IRS Issues Regulations Governing Longevity Annuities in Connection with the Minimum Required Distribution Rules

The IRS has issued regulations permitting participants in defined contributions plans such as 401(k) plans and traditional IRAs to purchase longevity annuities.  Basically, a longevity annuity begins payment of an annuity at a particular age, not to exceed 85.  The IRS issued regulations to deal with Internal Revenue Code §401(a)(9)’s minimum required distribution (MRD) requirements.  The rules do not apply to Roth IRAs (because the MRD rules do not apply to Roth IRAs).  The regulations generally limit the amount of an account balance that can be used to purchase a Qualifying Longevity Annuity Contract (QLAC) to the lesser of 25 percent of the account balance or $125,000. Requirements exist in order for an annuity to quality as a QLAC, but a QLAC can permit a refund of the premium(s) paid to the extent they exceed benefits paid.  The section 401(a)(9) benefit of a QLAC is the investment is excluded from the account balance for purposes of MRD calculations.  Thus, it reduces pre-annuity start MRDs. For 401(k) plans, there is a fiduciary obligation to permit only prudent investments with respect to plan assets.  Thus, fiduciaries will need to evaluate potential insurers as options for creditworthiness.  It is unclear whether the QLAC regulations are consistent with the limited purpose of Code §401(a)(9), but it seems unlikely anyone would want to challenge them.