- Government Shows Interest in Having DC Plans Provide Lifetime Benefit Options
- February 17, 2010 | Authors: Arthur Bachman; Wilhelm L. Gruszecki; Kari Knight Stevens
- Law Firm: Blank Rome LLP - Philadelphia Office
Retirement income “sufficiency and security” is a high priority on the Government’s 2010 Regulatory Agenda. The Department of Labor and the IRS have announced that they will shortly be issuing a Request for Information regarding how defined contribution plans may provide for lifetime payment options. Perhaps with this in mind, the IRS released Private Letter Ruling 200951039 that clarifies some of the legal requirements surrounding lifetime income options in defined contribution plans. In the PLR, the IRS addressed a novel variable annuity product that allows a plan participant to receive a stream of income for life (or the joint life of the participant and a beneficiary) in two phases.
During Phase 1, which runs for a minimum of five (5) years, each periodic payment is calculated as the product of the account value and an annuity factor, adjusted to reflect investment performance. During Phase 1, the participant has the option to start or stop the periodic payments, to lengthen or shorten the initial phase, to pay additional premiums into the group annuity, to request a partial lump-sum withdrawal, to surrender the group annuity for its surrender value, or to change the joint annuitant. At the conclusion of Phase 1, the participant is no longer able to make such changes.
If a participant dies during Phase 1, a death benefit equal to the account value is provided. The beneficiary may elect to receive the amount in a single sum or in a variety of life annuities that satisfy the IRC § 401(a)(9) minimum distribution requirements.
During the Phase 2, periodic payments in the form of contingent annuity payments are provided. Even though payments may increase or decrease based on the investment return during Phase 2, investment experience cannot exhaust the value of the group annuity, which continues for the life of the participant (or joint lives of the participant and beneficiary).
If a participant dies during Phase 2, continued payments are provided in the form elected by the participant.
The IRS ruled as follows:
- Minimum required distributions during Phase 1 should be determined under the rules applicable to defined contribution plans, and during Phase 2 under the rules applicable to defined benefit plans.
- Notice requirements, including QJSA, must be satisfied at the beginning of Phase 1 even though during Phase 1 the employee may change the Phase 2 joint annuitant and, by taking withdrawals, change the amount of the Phase 2 payments.
- The annuity payments made during Phase 2 could be considered payments under a QJSA, notwithstanding that the payment amounts would vary with investment performance.