4477
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That sounds good unless you or your employees weren't expecting to live
quite that long and have based your retirement savings accordingly.
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Before last July, buying a longevity annuity with retirement plan assets and
keeping it in the plan would have run afoul of the required minimum
distribution rules. These rules stipulate that qualified retirement plans must
begin distributing assets when account owners reach age 70-1/2. That
requirement would have defeated the longevity annuity's purpose.
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Exempting "QLACs"
IRS regulations* finalized in July exempted the value of "qualifying longevity
annuity contracts," or QLACs, from those required minimum distributions. A
QLAC is:
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In its latest regulations on this topic (Notice 2014-66), the IRS has said that a
set of deferred annuities can be folded into target date funds held in a
retirement plan. Deferred annuities include those you buy before retirement,
and which begin at retirement, or at any future date. Longevity annuities,
therefore, qualify as a form of deferred annuity.
Target date funds, as a "qualified default investment alternative," have
become the most popular 401(k) investment option for new plan participants
in recent years.
The new IRS /Department of Labor rule will "help ensure that American
workers and their families can attain guaranteed retirement income that
cannot be outlived," states the Insured Retirement Institute, a trade
association representing annuity providers.
Previously, using an annuity in a target date fund was essentially an all-ornothing proposition. Now, you and your employees "can use a portion of
[your] savings to purchase guaranteed income for life, while retaining other
savings in other investments," according to the IRS announcement.
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The price employees will pay for the annuities they purchase will vary
according to their age, as would be the case if they purchased an annuity
contract independently. Ordinarily allowing some retirement plan
participants to pay more or less than another participant based on age would
be barred as a discriminatory practice. The new rule, however, takes the
common sense approach of overruling that limitation for this purpose.
It also allows target date funds that incorporate a series of deferred annuities
to be limited to older plan participants, who happen to be the hottest
prospects for an annuity-laden fund.
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Anti-Discrimination Standards
More specifically, the new rule bypasses anti-discrimination rules if four
requirements are met:
2. The annuities within target date funds offered to older employees cannot
feature a guaranteed minimum withdrawal benefit (an arrangement
available to annuity buyers outside retirement plans).
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When the target date fund reaches its target date, the series of annuity
contracts that have accumulated over the years is converted to an annuity
certificate "representing the participant's interest in the annuity contract held
in the TDF," or target date fund, according to the IRS. The participant's nonannuity target date fund assets can be invested in other investment options
in the plan.
Of course retiring employees can also roll assets into an IRA and invest in
whatever else they wish.
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E-mail : info@hrp.net
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