Final Rules Seek to Expand In-Plan Longevity Annuity Access

Treasury officials, along with the Internal Revenue Service (IRS), say the final rules make longevity annuities more accessible to the 401(k) and individual retirement account (IRA) markets. In short, the final rules ease certain minimum distribution requirements that have made it difficult for retirees to purchase and hold longevity annuity products without potentially jeopardizing the qualified status of their accounts.  

“All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings,” says J. Mark Iwry, senior adviser to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy. “As Boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

As agency officials explain, a longevity annuity is a type of deferred income annuity that begins payments at an advanced age, say 80 or 85. Once payments commence the income stream continues throughout the purchaser’s lifetime. The products can provide a cost-effective solution for retirees willing to use part of their lump sum savings to protect against the possibility of outliving the rest of their assets, and can also help retirees avoid the alternative prospect of limiting spending too much in retirement.

Treasury officials say the final rules make longevity annuities more accessible for workplace retirement savers by amending required minimum distribution regulations so that longevity annuity payments will not need to begin prematurely in order to comply with those regulations. This change will make it easier for retirees to consider using deferred lifetime income options, officials explain. Instead of having to devote all of their account balance to annuities, retirees who wish to follow a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments will be able to do so.

The final rules also expand upon proposed rules on longevity annuities that the Treasury Department issued previously as part of a broader coordinated effort with the Department of Labor to encourage consideration of lifetime income products. The rules follow an extensive consultation process involving organizations and individuals across the public and private sectors, according to the Treasury and the IRS.

The rules are largely consistent with the proposed regulations, but certain responses to public comments have been implemented, as follows:

• Increasing the maximum permitted investment: Under the final rules, a 401(k) or similar plan, or IRA custodian, may permit account holders to use up to 25% of their account balance or  $125,000, whichever is less, to purchase a qualifying longevity annuity without concern about noncompliance with the age 70½ minimum distribution requirements. The dollar limit will be adjusted for cost-of-living increases more frequently than under the proposed rules (in $10,000 increments instead of the $25,000 increments under the proposed rules for adjustment of the previous $100,000 limit).

• Allowing “return of premium” death benefit: Under the final rules, a longevity annuity in a plan or IRA can provide that, if purchasing retirees die before (or after) the age when the annuity begins, the premiums they paid but have not yet received as annuity payments, will be returned to their accounts. This option may appeal to individuals seeking peace of mind that if they die before receiving the annuity, their initial investment can go to their heirs. The proposed regulations had permitted a life annuity payable to a designated beneficiary after the annuity owner’s death, but not this type of “return of premium” upon death.

• Protecting individuals against accidental payment of longevity annuity premiums exceeding the limits: The final rules permit individuals who inadvertently exceed the 25% or $125,000 limits on premium payments to correct the excess without disqualifying the annuity purchase.

• Providing more flexibility in issuing longevity annuities: The proposed regulations provided that a contract is not a qualifying longevity annuity contract unless it states, when issued, that it is intended to be one. In response to comments, the final rules facilitate the issuance of longevity annuities by allowing the alternatives of including such a statement in an insurance certificate, rider, or endorsement relating to a contract.

At least one industry group expressed support of the final rules. Cathy Weatherford, president and CEO of the Insured Retirement Institute, says today’s announcement by the Treasury Department is “a major milestone for making lifetime income more readily available to American workers and their families.”

The improved availability of longevity annuities in workplace plans and IRAs will facilitate access to a steady stream of guaranteed income throughout a retiree’s later years and help Americans enhance their retirement security at a time when they are most vulnerable to outliving their financial assets or facing reduced standards of living, she contends.

“On behalf of IRI’s member companies, we commend the Administration and the Treasury Department for their efforts to ensure that Americans can attain financial security throughout all their retirement years,” Weatherford adds. “We are pleased that we were able to work with regulators to provide constructive input throughout the rulemaking process to achieve our shared goals. We look forward to continuing our dialogue with policymakers as we partner together to reduce barriers and promote access to lifetime income.”

Text of the final regulations can be found here.