Treasury nailed it (or, as our eldest son is fond of saying, they just "friggin’" nailed it).

With just a relatively short regulation and a Revenue Ruling, Treasury simply and in a very straightforward way laid out the definitive structure for defined contribution plans (like 401(k) plans) to start providing lifetime income in a market friendly manner. The two pieces of guidance dealing with DB plans which were issued at the same time are very useful, but the meat of the matter is the critical guidance given under the proposed RMD regulation and the spousal consent Revenue Ruling, 2012-3.   The seminal guidance doesn’t answer all the questions, but it does creates the structure, and a context, in which other questions-both from the tax and the ERISA side-can be meaningfully addressed.  Amazingly, it is also structured in such a manner to accommodate both straight life annuities and the living benefit products as well (like the GLWB).   I had criticized IRS and Treasury in the past for what I had viewed as the less than thoughtful way in which they were addressing (and not addressing) critical lifetime income issues. The new releases change all of that, and–the more I look at it-in a pretty startling way. I’m not sure I have ever seen so much stuffed into so little a regulatory space.   I particularly like the proposed QLAC (“qualified lifetime annuity contract”): its an everyman’s rule. It is nonforfeitable (many argued that it be otherwise), and it is simply designed for meaningful use by the rank and file. Other, more exotic, annuities with living benefits and the like (which are generally geared for the high net worth participant) still can be used for lifetime income as 2012-3 Contracts, but they just won’t get the beneficial QLAC treatment under the RMD rule. There’s really no sane policy reason to incent those products, as such would actually serve as a disincentive to guaranteed lifetime income.    I’d like to share with you some of my initial thoughts on just what the proposed QLAC reg and Rev Rul 2012-3 did. Discussion and further study may shift some of these, but for now:       1.  Lifetime income as an investment. The QLAC and 2012-3 both confirmed a critical point: that the annuity contract can be treated as a plan investment, rather than a plan benefit.  They both made it clear that the purchase of the product could be a plan investment, rather than as for funding a benefit feature under a plan design. It is a critical distinction.   They recognize that 401(k) plans are able to purchase these products (with their varying levels of features, terms and conditions) for accumulation of lifetime income; for purchase of a deferred annuity to be distributed at the time of separation from service; or to be held within the plan itself and paid out over time, under their plans’ investment rules without massive changes to the terms governing the plans’ benefit structures.  To do otherwise would make lifetime income virtually impossible,  given the way the plan document market currently operates.   There will still be some technical “in-plan” versus “out of plan” things a plan will have to deal with but, if you are a document drafter, just make sure that the distribution rules under the plan don’t require a cash distribution, and permits a lump sum distribution. Better yet would be specific language permitting an in-kind distribution from the plan or, even more specifically, the distribution of an annuity contract. These can be well addressed within this structure.   2.  Spousal rights. Though the annuity purchase may be an investment, and not a benefit structure, 2012-3 and QLAC clarified that spousal rights will still apply on distribution of funds from the annuity (even if the annuity is distributed from the plan) and described the manner in which those rights will be applied. Rev Rul 2012-3 actually took a different position (and a very meaningful and useful  one, at that) than both of the two methods outlined in the two previous and conflicting PLRS.     It also has the effect of setting the stage (under standard DOL and state contract rules) for the “nervous administrator” of a plan to delegate that responsibility to annuity companies to take on the role of being the administrator.   3. Annuity starting date.  In outlining spousal rights, 2012-3 also provided us with a sensible definition of annuity starting date. Effectively, it is the payment date on which a contract payment can neither accelerated or commuted. The mere existence of a lifetime payment default at a future date will not trigger the annuity rules on those non-annuity withdrawals; the “profit sharing" rules will apply until the 180 day period before the actual default annuity staring date. There are likely a number of clarifications which will be needed to apply this rule under certain circumstances, but Treasury and IRS now has a structure within which to make consistent interpretations.     This will serve the plan in many ways, including making possible sane application of the manner in which QDROs and the like will apply, as well as the manner in which a required minimum distribution is computed.   4. Forfeiture.  As I noted in the discussion of the QLAC, Treasury and the IRS made it clear that, once the benefits are purchased, they can only be forfeited by death (and, then, only if the spouse is protected or given the right to waive), and otherwise subject to the 401(k) rules.  This may create portability issues but there are better ways to address that issue than allowing forfeiture (see, for example, reporting and disclosure, below).    5. Reporting and disclosure. A QLAC requires IRA type of reporting, and a new participant disclosure. This is probably the most striking of the new rules: the concept actually enables structural solutions to a number of other problems.   For example,  the reporting rules do not apply to annuities distributed under 2012-3, but Treasury should consider doing so when finalizing the QLAC regs.  The reporting could enable the DOL to manage portability (which, when it gets down to it, is really a Form 5500 problem) by doing such things as eliminating the 5500 reporting of these 2012-3 annuities which are distributed by a plan (as they probably are now); and would allow the DOL to provide simplified reporting for 2012-3 annuities still held by a plan.  From a pure public policy and tax administration view, reporting  these 2012-3 annuities prevents them from effectively “marching” put of the system-which they are, effectively, doing now.     Oddly enough, reporting also enables 2012-3 contract consolidation after leaving the plan. The rollover regs treats amounts distributed from such contracts as being able to be rolled over to another qualified plan, a reg which could then simply be clarified to roll into another 2012-3 contract-without the IRS getting worried about these funds disappearing into a black hole.   These rulings even helps address the fiduciary issue: one option carriers will have is to design 2012-3 contracts” that fall within state guaranteed fund schemes, until such time as Congress creates alternate federal protection.   Helpful would be a ruling by the DOL that, as long as the insurer picks up the administration responsibility, that 2012-3 contracts should not be considered plan assets when distributed from the plan. Also, because a number of security law rules are implicated, it would be helpful to get the SEC to cmmit to play in this sandbox.   It’s finally begun.