There are only ten (or so) different provisions under SECURE 2.0 which seem to have any sort of direct relation to the provision of Lifetime Income through defined contribution plans (“LI”), and none of them seem to have the bold, systemic effects that we saw under the some of the terms under Secure 1.0. The 2.0 lifetime income terms have “headline grabbing” titles like “Remove RMD Barriers for Life Annuities;” and “Removing a Penalty on Partial Annuitization;” and the particularly catchy “Surviving Spouse Election To Be Treated As Employee.” Though there are a number of technical questions which need to be addressed under each of these sections, none of them seem to have any broad, meaningful impact on the LI market.
That is except with regard to a little noticed rule change in the handling of Qualified Longevity Annuity Contracts (QLAC) under divorce orders or separation agreements (which include both QDROs and DROs) under Section 202 of the Act. Though that Section’s increase in the QLAC limit to $200,000 (indexed) and the removal of the 25% account balance restriction have been widely reported, Section 202(b) is the term which is more likely to have widespread, institutional impact.
Sect. 202(b) actually does not make any statutory change to any of the Code’s or ERISA rules governing the distribution of a plan’s assets pursuant to divorce or separation orders, or other any such landmark modification. Instead, it instructs Treasury to amend its QLAC rules, which are obscurely found under Required Minimum Distribution applicable to DC plans which purchase annuities (Reg 1.401(a)(9)-6). The regs must be changed to reflect that if a QLAC is issued as a joint and survivor annuity (which it is required to be unless spousal consent is obtained, under plans to which such rules apply), and a divorce subsequently occurs prior to the date the annuity payments actually begin, the DRO “will not affect the permissibility of the joint and survivor annuity benefits” as long as that order:
• provides that the former spouse is entitled to the survivor benefits under the contract;
• provides that the former spouse is treated as a surviving spouse for purposes of the contract;
• does not modify the treatment of the former spouse as the beneficiary under the contract who is entitled to the survivor benefits; or
• does not modify the treatment of the former spouse as the measuring life for the survivor benefits under the contract.
There are a number of technical issues to work through in these instructions, not the least of which is discerning the meaning of the term “will not affect the permissibility of the joint and survivor annuity benefits.” Curiously enough, this change is retroactively effective to the initial effective date of the QLAC reg, July 2, 2014, which may create a few other challenges.
Technical analysis aside, however, is the potential “downstream” impact of this provision on a wide number of plan participants, legal and professionals who represent plan participants in divorce proceedings. Where there is a QLAC in a plan, this means that a wide swath of professionals of all sorts may need to be involved in sorting through this issue in resolving a domestic relations matter.
Handling QLACs in QDROs has may well force the whole idea of DC LI into the a significant number of professional “portfolios” as a matter of necessity. Particularly given the the adoption of the QLAC by the University of California Retirement Savings Program, with its 320,000 participants and $30 billion or so in assets (the second largest public sector DC in the US behind the federal government), its impact may begin to become widespread. At the very least, a significant number of non-ERISA attorneys and accountants may now need to have to some basic understanding of the QLAC, and at least a little familiarity with the manner in which DC annuities work.
Is DC Lifetime Income about to go mainstream?