To encourage defined contribution plans (such as 401(k) plans) to offer annuities, the Treasury Department issued several pieces of guidance on February 2.

To encourage defined contribution plans (such as 401(k) plans) to offer annuities, the Treasury Department issued several pieces of guidance on February 2.

The purpose of the guidance is to encourage more retirement plans to offer annuities, giving retirees a stream of income for life. Historically, employers offered defined benefit pension plans, which guarantee income for life. Since the advent of 401(k) plans, however, employers have been moving toward defined contribution plans and freezing and terminating their pension plans. Because pension plans are no longer as popular as they once were, and because defined contribution plans are not currently required to offer annuity options, concern over retirees outliving their savings has increased.

Two pieces of the lifetime income guidance that apply directly to defined contribution plans are summarized below.

Qualified Longevity Annuity Contracts in Defined Contribution Plans

The recent guidance introduces Qualified Longevity Annuity Contracts (QLACs) in defined contribution plans. The premise behind the QLAC is to allow a retiree to take a partial distribution currently to meet current cash needs, but still have an annuity that would begin much later in life, but not later than 85. This way, if the retiree outlives his financial planning, he will still have a stream of income through the QLAC.

QLACs would be subject to several requirements, including a maximum premium cost, certain death benefits, prohibition on a cash surrender value, death benefits only in the form of lifetime annuities to beneficiaries, and a specific intent to be treated as a QLAC.

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Spousal Annuity Protections in Defined Contribution Plans

Another piece of the recent guidance, Revenue Ruling 2012-3, describes the spousal consent rules for annuities offered by defined contribution plans that are not QLACs. Interestingly, the guidance treats an annuity as a form of investment—not a form of distribution. In summary, if the participant can change his investment to and from the annuity at any time, the typical spousal consent rules—which, in order to protect the spouse from being left without an income stream if the participant predeceases the spouse, require the spouse’s notarized consent to any change in beneficiary or distribution option—do not apply. On the flip side, if investments into an annuity cannot be moved, the spousal consent rules would apply if the participant were to chose a different form of distribution. Further, if the qualified preretirement survivor annuity feature cannot be waived, the spousal consent rules apply, while the ability to waive this feature results in no spousal consent requirement.

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