When Can a Participant Purchase a QLAC?

Q: An active participant in our 403(b) plan wants to purchase a qualified longevity annuity contract, or QLAC, with her retirement plan account balance, which she claims she can do with the passage of the SECURE 2.0 Act of 2022. However, when I discussed the matter with our recordkeeper, the recordkeeper stated that the plan, though it provides for some annuity benefits, does not offer a QLAC, and the participant would thus require a distributable event to purchase a QLAC, which this participant does not have. Is our recordkeeper correct?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Though the Experts would suggest that you discuss this matter with retirement plan counsel, based on the facts that you have provided, your recordkeeper does appear to be correct.

For the benefit of our readers, a QLAC is a type of deferred fixed-annuity contract in which the purchaser can put off receiving payments until as late as age 85, providing them with some relief from the required minimum distributions that would normally have commenced between age 72 and age 75, depending on the purchaser’s current age.

Your participant was partially correct in that SECURE 2.0 made it easier to purchase a QLAC by raising the limit from the lesser of 25% of one’s account balance and $125,000 (indexed) to a participant’s entire account balance up to $200,000 (indexed). However, SECURE 2.0 did not change the rules for purchasing a QLAC. If a QLAC is offered in a retirement plan, then it may be directly purchased by the participant. Otherwise, the funds must be rolled over to an IRA or other retirement plan that offers a QLAC.

In order to complete a rollover, a participant must be eligible for a distribution from the retirement plan. In your case, it appears that your retirement plan does not allow the active employee in question to take a distribution; thus, she cannot roll over her funds to an IRA or other retirement plan that would enable her to purchase a QLAC.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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