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Compliance January 30, 2023
SECURE 2.0 Makes a Few Changes to Annuities
While not the focus of the bill, annuities gained increased flexibility and availability.
Reported by Paul Mulholland
The SECURE 2.0 Act of 2022, the retirement reform legislation that passed in December 2022, aimed to increase retirement access and security for Americans, primarily by reforming defined contribution plans.
SECURE 2.0 contains few reforms related to annuities, despite research showing both their popularity among workers and that Americans lack knowledge about their own life expectancy. Though the reforms made to policies addressing annuities in SECURE 2.0 are few in comparison to the changes made to defined contribution retirement plans, or even defined benefit plans, the legislation still has some impact on annuities.
Section 201 of SECURE 2.0 removes availability barriers to some life annuities in tax-advantaged retirement accounts. Previously, required minimum distribution tests limited the availability of some lifetime annuities which had large benefit increases from year to year. SECURE 2.0 allows these annuities to increase at a constant percentage, no more than 5% per year.
Section 202 seeks to make Qualified Longevity Annuity Contracts easier to invest in. The section raises to $200,000 the cap on how much money a participant can use from their retirement account to purchase a QLAC. It used to be either 25% of the account’s value or $125,000, whichever was greater. The new figure of $200,000 is also indexed to inflation, whereas the previous $125,000 maximum was not.
Additionally, according to Elizabeth Dold, a tax attorney and executive committee member at the Groom Law Group, Section 204 allows a retiree with a partially annuitized plan to combine the payments from both the annuity and the plan for the purposes of calculating their required minimum distribution. Previously, the two accounts had to be separated, each with their own RMD calculation, which could result in higher RMD payments than if they were counted together.
This allows the assets in the plan to potentially continue to grow, giving the retiree more flexibility in their retirement planning going forward.