On December 29, 2022, bipartisan legislation was signed into law, which is designed to further enhance workplace defined contribution (DC) retirement plans, such as 401(k) plans, and strengthen retirement security. The new law, which was contained in the Consolidated Appropriations Act, 2023, is the SECURE 2.0 Act of 2022. It’s commonly referred to as SECURE 2.0 because it comes on the heels of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
While there are many provisions included in the SECURE 2.0 Act of 2022, there are several specific provisions that are covered in this Special Commentary whitepaper related to Qualifying Longevity Annuity Contracts (QLACs), a type of longevity insurance available to defined contribution (DC) plan sponsors and their plan participants.
MetLife was the first company to introduce a longevity insurance product into the marketplace, which later paved the way for QLACs to be sanctioned by the U.S. Treasury Department in 2014. A QLAC is fixed deferred annuity provided as a distribution option from qualified retirement plans, such as 401(k) plans, 403(b) plans or individual retirement accounts (IRA). QLACs are typically purchased at the point of retirement (e.g., age 65), with the guaranteed annuity benefit commencing at an advanced age, typically age 80 or 85, and meeting certain other requirements. MetLife was also the first company to introduce an institutional QLAC into the marketplace.
An Internal Revenue Service (IRS) QLAC regulation 26 CFR § 1.401(a)(9)-5 allows for the portion of the retiree’s 401(k) balance, for example, that is used to buy the QLAC to generally be excluded from the funds used to calculate RMDs. Retiring participants could begin income payments at a chosen start date, which can be as late as age 85.
At that time of the initial IRS regulation, the maximum amount that could be used for the QLAC premium was the lesser of 25% of the individual’s 401(k) balance or $125,000. The original QLAC limit of $125,000 was increased to $130,000 effective January 1, 2018, and again on January 1, 2020 to $135,000 and, finally, on January 1, 2022, it was raised to $145,000. Notably, the 25% limit was applied to each employer plan separately, but in aggregate to IRAs.
Secure 2.0 QLAC Changes
Secure 2.0 paves the way for QLACs to be more accessible for DC plan participants. Section 202 of Secure 2.0 eliminates the 25% threshold, increases the dollar limit to $200,000 (indexed for inflation), and clarifies that survivor benefits may be paid in the case of divorce.
In addition, Section 202 also clarifies that free-look periods are permitted – but not required – in the QLAC contract, allowing the annuity purchaser to cancel the annuity for up to 90 days with respect to contracts purchased (or received in an exchange) on or after July 2, 2014.
The Secretary of the Treasury (or the Secretary’s delegate) has 18 months from the enactment of Secure 2.0 to amend the regulation issued by the Department of the Treasury relating to ‘‘Longevity Annuity Contracts’’ (79 Fed. Reg. 37633 (July 2, 2014)).
Former Treasury Official Touts QLAC Benefits
Mark Iwry, the former Treasury official who “shepherded the QLAC into existence during the Obama administration, and who was consulted on the writing of the QLAC provisions in Secure 2.0,” continues to recommend them. In a Retirement Income Journal article, Iwry said “The combination of mortality pooling and predictable investment for 15 to 20 years produces a meaningful add-on to Social Security income starting at 80 or 85.”1
As the innovator of longevity insurance and the first company to introduce an institutional QLAC, MetLife believes there is enormous value in plan sponsors considering QLACs as a plan distribution option for their DC plan participants. By using a small portion of their retirement savings (e.g., 10-20%) to purchase a QLAC as a Qualified Plan Distributed Annuity (QPDA), retirees are guaranteed income later in life when they will likely need it most.
1 Secure 2.0: A Booster Shot for Qualified Savings Industry, Retirement Income Journal, May 6, 2021.