Press Room: Tax Release

March 28, 2012

Encouraging Lifetime Annuity Options Available Under Retirement Plans

In a set of proposed regulations and rulings, the Treasury Department and the Internal Revenue Service (IRS) have reduced the regulatory burdens for retirement plans and made it easier for retirees to choose retirement benefits in the form of lifetime annuities. Such annuities may benefit retirees who risk outliving their retirement assets. Generally, the proposed rule changes include the following:

  1. Encourage partial annuity option.  The proposed regulations would amend the current regulations to simplify the treatment of certain forms of benefits that are paid partly in the form of an annuity and partly in a more accelerated form such as a lump sum payment. Under the proposed rules, if a participant elects to bifurcate his or her benefits, then the two different distribution options are treated as two separate optional forms of benefits. This bifurcated treatment makes a partial annuity option easier to accomplish than it has been in the past.
  2. Remove key obstacles to longevity annuities.  Under these proposed regulations, a participant would be eligible to purchase a qualified longevity annuity contract and have such annuity contract excluded from the calculation of his or her required minimum distribution commencing at age 70 ½. The premiums under a qualified longevity annuity contract would be limited to $100,000 or 25% of the participant’s account balance on the date of payment. The annuity commencement date cannot be later than the first day of the month following the month in which the participant attains age 85. Further, the benefit payable on death of the participant is a life annuity to the beneficiary. These new rules would apply to qualified defined contribution plans, IRAs, Sec. 403(b) annuity arrangements and eligible governmental Sec. 457 plans.
  3. Spousal protection rules under profit sharing plans.  In a new revenue ruling, IRS outlines how the qualified joint and survivor annuity and qualified preretirement survivor annuity rules would be applied if a profit sharing plan were to offer a deferred annuity contract as an investment option under the plan. Generally, profit sharing plans do not offer annuity arrangements as a payout option because of the burden of complying with the complicated qualified joint and survivor and qualified preretirement survivor annuity rules. The ruling eases that burden by setting forth the terms that must be in the profit sharing plan as well as the annuity contract to protect spousal rights while avoiding the requirement of spousal consents before the annuity payout begins.
  4. Rollover of benefits under a 401(k) plan to a defined benefit plan.  In this new ruling, IRS provides guidance on how a participant in an employer’s 401(k) plan can rollover some or all of the 401(k) benefit to the employer’s defined benefit plan to enhance the annuity under the defined benefit plan. The guidelines address how the defined benefit plan provides the annuity, what happens if the annuity starting date occurs after the defined benefit plan receives the rollover, and the required payment with respect to the rollover if the participant dies prior to the annuity starting date.

Your WTAS advisor can assist you in assessing whether a defined benefit option should be a part of your retirement planning. If you have any questions, please contact your WTAS advisor or Dennis Minich at 312.357.3940 or