Russell E. Towers, JD, CLU, ChFC, is
Vice President – Business & Estate Planning
at Brokers’ Service Marketing Group.
· A QLAC may offer a return of premium (ROP) feature
that is payable before and after the annuity starting
date prior to age 85.
· The QLAC may provide a lump sum death benefit paid
to a beneficiary in an amount equal to the excess of the
QLAC premium payments over and above the cumulative
payments made to the participant.
· If the QLAC is providing a life annuity to a surviving
spouse, it may also provide a similar ROP benefit after
the death of both the participant and spouse.
Other QLAC requirements:
· A QLAC does not include a variable annuity contract
or an indexed annuity contract.
· The QLAC contract is not permitted to make available
a commutation benefit or cash surrender value.
· The language of the deferred annuity contract must
clearly identify the contract as a QLAC within the
contract, a rider or an endorsement.
· Multiple QLAC contracts are permitted, but the
cumulative premium for all contracts cannot exceed
the lesser of the $125,000 indexed premium amount
or 25 percent of account balance rule.
· The final QLAC regulation does not apply to defined
benefit plans since these plans generally offer an annuity
payout, which already provides longevity protection.
Transfers or exchanges into QLACs:
· If after July 2, 2014, an existing contract is exchanged
for a contract that satisfies the requirements for a QLAC,
the new QLAC will be treated as purchased on the date
of the exchange. In this case, the fair market value of the
contract that is exchanged for a QLAC is treated as a
premium amount that counts toward the QLAC limit.
When QLACs are made available
for sale by carriers
The client is 65 years old and is actively involved in planning for retirement. An existing mutual fund
IRA of $625,000 is invested in a portfolio of equities
and fixed income assets consisting of corporate bonds
and U.S. government securities. The client feels he won’t
need to spend all of the RMD that will be required to
be distributed at age 70½. In addition, the client and
spouse expect to receive about $45,000 per year of Social
Security benefits and $24,000 per year from a defined
benefit pension from a prior employer. They have about
$250,000 of other non-qualified liquid assets. The client
asks if there is a way to allocate part of the IRA into a
financial asset where he won’t be required to take income
until a later date. What strategy might you recommend?
You should suggest that the client consider “carving
out” $125,000 and placing it into a QLAC IRA deferred
income annuity, which will start lifetime payments at
age 85 with a guarantee of 15 years. The features of the
plan are as follows when QLACs are available for sale:
» The $125,000 QLAC IRA will not be subject
to RMDs at age 70½.
» Starting at age 85, the client will receive a lifetime
payout of $23,293 per year with a guaranteed
payment period of 15 years.
» If the client dies during the 15-year period after
age 85, the designated beneficiary of the client
(spouse or non-spouse) will receive the remaining
» If the client dies prior to age 85, the designated
beneficiary will receive the original amount of
$125,000 as a taxable lump sum death benefit.
» Payments from the QLAC IRA deferred income have
a $0 cost basis so they are fully taxable as ordinary
income to the client during lifetime. And any lump
sum death benefit paid to the designated beneficiary
prior to age 85 is also fully taxable as income in
respect of decedent (IRD) to the beneficiary.
Remember, the carrier will have to include QLAC
language in the body of the contract, a rider or an
endorsement so that the deferred income annuity
contract is considered to be a “qualified” contract. RA