Lifetime Income from Defined Contribution continues to gain traction, which means that those tasked with administering these programs really need to start paying attention to the details of how its done. This also means understanding how the Joint & Survivor Annuity rules-rules which many have spent a career avoiding in 401(k) plans- operate. This then means understanding how Revenue Ruling 2012-03 actually works.

Revenue Ruling 2012-3 was issued by Treasury as part of a package of rulings designed to enhance the availability of lifetime income from DC plans. This package included the proposed QLAC regulations (whose terms were coordinated with the Rev Rul) and another Rev Rul which addressed the issue of partial annuitization from DB plans.

2012-3 is an actuary’s dream, with specific, almost painful details outlining the machinations of how the J&S rules apply when making lifetime income payments from a plan which otherwise is designed to avoid this issue. Remember that the J&S rules not only require that the payment from a retirement plan be made in the form of a 50% Joint and Survivor Annuity, but also requires a particular notice scheme before the payments begin. 401(k) (and more and more, 403(b)) plans are designed to meet the exception to these rules by providing lump sum benefits, with the spouse being the default named beneficiary. Lifetime income blows up this exception. So, now what do you do?

There’s a pile of issues which need to be addressed when making Lifetime Income arrangements under a DC plan, but four of the most basic concerns are addressed by 2012-3:

  1. The annuities are investments, not protected plan benefits.

The first key point that the Rev Rul makes is that choosing lifetime income under a 401(k) plan doesn’t need to be a matter of plan design, but should instead be designed as a matter of the participant making an investment choice. As a practical matter, this means that your plan document does not have to be amended to enable the payment of an annuity benefit (which would be a “protected benefit” under Code Section 411(d)(6)). The plan document language merely needs provide broad enough investment authority to enable the fiduciary to offer the purchase of an annuity contract as a plan investment for the participant (yes, if you really want guaranteed lifetime income, that guarantee still can only be provided under an annuity contract issued by a licensed insurance company).

2. The joint and survivor rules apply only to the elected annuity contract, not to the entire plan-or even to the entire account balance of the participant.

The Rev Rul makes I clear that, as long as individual accounts are being maintained, the exemption from the J&S rules for the rest of the plan -or the rest of the participant’s account-is not lost.

3. The J&S rules won’t apply until the “annuity starting date.”

This is really a big deal. The “annuity starting date” is a critical definition for lifetime income programs. The Revenue Rul defines when the annuity starting date occurs for the lifetime income payout, under which the entire notice and consent process is triggered. The Rev Rul took the position that the annuity starting date is effectively the date when the payout option is irrevocable. In most products, that will be the date the lifetime payments will begin, but it is possible for it to even be decades earlier.

4. Making the annuity the default method of payment under the plan won’t trigger the J&S rules if the participant can elect out of it before the annuity starting date.

The fact that the lifetime payout is the default option is not determinative of the “annuity starting date,” as long as the participant has the ability to choose another option before payments begin.

Getting re-acclimated to the J&S administration will be a challenge.