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Regulation and Compliance > State Regulation

New Qualified Plan Distribution Regs: Opportunity For Annuity Producers

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By now, most of you have read something on the new (and final) regulations for qualified plan distributions, which were issued by the IRS on April 16 of this year.

As an annuity producer, you may not have paid close attention to these regulations, since they apply to qualified plans. I want to urge you, however, to pay close attention for two very important reasons: 1.) about half of all annuities sold are qualified; therefore, you do need to have qualified plan expertise in the annuity business; and 2.) your clients need you on this issue. They can save money using the new regulations and you can earn money by helping them.

First, some history. Weve waited a long time for these regulations. The Tax Reform Act of 1986 brought about sweeping changes on how distributions from qualified plans were to be handled. Most notably, the law set forth the general rules of required minimum distributions beginning at 70. General rules, however, do not a tax code make, and therefore, Congress left it to the IRS to write the regulations. The IRS moved with reasonable speed and issued proposed regulations in July 1987. The proposed regulations were over 60 pages long (fine print) and quite complicated.

The IRS repeatedly promised that final regulations would be published “soon.” They must have meant that in a geological sense.

Thirteen years came and went, when in 2001 the IRS issued not final regulations, but another set of proposed regulations. To their credit, the proposed regulations of 2001 were a significant simplification and improvement over the proposed regulations of 1987. And, again to their credit, the IRS issued final regulations in a reasonable timeframe (April 16, 2002).

These final regulations were largely consistent with the proposed regulations, and included updated (improved) mortality tables.

Heres what it means to you. For your clients who have qualified money [IRA, TSA, 401(k), 457, 401(a), etc.] in annuities or not, you have a tremendous planning opportunity. Youll note that the knowledge you acquire by learning the new regulations will serve as a great prospecting tool as well. Here are just some of the planning points that result from the new regulations:

1.) At 70 and beyond, required distributions can be much lower, thanks to new rules and new mortality. For example, for a $300,000 IRA for a 75-year old husband and wife, the old method (depending on elections) may have caused them to take a $19,230 distribution, whereas the new regulations would only require a $13,100 distribution. If they dont need this income, this will result in a significant tax saving, especially over a number of years.

2.) Pre-59 life expectancy calculations may now be altered using new life expectancy tables, without subjecting the change to penalties under the “substantially equal” rule.

3.) Beneficiaries who defaulted to, or who were otherwise subject to the 5-year distribution rule, may now switch to a life expectancy distribution period.

4.) IRA transfers are no longer subject to Required Minimum Distributions having to be taken prior to the transfer. They now just need to be taken as they would otherwise, without a transfer.

5.) Separate accounts for different beneficiaries may be established at any time, for any number of beneficiaries, either before or after the participant turns 70. For purposes of required distributions after the participants death, separate accounts may be established up to the end of the year following the year the participant dies. This enables each beneficiary to have a separate account and, with each separate account, the distribution period is based solely on the beneficiary of that account; other beneficiaries are disregarded. Separate investments can be made for each separate account.

6.) The new regulations clarify many issues around stretching qualified assets over multiple beneficiaries. These changes can significantly impact your advice to your clients relative to distribution structure, as well as issues such as asset allocation and asset rebalancing. [Distribution of plan assets can now be stretched over not only the plan participants life expectancy, but also that of the spouse and the spouses beneficiary.]

7.) Since it is unlikely for 401(k) plan sponsors to embrace the stretch options that are available for IRAs, you have an opportunity to introduce the new regulations and consequent planning options to your clients as an alternative to the 401(k) plan at the time of retirement from service. Traditional retirement plans tend to be much more restrictive, opening the door to the more flexible IRA.

8.) Under the old regulations, once a participant named a beneficiary for post-70 distributions, the distribution election was irrevocable. This required careful consideration of whom the beneficiary was to be, as well as the state of his or her health. Under a recalculated life expectancy, the death of the beneficiary left the participant with only his or her single life on which to base any remaining distributions. Now, participants may name any beneficiary theyd like, with no effect on the minimum distribution.

This list goes on, but Ill stop here. It is vitally important that you take the time to learn about how the new regulations affect your qualified plan clients. The net result of the new regulations is lower distributions for most owners and likely changes in the manner in which beneficiary designations are made–both owners and their beneficiaries may be looking at substantially larger estates. This may very well lend itself to liquidity concerns and estate tax issues, which can effectively be handled by life insurance.

Change brings opportunity. The new regulations offer many direct and indirect opportunities to forge even stronger relationships with your clients and provide a solid foundation for working with new prospects. Taking advantage of these opportunities will provide your clients with a better retirement. Doing so will also provide you with a better retirement.

Thomas F. Streiff, CFP, CLU, ChFC, CFS, is

a partner of NxtStar Ventures, LLC in Chicago, Ill.

He can be reached via e-mail at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 22, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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