I have expressed several times my sense that the 2007 403(b) regulations were unfortunate in a number of different ways. Though they sought to address some very real compliance issues, they did so in a heavy handed and often complicated way which virtually ignored the difficulties inherent in transitioning from a statutory and commercial system
The 403(b) SPARK Standard Is Not a DOL Disclosure Solution
The 403(b) regulations replaced the "contract exchange" rules under Revenue Ruling 90-24 (which allowed the tax free transfer of 403(b) contracts between different vendors, including that of different plans, as long as certain, minimal conditions were met) with a new scheme of exchanges and transfers. After September 24, 2007, the former "90-24 transfers" between unrelated
ERISA Traps Related to “Retail” Annuities Purchased by 401(k) Plans
With the current attention being paid to annuities by the recent activity of Treasury, those plan sponsors and their advisors who may be interested in annuities in their 401(k) plans may also be tempted to take a close look at the wide array of annuities that are available for the IRA and individual marketplace for
The Party-In-Interest Threshold to the “Edges” of 408(b)(2)
If plan assets are used to purchase a typewriter at Office Depot for the exclusive use by the plan in its administration by the plan sponsor (and the plan sponsor is not Office Depot, an affiliate, or its not a plan also covering Office Depot’s employees), the purchase is merely a direct expense of the
How DC Annuitization Works; Using the QLAC
I have spent much of my career studying and practicing in the law of annuities as it applies to retirement plans-starting even prior to my long stint with an insurance holding company, when the Master Trust of the Fortune 100 company for which I was in-house ERISA counsel formulated its own synthetic, pooled GIC for
Treasury and IRS Successfully Lay the Base For Lifetime Income: The “2012-3 Annuity” and The QLAC
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:
Important 408(b)(2) Relief for 403(b) Plans
The DOL continues with its sensitivity to the challenges created for 403(b) plan sponsors in the transition to an employer accountable world. In today’s release of the final 408(b)(2) regs, the DOL provided tremendously needed relief for 403(b)plans. The language from the preamble speaks for itself:
The Department was persuaded by commenters on the interim final
The Making of the 403(b) Model Disclosure Form
The successful chair of a committee serves the committee, the committee does not serve the chair. And so it was with the creation of the just-released "best practices" 403(b) Model Disclosure, which was developed jointly by NEA, ASBO, NTSAA and ASPPA. I was fortunate enough, and honored, to serve as the chair of that
Minutiae’s Triumph: The Striking Impact of Transparency, the Prohibited Transaction Rules and the Exclusive Benefit Rule
Freedom and liberty are not merely themes sounded by politicians in political campaigns, or in rousing marches by military bands (though I am personally particularly fond of them!), nor are they ideas which you will typically see being discussed in a piece about retirement issues. But they are themes woven into the fabric of our
408(b)(2) and the 401(k) Group Annuity/Insurance Company General Account, in More Detail
A while back, I did a piece on the manner in which the 408(b)(2) regs applied to the variable investment accounts under a group annuity contract held by a retirement plan, in particular, 401(k)plans; and a "light" piece on its application to general account products. In that I hear more and more rumblings about the "fixed investment" portion of these accounts under 408(b)(2), it may be helpful to take another, more detailed look at how that reg applies to such accounts.
The first thing that comes to mind when looking at the regs for these purposes is the thing I noted in that previous blog: regardless of what you may think about 408b2 and the requirements now imposed by the rules, this reg has been craftfully drafted. The pieces fit together nicely, and complex issues with regard to investment products have been meaningfully addressed in as simple and direct manner as possible.There may be a few interpretaive issues that need to be resolved (which is to be expected), and 403(b) issues continue to be a serious challenge, but this is a fine piece of technical writing.
So it is with the "guaranteed account," "stable value fund" or "fixed account" within these group annuity contracts. The 408(b)(2) pieces fit well together.
First, it may be helpful to read my piece on general accounts, and how they work. This can go a long way in understanding why 408b2 applies in the way it does. It is one of my favorites, because it includes a Dick Van Dyke clip from "Mary Poppins." That blog only generally addressed the 408b2 issue.
Next, the fiduciary needs to know whether or not the investment account is a contractual obligation of the insurer, backed by the "general assets" of the insurer, or if it is part of a "separate account" (see my above noted blog on this). Confusion may arise from the variety of marketing names these funds may be called: the general account product will sometimes be called a "stable value fund" (typically because the crediting rate is set by use of an unrelated, third party index), which may be confused by a "stable value" mutual fund or collective trust interest which is offered under the annuity contract’s variable investment separate accounts.
Once you know that fund is a fixed obligation of the insurer from its general account, you need to see what kind of Covered Service Provider (CSP) is the insurer. It will not be considered an "A" type with regard to the fixed account, because it is not a fiduciary with regard to the management of the assets of the general account backing its contractual promise (a book could be written on this point, alone). It may be a "B" type of CSP if, under the contract, the insurer is a "recordkeeper." It will not typically be a "C" type of CSP because, even though it is insurance, the insurer will not usually receive indirect compensation (as that term is defined by 408b2) related to that account (but keep in mind that these contracts may be part of an annuity where separate accounts are used-and thus indirect comp typically received-for which "C" status may occur).
What needs to be disclosed?
-If the plan will only buy a group annuity contract with a fixed fund from the insurer, and the insurer will not provide any participant level recordkeeping services, then the insurer may not even be a CSP that will need to report under the new 408(b)(2) regs. The only complication will be the reporting of commissions.
-If the insurer is a "B" CSP, then two things will need to be reported: (i) a description of any compensation that will be charged directly against the account balance in connection with the acquisition, sale, transfer of, or withdrawal from the product, like surrender charges; and (ii) description of any ongoing expenses such as mortality and expense charges or contract charges.
What will NOT need to be reported, however, is any "spread" between the crediting rate under the contract and the investment return on the insurers’ general account, as the regs specifically exempt "operating expenses" from needing to be reported from a fixed account.
Didn’t say it would be easy, but it all does fit together nicely…..
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Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.