to be a QLAC because it does not satisfy the dollar limitation in
paragraph (b)(2) of this A-17 or the age limitation in paragraph (a)(2)
of this A-17, any subsequent adjustment that is made pursuant to
paragraph (d)(3)(i) or paragraph (d)(3)(ii) of this A-17 will not cause
the contract to become a QLAC.
(4) Multiple beneficiaries. If an employee has more than one
designated beneficiary under a QLAC, the rules in Sec. 1.401(a)(9)-8,
A-2(a), apply for purposes of paragraphs (c)(1)(i) and (c)(2)(i) of
this A-17.
(5) Roth IRAs. A contract that is purchased under a Roth IRA is not
treated as a contract that is intended to be a QLAC for purposes of
applying the dollar and percentage limitation rules in paragraphs
(b)(2)(ii)(B) and (b)(3)(ii)(B) of this A-17. See Sec. 1.408A-6, A-
14(d). If a QLAC is purchased or held under a plan, annuity, account,
or traditional IRA, and that contract is later rolled over or converted
to a Roth IRA, the contract is not treated as a contract that is
intended to be a QLAC after the date of the rollover or conversion.
Thus, premiums paid for the contract will not be taken into account
under paragraph (b)(2)(ii)(B) or paragraph (b)(3)(ii)(B) of this A-17
after the date of the rollover or conversion.
(e) Effective/applicability date. This Q&A-17 applies to contracts
purchased on or after the date of publication of the Treasury decision
adopting these rules
[[Page 5453]]
as final regulations in the Federal Register and for determining
required minimum distributions for distribution calendar years
beginning on or after January 1, 2013.
Par. 4. Section 1.403(b)-6 is amended by adding paragraph (e)(9) to
read as follows:
Sec. 1.403(b)-6 Timing of distributions and benefits.
* * * * *
(e) * * *
(9) Special rule for qualifying longevity annuity contracts. The
rules in Sec. 1.401(a)(9)-6, A-17(b) (relating to limitations on
premiums for a qualifying longevity annuity contract (QLAC), and Sec.
1.401(a)(9)-6, A-17(d)(1) (relating to reliance on representations with
respect to a QLAC), apply to the purchase of a QLAC under a section
403(b) plan (rather than the rules in Sec. 1.408-8, A-12(b) and (c)).
* * * * *
Par. 5. Section 1.408-8, Q&A-12, is added to read as follows:
Sec. 1.408-8 Distribution requirements for individual retirement
plans.
* * * * *
Q-12. How does the special rule in Sec. 1.401(a)(9)-5, A-3(d), for
a qualifying longevity annuity contract (QLAC), defined in Sec.
1.401(a)(9)-6, A-17, apply to an IRA?
A-12. (a) General rule. The special rule in Sec. 1.401(a)(9)-5, A-
3, for a QLAC, defined in Sec. 1.401(a)(9)-6, A-17, applies to an IRA,
subject to the exceptions set forth in this A-12. See Sec. 1.408A-6,
A-14(d) for special rules relating to Roth IRAs.
(b) Limitations on premium--(1) In general. In lieu of the
limitations described in Sec. 1.401(a)(9)-6, A-17(b), the premiums
paid for the contract on a date are not permitted to exceed the lesser
of the dollar limitation in paragraph (b)(2) of this A-12 or the
percentage limitation in paragraph (b)(3) of this A-12.
(2) Dollar limitation. The dollar limitation is an amount equal to
the excess of--
(i) $100,000, over
(ii) The sum of--
(A) The premiums paid before that date under the contract, and
(B) The premiums paid on or before that date under any other
contract that is intended to be a QLAC and that is purchased for the
IRA owner under the IRA, or any other plan, annuity, or account
described in section 401(a), 403(a), 403(b), or 408 or eligible
governmental section 457(b) plan.
(3) Percentage limitation. The percentage limitation is an amount
equal to the excess of--
(i) 25 percent of the total account balances of the IRAs (other
than Roth IRAs) that an individual holds as the IRA owner as of
December 31 of the calendar year immediately preceding the calendar
year in which a premium is paid, over
(ii) The sum of--
(A) The premiums paid before that date under the contract, and
(B) The premiums paid on or before that date under any other
contract that is intended to be a QLAC and that is held or was
purchased for the individual under those IRAs.
(c) Reliance on representations. For purposes of the limitations
described in paragraphs (b)(2) and (b)(3) of this A-12, unless the
trustee, custodian, or issuer of an IRA has actual knowledge to the
contrary, the trustee, custodian, or issuer may rely on the IRA owner's
representation (made in writing or such other form as may be prescribed
by the Commissioner) of the amount of the premiums described in
paragraphs (b)(2)(ii)(B) and (b)(3)(ii)(B) of this A-12 that are not
paid under the IRA, and the amount of the account balances described in
paragraph (b)(3)(i) of this A-12, other than the account balance under
the IRA.
(d) Roth IRAs. A contract that is purchased under a Roth IRA is not
treated as a contract that is intended to be a QLAC for purposes of
applying the dollar and percentage limitation rules in paragraphs
(b)(2)(ii)(B) and (b)(3)(ii)(B) of this A-12. See Sec. 1.408A-6, A-
14(d). If a QLAC is purchased or held under a plan, annuity, account,
or traditional IRA, and that contract is later rolled over or converted
to a Roth IRA, the contract is not treated as a contract that is
intended to be a QLAC after the date of the rollover or conversion.
Thus, premiums paid for the contract will not be taken into account
under paragraph (b)(2)(ii)(B) or paragraph (b)(3)(ii)(B) of this A-12
after the date of the rollover or conversion.
(e) Effective/applicability date. This Q&A-12 applies to contracts
purchased on or after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register and
for determining required minimum distributions for distribution
calendar years beginning on or after January 1, 2013.
Par. 6. Section 1.408A-6 is amended by adding paragraph A-14(d) to
read as follows:
Sec. 1.408A-6 Distributions.
* * * * *
A-14. * * *
(d) The special rules in Sec. 1.401(a)(9)-5, A-3, and Sec. 1.408-
8, Q&A-12, for a QLAC, defined in Sec. 1.401(a)(9)-6, A-17, do not
apply to a Roth IRA.
* * * * *
Par. 7. Section 1.6047-2 is added to read as follows:
Sec. 1.6047-2 Information relating to qualifying longevity annuity
contracts.
(a) Requirement and form of report--(1) In general. Any person
issuing any contract that states that it is intended to be a qualifying
longevity annuity contract (QLAC), defined in Sec. 1.401(a)(9)-6, Q&A-
17, shall make reports required by this section. This requirement
applies only to contracts purchased or held under any plan, annuity, or
account described in section 401(a), 403(a), 403(b), or 408 (other than
a Roth IRA) or eligible governmental section 457(b) plan.
(2) Initial disclosure. The issuer shall be required to prepare a
report identifying that the contract is intended to be a QLAC and
containing the following information--
(i) A plain-language description of the dollar and percentage
limitations on premiums;
(ii) The annuity starting date under the contract, and, if
applicable, a description of the individual's ability to elect to
commence payments before the annuity starting date;
(iii) The amount (or estimated amount) of the periodic annuity
payment that is payable after the annuity starting date as a single
life annuity (including, if an estimated amount, the assumed interest
rate or rates used in making this determination), and a statement that
there is no commutation benefit or right to surrender the contract in
order to receive its cash value;
(iv) A statement of any death benefit payable under the contract,
including any differences between benefits payable if the individual
dies before the annuity starting date and benefits payable if the
individual dies on or after the annuity starting date;
(v) A description of the administrative procedures associated with
an individual's elections under the contract, including deadlines, how
to obtain forms, and where to file forms, and the identity and contact
information of a person from whom the individual may obtain additional
information about the contract; and
(vi) Such other information as the Commissioner may require.
(3) Annual report. The issuer shall make annual calendar-year
reports on the applicable form prescribed by the Commissioner for this
purpose concerning the status of the contract. The report shall
identify that the
[[Page 5454]]
contract is intended to be a QLAC and shall contain the following
information--
(i) The name, address, and identifying number of the issuer of the
contract, along with information on how to contact the issuer for more
information about the contract;
(ii) The name, address, and identifying number of the individual in
whose name the contract has been purchased;
(iii) If the contract was purchased under a plan, the name of the
plan, the plan number, and the Employer Identification Number (EIN) of
the plan sponsor;
(iv) If payments have not yet commenced, the annuity starting date
on which the annuity is scheduled to commence, the amount of the
periodic annuity payable on that date, and whether that date may be
accelerated;
(v) The amount of each premium paid for the contract, along with
the date of the premium payment; and
(vi) Such other information as the Commissioner may require.
(b) Manner and time for filing--(1) Initial disclosure. The report
required by paragraph (a)(2) of this section shall not be filed with
the Internal Revenue Service.
(2) Annual report--(i) Timing. The report required by paragraph
(a)(3) of this section shall be filed in accordance with the forms and
instructions prescribed by the Commissioner. Such a report must be
filed for each calendar year beginning with the year in which premiums
for a contract are first paid and ending with the earlier of the year
in which the individual in whose name the contract has been purchased
attains age 85 (as adjusted pursuant to Sec. 1.401(a)(9)-6, A-
17(d)(3)(ii)) or dies.
(ii) Surviving spouse. If the individual dies and the sole
beneficiary under the contract is the individual's spouse (in which
case the spouse's annuity would not be required to commence until the
individual would have attained age 85), the report must continue to be
filed for each calendar year until the calendar year in which the
distributions to the spouse commence or in which the spouse dies, if
earlier.
(c) Issuer statements. (1) Initial disclosure. Each issuer required
to make a report required by paragraph (a)(2) of this section shall
furnish to the individual in whose name the contract has been purchased
a statement containing the information in the report. The statement
shall be furnished at the time of purchase. The statement is not
required to include information that the issuer has already provided to
the individual in order to comply with any applicable state disclosure
law.
(2) Annual report. Each issuer required to file the report required
by paragraph (a)(3) of this section shall furnish to the individual in
whose name the contract has been purchased a statement containing the
information required to be furnished in the report, except that such
statement shall be furnished to a surviving spouse to the extent that
the report is required to be filed under paragraph (b)(2)(ii) of this
section. A copy of the required form may be used to satisfy the
statement requirement of this paragraph (c)(2). If a copy of the
required form is not used to satisfy the statement requirement of this
paragraph (c)(2), the statement shall contain the following language:
``This information is being furnished to the Internal Revenue
Service.'' The statement required by this paragraph (c)(2) shall be
furnished on or before January 31 following the calendar year for which
the report required by paragraph (a)(3) of this section is required.
(d) Effective/applicability date. This section applies on or after
the date of publication of the Treasury decision adopting these rules
as final regulations in the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-2340 Filed 2-2-12; 8:45 am]
BILLING CODE 4830-01-P