In July 2014, the IRS released final regulations on QLACs, or Qualifying Longevity Annuity Contracts. These “deferred income annuities” can be purchased by IRAs and qualified plans (within limits) and the contract values will be exempt from RMD rules until age 85, thus allowing even greater benefit of tax deferral. However, the regulations are fairly complex and raise some questions that they don’t answer.
Here are six questions that producers are asking about this new, popular product.
Q: Can a QLAC in a qualified plan be converted to a Traditional IRA?
A: Some qualified plans must offer a qualified pre-retirement survivor annuity (QPSA). A QLAC in such a plan, having such required language, may prove problematic when transferred to an IRA with a non-spouse beneficiary.
Q: Can a QLAC in a qualified plan be converted to a ROTH IRA?
A: It is not yet clear whether a QLAC in a qualified plan can be converted to any type of IRA. Gary Mettler believes that unless it is determined that the rules specifically disallow such conversion, some insurers will permit it: “It’s a logical extension. They will just use the same 12/31 valuation statements for RMD purposes or perhaps a specially prepared valuation statement at the time of conversion. They would then issue the appropriate Roth amendments to the contract.” That said, the same QPSA requirement for qualified plans as noted above may prove administratively difficult.
Q: Can a QLAC in a Traditional IRA be converted to a ROTH IRA?
A: The final regulations do not prohibit such a conversion, but the resulting contract will not be a QLAC, nor will it need to be, as Roth IRAs do not have RMDs during the life of the IRA holder.
Q: May an individual purchase a QLAC after Required Beginning Date (RBD)?
A: This is answered by implication in the revised Treasury Reg §1.401(a)(9)-6, A-17(c)(v), which states that, for contracts permitting set non-spousal beneficiary designation, “payments are payable to the beneficiary only if the beneficiary was irrevocably designated on or before the later of the date of purchase or the employee’s required beginning date.” Clearly, an employee (in the case of a qualified plan) or IRA participant may purchase a QLAC after RBD.
Q: How must annuity issuers modify the language of existing DIAs to make those contracts QLACs?
A: Carriers must disclose that the contract to be considered a QLAC is intended to be a QLAC, and an annual report to include the minimum requirements found in the Initial Disclosure and Annual Reporting Requirements of the Final Regulations. This disclosure can be in the form or a rider or endorsement, certificate and continue annually while the contract is in the deferral period. All RMD MDIB (Minimum Death Incidental Benefit) rules must be followed after the ASD.
Q: May both QLACs and non-QLAC DIAs be held in a taxpayer’s Traditional IRA and will the QLACs get the RMD exemption of the regulations but the non-QLAC DIAs will not?
A: The regulations answer this question by their focus; they address QLACs only, not IRA-held DIAs that are not QLACs. They take away nothing that was in existence before. Nothing in the regulations prevents a taxpayer from holding a non-QLAC DIA in a Traditional IRA and the method of RMDs has already been established for non-QLAC DIAs. The Actuarial Present Value [APV] (which may be referred to as Fair Market Value [FMV]) is calculated and RMDs attributable to that value must be taken out of another IRA or a commutation liquidation from the DIA contract. After ASD, the income payments from the DIA automatically satisfy the RMD requirement.No separate calculation is required.