ERIC Testifies Before IRS on Proposals to Expand Lifetime Income Options

June 1, 2012


ERIC News Release

For Immediate Release:  June 1, 2012

Washington, D.C. – Seth Safra, a partner at Covington & Burling LLP, testified today on behalf of The ERISA Industry Committee (ERIC) before an Internal Revenue Service hearing on proposed regulations to expand lifetime income options released in February 2012. 

In particular, he addressed the proposed regulations relating to present value requirements for partial annuity distributions options under defined benefit plans, and proposed regulations related to qualifying longevity annuity contracts (QLACs). 

Safra noted that ERIC appreciates the efforts that have been made to increase interest in lifetime income and to encourage innovation by reducing regulatory barriers, and welcomes the proposals to better accommodate deferred and partial annuities. 

Longevity Annuity Contract Regulations:  Safra noted that ERIC supports efforts to modify existing minimum required distribution rules to better accommodate deferred annuities, but urges the agency to revise the proposed penalty for setting aside more than the maximum amount in a qualified longevity annuity contract (QLAC). 

Safra explained that, under the proposed regulations, if one requirement is not satisfied, the entire deferred annuity is disqualified and must be taken into account for purposes of minimum required distribution calculations. 

“We think this result is draconian and will be difficult to administer.  No matter how hard we try, mistakes will inevitably occur,” Safra said.  He contended that a more sensible rule is to allow QLAC treatment to the extent that the requirements are satisfied.

Safra also recommended extending QLAC relief to defined benefit (DB) plans.  He noted that the proposed regulation states that the proposal does not apply to DB plans, because they already offer annuities.  Safra argued, however, that while it is true that DB plans offer annuities, existing minimum required distribution rules interfere with the ability to offer deferred annuities. 

Safra said that the proposal to allow QLACs only in defined contribution plans and IRAs will lead to a result that we think is unintended and will harm retirees.  He argued that 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, in effect forcing participants in DB plans to buy annuities outside the plan. 

Partial Annuity Regulations:  Safra noted that 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. 

His testimony focused specifically on certain issues under the proposed regulations, including what rules should apply for the past; how to apply Section 417(e) for a frozen lump sum option; and coordination with the present value rule for hybrid plans. 

Safra urged that the final regulations should expressly endorse good faith compliance with any reasonable interpretation of the statute and existing regulations, and recommended a retroactive safe harbor for plans that already have procedures that are consistent with the principles of the proposed or final regulations.  He explained that the statute and existing regulations do not require Section 417(e) assumptions for the portion of a benefit that is not paid in a lump sum. 

Safra advised that many plans already offer split payment options and apply section 417(e) assumptions only for the lump-sum portion of the benefit, and argued that a regulation endorsing this approach should be permitted both prospectively and in the past. 

As to how to apply Section 417(e) for a frozen lump sum, Safra also discussed technical conditions that could be interpreted to render the proposed rule ineffective for many plans.

Links to Safra’s testimony appear below:

Oral Testimony on QLACs

Oral Testimony on Split Payment Options


For more information:

Ted Godbout
Director, Communications
The ERISA Industry Committee
1400 L Street, NW, Suite 350
Washington, DC 20005
Phone: (202) 789-1400


The ERISA Industry Committee (ERIC) is a non-profit association committed to representing the advancement of the employee retirement, health, and compensation plans of America's largest employers.  ERIC's members provide benchmark retirement, health care coverage, compensation, and other economic security benefits directly to tens of millions of active and retired workers and their families.  ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy.