Lifetime Income Options - Recent Revenue Rulings and Proposed Regulations
To encourage retirement plans to offer lifetime income options to participants, Treasury and IRS recently released:
- A revenue ruling clarifying rules for defined contribution plans that offer lifetime income options,
- A revenue ruling clarifying rules that apply to rollovers into defined benefit plans,
- Proposed regulations that would provide guidance for plans offering longevity annuity options, and
- Proposed regulations that make it easier for employers to distribute a partial lump sum payment from a defined benefit plan.
Spousal annuity requirements for deferred annuities
Revenue Ruling 2012-3 clarifies when a plan that offers deferred annuity contracts is subject to the qualified survivor annuity requirements (under Internal Revenue Code sections 401(a)(11) and 417). Three examples illustrate when a profit-sharing plan that offers participants different election options regarding deferred annuity contracts may have to:
- provide the applicable survivor annuity written notification, and
- obtain a notarized spousal consent from a married participant if a different payout option is chosen.
Self-annuitization - rollover to a defined benefit plan
Revenue Ruling 2012-4 clarifies the rules that apply when an employer maintaining both a defined benefit and a defined contribution plan allows the DC plan participants to “purchase” annuities by rolling their lump sum distributions to the DB plan. The ruling intends to make it easier for the DC plan participants to “purchase” an annuity. Under the scenario described in the Revenue Ruling, the rollover does not cause the DB plan to violate IRC sections 411 and 415 if it converts the rolled-over DC account into an actuarially equivalent immediate annuity benefit using the actuarial basis required under IRC section 411(c), including using the interest rate and mortality table under IRC section 417(e) for certain calculations.
The plan can’t use a less favorable actuarial basis (provide a smaller annuity) than required by IRC section 411(c) because that would cause an impermissible forfeiture of benefits. However, if the plan uses a more favorable actuarial basis (provides a larger annuity) than required by IRC section 411(c), then the excess over the 411(c) amount:
- may be forfeitable subject to the vesting provisions of the plan and IRC section 411, and
- must be included when applying the annual benefit limit that can be accrued or paid to a DB plan participant (see IRC section 415(b)).
REG-115809-11 – proposes allowing IRA owners and DC plan participants to use up to 25% of their account balance (up to $100,000) to purchase a qualified longevity annuity – an annuity which begins paying benefits at an advanced age, such as 80, but not later than age 85 – and having the value of the annuity excluded from the account balance when calculating the required minimum distributions before the annuity begins.
REG-110980-10 – would make it easier for defined benefit plans to offer participants the option of receiving a portion of their plan benefits in a lump-sum and the remaining portion as an annuity. This option may encourage more participants to receive a portion of their benefits as a lifetime annuity rather than choosing to receive their entire benefit in a lump-sum. The proposed regulations would simplify the calculations for the partial annuity by providing that plans generally would need to apply the IRC section 417(e)(3) minimum present value requirements only to the portion of the benefit paid in a lump-sum (or other form subject to IRC section 417(e)(3)), and could apply the plan’s regular conversion factors to the portion of the benefit paid as a partial annuity.
A public hearing on the proposed regulations relating to longevity and partial annuities will be held June 1, 2012, in Washington, DC. Comments are due by May 3.
- U.S. Treasury, Labor Departments Act to Enhance Retirement Security for an America Built to Last (Treasury Press Release –
February 2, 2012)
- Treasury Fact Sheet - Helping American Families Achieve Retirement Security by Expanding Lifetime Income Choices