The final rules follow the proposed QLAC rules in most respects. The significant changes are that the dollar limit (what can be used to purchase a QLAC) was expanded by $25,000 (to the lesser of 25% or $125,000) and QLACs can now have a "return of premium" feature, which permits the contract to provide that, if a participant or participant and beneficiary die before they have received a return of the premium they paid, the contract may refund the remainder of the premium amount. The final rules also provide for a cure period, in the event the limits are exceeded; under the cure rules, the contract will still qualify if the excess amounts are returned to the participant's account by the end of the calendar year following the year in which the contract is purchased.
To be a QLAC:
- Premiums can't exceed the above amounts
- Distributions can't begin later than the first of the month following the participant's 85th birthday (note that the amounts paid as premiums on the QLAC are excluded from the 70 1/2 minimum distribution rule calculation)
- Death benefits have to follow specified requirements (which differ, depending on whether the beneficiary is the spouse of the participant and whether the participant dies before or after the annuity starting date)
- The contract must state that it is a QLAC and the issuer must comply with annual reporting requirements
The rules are effective July 2, 2014
It will be interesting to see whether the QLAC rules are a big enough change to support participants' leaving their retirement savings in employer plans, particularly in light of the primary role being assumed by DC plans in the employer-plan universe. While adjustments to the dollar limits and maximum commencement age (the former being indexed to cost of living adjustments and the latter to changes in life expectancy) will help, it is likely that this initial step is not big (or flexible) enough to accomplish that for most participants.
It will also be interesting to see whether a QLAC concept will be extended to DB plans. The IRS has requested comments on that point.