SECURE Act 2.0 and Qualified Longevity Annuity Contracts (QLACs)

The SECURE Act 2.0 continues to be revised, and it’s likely to dominate the House Ways and Means Committee ahead of the midterm elections. It seems likely that the retirement proposal may be combined with some of the expired parts of the 2017 tax law, creating a tax package acceptable to both sides. But the full agenda from the committee is still in limbo.

Clearly, President Biden’s reconciliation package won’t make it through in its current form, which will affect the outlook for ay bipartisan tax legislation this year.

My interest is on the legislation’s attempt to build retirement savings, building on the first SECURE Act enacted in 2019 that included tax credits for employer-sponsored retirement plans, eliminated age limits on IRAs to allow wage earners to contribute to their plans until death, and permitted some part-timers to benefit from saving for retirement with a 401(k) plan. A version of this bill passed the House with strong bipartisan support.

This latest version of the Securing a Strong Retirement Act of 2021 (H.R. 2594) would require automatic enrollment in 401(k) and 403(b) plans and make it easier for small employers to offer pension plans. It would also establish a national online database of retirement plans, letting people find their retirement plans if the company they work for is bought out or changes its name. Finally, it will incrementally increase the age to begin required minimum distributions to 75.

I’m keeping an eye on the proposed changes for QLACS – Qualifying Longevity Annuity Contracts. I’ve written about this extensively and these changes could lead to increased opportunities for retirement security. QLACs are generally deferred annuities that begin payment at the end of an individual’s life expectancy. Because payments start so late, they are an inexpensive way for retirees to hedge their risk of outliving savings that often occurs in defined contribution plans and IRAs. QLACS also can qualify as Medicaid compliant annuities.

Strict minimum distribution rules prevented a lot of growth in using QLACs in defined contribution plans and IRAs because the rules required payments to start at age 72, before QLACs began payments. Regulations enacted in 2014 generally exempted QLACs from the minimum distribution rules until payments began. But a lack of statutory authority to provide a full exemption means there are limits on the exemption. This has prevented QLACs from being used more widely in protecting retirees from outliving their savings.

Section 202 of the SECURE 2.0 legislation would repeal the 25% limit and facilitate the sales of QLACs by providing spousal survival rights. In addition, you can cancel the annuity within 90 days.

These changes would enhance the role of QLACs in creating a retirement plan that works for Americans, who, even in the face of COVID, are living longer and need additional ways to create income for an extended period.