The 403(b) QLAC

By Robert Toth on May 20, 2015

Posted in Lifetime Income, Uncategorized

I went into quite a bit of detail on the value of the the Qualified Longevity Annuity Contracts” (the “QLAC”) last year in a posting right after the QLAC regs were finalized.What the QLAC does is remove a logistical problem caused when you purchase an annuity to provide lifetime income, while creating a minor tax break for participant electing to annuitize.

As a quick update, here’s how it works: a participant can use up to 25% (or, if less, $125,000) of their 403(b) account balance to purchase a straight life annuity which becomes payable no later than age 85. If that annuity qualifies as a “QLAC”, the participant will not have to use the value of the annuity (which will effectively be the premium pad for it) in computing the required minimum distribution payments which may otherwise payable under the 403(b) contract after age 70 ½.

A QLAC can be purchased and held within a plan, or it can be purchased by a plan and distributed to the participant, depending on plan design. The QLAC is really intended to be used in conjunction with a systematic withdrawal program from a participant’s account balance: the systematic withdrawal program will cover the retirement needs until the date the QLAC’s annuity payments begin.

There are some very specific rules governing the QLAC:

It must be an annuity contract. Though a participant can take systematic withdrawals from their custodial account until the lifetime annuity kicks in, the QLAC itself can’t be the custodial account.

It must be an annuity contract. Though a participant can take systematic withdrawals from their custodial account until the lifetime annuity kicks in, the QLAC itself can’t be the custodial account.
The annuity contract itself must state that it’s a QLAC, beginning January 1, 2016.
There can be no account balance or surrender value (other than the return of premium), and the only death benefit is a lifetime annuity in favor of the joint annuitant. This means there can be no GMWBs in a QLAC program; and that a 403(b) account balance –even if in a 403(b) contract-will need to be transferred to a QLAC for it to work.
Payments must start no later than age 85, though earlier payment can be elected.
The insurer must act as the administrator, and comply with “IRA-like” annual reporting obligations. The employer doesn’t have these reporting obligations. The annual report to the participant includes
- Information about the issuer, including contact information.
- Information on the individual for who contract is purchased.
- If still part of the plan, plan information.
- Starting date of annuity, if not yet commenced
- For the year purchased, the amount of premium and date paid
- Total premiums paid for contract over time
- The fair market value of the QLAC at close of year
No Roth funds can be used to purchase the contract.

Now, we see the marketplace beginning to offer some products, but it appears that insurers are mostly offering them as IRA products as opposed to being purchased by plans and distributed to participants. Which then causes us to pause some and consider how you do a 403(b) QLAC.

The QLAC seems to be in the 403(b) “sweet spot”, considering that 403(b) annuities were originally designed to provide lifetime income in the first place. However, as with all things 403(b), however, there are a few unusual twists when trying to put a QLAC in a 403(b) arrangement. Here are a few of the things to consider:

For existing 403(b) individual annuity contracts, or certificates under a group contract, it does not appear that a new contract will actually need to be issued. It seems like the insurer can issue a rider to an existing contract which provides that a portion of the account balance can be used to partially annuitize the contract. This, however, will be the choice of the vendor.
Where the vendor will require a rollover to another contract, there can be issues for those 403(b) contracts which have been distributed from a plan: a vendor may be reluctant to do so for these contracts, given the 403(b) tax regulation requirements of employer control. If there is no employer, the vendor may not be willing to arrange for a QLAC.
An employer’s approval of a 403(b) QLAC may trigger ERISA status for a non-governmental, non-ERISA plan.
The 403(b) plan document will need to provide for a QLAC, to the extent that the 403(b) contract still is in the plan.

As we implement, I suspect we will be flushing out a few more concerns-some of them related to the manner in which we combine 403(b) contracts for purposes of having a single 403(b) QALC. But this is the beginning of an exciting time.