The Treasury Department and the Internal Revenue Service issued final rules on July 1 to make longevity annuities—which provide regular payments that begin at an advanced age and continue throughout the individual's life—accessible to the 401(k) and IRA markets.
The new rules are “effective immediately,” Mark Iwry, senior advisor to the secretary of the Treasury and deputy assistant secretary for retirement and health policy, said to applause at the Insured Retirement Institute's Government Legal & Regulatory Conference in Washington.
“We think this helps advance lifetime income in a way that we haven't seen before,” IRI President and CEO Cathy Weatherford said.
Iwry told IRI attendees that Treasury has amended its required minimum distribution rules so that longevity annuity payments will not need to begin prematurely in order to comply with those regulations.
“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live,” Iwry said.
The change to the required minimum distribution rules will make it easier for retirees to consider using lifetime income options. “Instead of having to devote all of their account balance to annuities, retirees who wish to follow a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments will be able to do so,” Iwry said.
He explained that the final rules expand upon proposed rules on longevity annuities that the Treasury issued previously as part of a broader effort with the Department of Labor to encourage lifetime income.
“We’ve tried to keep this flexible so that the industry can continue to innovate” in the longevity annuity area, Iwry said.
Treasury says that the rules are “largely consistent with the proposed regulations, but respond to public comments” by expanding the permitted longevity annuities in several respects, including:
Increasing the maximum permitted investment: Under the final rules, a 401(k) or similar plan, or IRA, may permit plan participants to use up to 25% of their account balance or (if less) $125,000 (up from $100,000 in the proposed regulations) to purchase a qualifying longevity annuity without concern about noncompliance with the age 70 1/2 minimum distribution requirements. The dollar limit will be adjusted for cost-of-living increases more frequently (in $10,000 increments instead of the $25,000 increments under the proposed rules for adjustment of the previous $100,000 limit).
Allowing “return of premium” death benefit: Under the final rules, a longevity annuity in a plan or IRA can provide that, when purchasing retirees die, the premiums they paid but have not yet received as annuity payments will be returned to their accounts. This option may appeal to individuals seeking peace of mind that if they die before receiving the annuity, their initial investment can go to their heirs. The proposed regulations had permitted a life annuity payable to a designated beneficiary after the annuity owner's death, but not this type of “return of premium” upon death.
Protecting individuals against accidental payment of longevity annuity premiums exceeding the limits: The final rules permit individuals who inadvertently exceed the 25% or $125,000 limits on premium payments to correct the excess without disqualifying the annuity purchase.
Providing more flexibility in issuing longevity annuities: The proposed regulations provided that a contract is not a qualifying longevity annuity contract unless it states when issued that it is intended to be one. In response to comments, the final rules facilitate the issuance of longevity annuities by allowing the alternatives of including such a statement in an insurance certificate, rider or endorsement relating to a contract.