Qualified Longevity Annuity Contracts (QLAC)- The Treasury’s Effort to Ease Managing the Risk of Outliving Retirement Funds

Actual IRS QLAC Final Regs

A copy of the actual final regulations is linked above. This article is intended to provide accurate, detailed summary information about the QLAC regulations in the following areas:

1)      RMD changes resulting from the use of QLAC’s

2)      QLAC Definition and qualifications

3)      Planning implications

Longer life expectancy, the shift from defined retirement plans with guaranteed income for life to defined contribution plans that are self directed without income guarantees and required minimum distribution rules make it more important than ever, and difficult, for individuals to plan for the risk of outliving their retirement savings.

One way to create income for life is through the use of annuities. In recent years, several financial academic and financial planning studies have concluded that combining some guaranteed income from annuities with readily liquid equity based retirement savings can provide greater probability that overall savings will last longer in retirement.

Many people have the majority of their retirement savings in retirement plans, which would have been a less desirable location to own an immediate annuity that deferred income until a later age because the asset would have counted for determining required minimum distributions at age 70 and a half, but the income from the asset wouldn’t have been available for distributions till later ages.

New RMD Opportunities

On July 1st, the treasury released final regulations that ease the burden of planning for longevity by changing how RMD’s are calculated if you choose to exercise the use of a new type of deferred income annuity contract called a QLAC or (qualified longevity annuity contract.) Very simply, the amount of funds given to an insurance company as the premium payment for the qualified longevity annuity contract will be excluded from RMD calculations. The lesser of 25% of a retirement account value or $125,000 is the maximum that can be used to purchase a QLAC. A client may have more than one QLAC, but the combined dollar and percentage limit must not be exceeded. The premium limitation will be adjusted annually at the same time and manner as other contribution amounts are for retirement plans under section 415(d). Increases, to the extent there are any; will be in increments of $10,000.

The annuitized income payments from QLACs can be deferred to a maximum age of the first day of the first month after the attainment of age 85. The maximum distribution age, currently age 85, may be adjusted to reflect changes in mortality. Adjustments increasing the maximum age will not occur more frequently than adjustments to the limitation on premiums occur, which is annually. The payments from the QLAC at age 85 will not satisfy required minimum distributions for the balances remaining in the retirement account.

Qualifications for an annuity to be a QLAC

1)      A contract is not a qualified longevity annuity contract unless it states, when issued, that it is intended to be a QLAC.

2)      Contracts are not permitted to make available any commutation or cash surrender value benefit.

3)      The contract must state that income will start no later than the first day of the first month after the attainment of age 85.

4)      Though a return of premium death benefit is a permissible feature, the only other benefit payable to a surviving spouse or nonspouse is a life annuity that does not exceed 100% of the annuity payment payable to the deceased insured. 403(b) plans are the exception to this rule. They permit an annuity to exceed the annuity that would have been payable to the employee to the extent necessary to satisfy the requirement to provide a qualified preretirement survivor annuity.


Variable or indexed annuities are not permissible in the treasury’s final regulations. The stated reason was that the purpose of creating the regulations was to create guaranteed income in later years and they felt that variable contracts were counter to the objective. The Commissioner may provide an exception to this rule in revenue rulings, notices or other guidance published in the internal revenue bulletin in the future.

Contracts from mutual companies that are considered participating or pay dividends are permissible, as are cost of living adjustments.

Note that If the contract has a return of premium feature( ROP), payment must be paid no later than the end of the calendar year following the calendar year in which the insured dies. If the insured’s death is after the RMD period the ROP payment is treated as a required minimum distribution for the year in which it is paid and is not eligible for rollover.

QLAC’s do not apply to Roth IRA’s or defined benefit plans. If a traditional IRA holding a QLAC is converted to a Roth the existing contract will not count against the limitation requirements for a new contract.

Lastly, reporting requirements under 6047(d) require annual issuance to employee’s/insureds by the issuers similar to annual reporting requirements on form 5498 “IRA Contribution Information.”


Additional Planning Implications

Clients who this may most appeal to are those who would or do have excess unneeded or undesired required minimum distributions. The permissible return of premium feature will probably be a highly desired feature with these contracts and help to avoid the use or lose nature of the contracts which would otherwise depend on the client living to age 85.

The primary risks to purchasing these contracts are that they are illiquid (no cash surrender values) and irrevocable. Given that a client could not put more than 25% of their funds in a QLAC, this may mitigate some of the concern in regards to the need for liquidity from these contracts.

Also, the return on a QLAC is dependent on how long a person lives. The longer a person lives the greater the return. The return expected on a QLAC would be relatively low given the prohibition of the use of variable investments in QLACs, which means the insurance carriers are using fixed income returns to generate the guaranteed income at later ages. If a client had invested their funds in a balanced portfolio and lived to an advanced age it’s very possible that they may have been able to annuitize a larger dollar amount in later years and generated as much if not more guaranteed income or simply had a larger dollar amount from which to take distributions from at a safe withdrawal rate.

Hope this helps!

Jeremy P. Green CFP, CTFA, CLU, CEBS, MSFS, AEP, EA 
Wealth Strategist & Expert Witness Consultant
Wealth Strategist Designs
Cell: 612-405-0799

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