ERIC submitted three comment letters offering recommendations addressing the longevity annuity contract regulations, the partial annuity regulations, and the revenue ruling concerning rollovers from defined contribution (DC) plans to defined benefit (DB) plans (see “Treasury Proposals Pave Way for Offering Lifetime Income Options”).
Longevity Annuity Contract Regulations
While ERIC supports efforts to modify existing minimum required distribution rules to better accommodate deferred annuities, it urged the Treasury and Internal Revenue Service (IRS) to revise the proposed penalty for setting aside more than the maximum amount in a qualified longevity annuity contract (QLAC).
“This all-or-nothing approach is unduly draconian … If this happens, there is no reason to treat the amount set aside up to the limit differently than if excess amounts had not been set aside,” Ugoretz and Ricard said in the letter. Moreover, they contend that the risk of such harsh consequences will make plan sponsors and participants hesitant to offer or purchase QLACs.
Accordingly, ERIC urges that the final regulation should state that if the amount set aside for a QLAC exceeds the maximum permitted by the regulation, then minimum required distribution calculations should take into account only the value attributable to excess premiums.
ERIC also recommends extending QLAC relief to DB plans. The proposed regulation states that the proposal does not apply to DB plans, which “offer annuities which provide longevity protection.” ERIC’s letter explains, however, that while DB plans offer annuities, existing minimum required distribution rules interfere with the ability to offer deferred annuities.
Allowing QLACs under DC plans and IRAs, but not DB plans, will encourage many participants to request lump-sum distributions and roll them over to a DC plan or an IRA, where they can buy a QLAC, the letter explains. Furthermore, ERIC contends that forcing participants to go this route will result in many participants buying annuities that are less attractive than what could be provided under a DB plan, thus undercutting the efforts described in Revenue Ruling 2012-4.
The letter also urges the agencies to revise the existing regulations to allow participants who are receiving annuity payments to accelerate payment of their benefits. “Like the availability of a split-payment option or a deferred annuity, flexibility to request accelerated payments under an annuity will make annuities less risky and more attractive,” ERIC contends.The comment letter on longevity annuity regulations can be found at http://www.eric.org/uploads/doc/retirement/ERIC_Commentletter_QLAC_050212.pdf.
Partial Annuity Regulations
ERIC supports the proposal to clarify that the Internal Revenue Code section 417(e) actuarial assumptions would apply only to the part of the benefit that is paid in a lump sum, but also recommends that the final regulations should allow plan sponsors to rely on the proposed rule both prospectively and for the past. Many plans already offer split payment options and apply section 417(e) assumptions only for the lump-sum portion of the benefit, and a regulation endorsing this approach should not put early adopters at risk, according to ERIC.
In addition, ERIC urges the agencies to ensure that the bifurcation rules are intuitive and consistent with the statute, and recommends that the same bifurcation rule should apply for purposes of determining whether an optional form is redundant under Treasury regulations.The comment letter on partial annuity regulations is at http://www.eric.org/uploads/doc/retirement/ERIC_Commentletter_SplitPaymentOptions_050212.pdf.
Revenue Ruling 2012-4 on DC-DB Rollovers
ERIC supports the Treasury’s and IRS’s efforts to promote DC-DB rollovers, but urges that Revenue Ruling 2012-4 be withdrawn and replaced with proposed regulations open for comments and input from stakeholders.
ERIC’s most significant concern is the premise that an amount voluntarily rolled over from a DC plan should be treated as a mandatory employee contribution to the DB plan. The letter argues that treating rollover contributions like mandatory contributions is inconsistent with the fact that rollover contributions are entirely voluntary, and that this will have troubling consequences for existing floor-offset arrangements and other plans that already allow DC-DB rollovers.The comment letter on DC to DB rollovers is at http://www.eric.org/uploads/doc/retirement/ERIC_CommentLetter_RevRuling2012-4_050212.pdf.
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