QLACs

Submitted by Jason Hochstadt on Mon, 2015-02-02 21:17

Hello,

1. Is it possible to use a QLAC for a client who is older than 70 1/2 and already taking RMDs?

2. Are QLACs available for non-spouse beneficiaries (Inherited IRAs)?

3. Is there a penalty (and what is it) if someone has more than 25% of their eligible retirement accounts (Non-Roth IRAs and Qualified Plans) invested in QLACs – based upon the 25% threshold being exceeded in relation to the 12/31/14 total eligible retirement account values?

4. Can QLACs ever be accelerated (e.g. similar to an accelerated benefit rider for a life insurance policy in the event of a long-term care need)?

5. Can 1 QLAC be replaced by a different QLAC?

6. Is an individual allowed to sell a QLAC prior to its maturity date – e.g. a 65 year old gets a QLAV that he plans on having until age 85 – yet at age 75 or 80 can he sell the QLAC if he so desires? If so, presumably the RMDs then commence inclusive of the value of the QLAC which has been sold.

7. If a 401k Plan participants invests in a QLAC, then retires, can he roll over (on a direct, trustee-to-trustee basis) the QLAC (as part of the 401k Plan) into a Rollover IRA – assuming the receiving custodian permits QLACs to be held w/ them?

8. Do you think Plan Sponsors of Qualified Plans will be reluctant to offer QLACs given the financial risk inherent in the carrier selection and uncertainty that the carrier will be able to meet its obligations many years into the future?

Thank you.



Submitted by Alan - IRA critic on Tue, 2015-02-03 19:33

  1. Yes
  2. No
  3. Excess amount of premium must be returned within 1-2 years, if not more complex sanctions exist.
  4. No. QLACs cannot be commuted.
  5. Not replaced, but an additional QLAC can be purchased
  6. As above. A sale amounts to a commutation.
  7. Probably. Regs attached did not address
  8. Not sure.
  9. Here are the QLAC Regs     https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-15524.pdf

Submitted by Jason Hochstadt on Tue, 2015-02-03 22:18

Thank you, Alan, for your response.  In sum, is it fair to say that the downsides of the QLAC are (1) if the individual were to unexpectedly require the funds prior to the age of the deferred annuity payout – as well as giving up access to the principal value up to the $125k and (2) if newer QLACs offer better interest rates/terms/conditions, unlike w/ a mortgage where one can often refinance (or an investment where one can make a sale and then a purchase), in this case since the QLAC substituted/sold, another QLAC would need to be purchased; however, this may not be possible if the 1st QLAC comprises >25% of eligible retirement accounts.  Also, if someone were to make this purchase at the maximum QLAC limit ($125k or 25% of the account), and the value of their account falls, presumably this is irrelevant because the sole consideration of the QLAC limitation is based upon its purchase date relative to the prior year-end 12/31 total eligible retirement account values (if incorrect, please advise).Given so many uncertainties, I can only see this as being attractive right now for a HNW client who doesn’t need their RMDs, is unconcerned about ever needing the RMDs and is looking for way to defer taxes – and can do so for up to another 15 years on the value used to purchase the QLAC (up to $125k).Thank you!   Jason

Submitted by Alan - IRA critic on Tue, 2015-02-03 23:57

  • Good point. Since you cannot replace a purchased QLAC, if you used up your 125k premium and later found one with better terms, you would be locked out of taking advantage. The 25% QLAC limit is calculated using the account balance of your account on the date of purchase, not prior 12/31 balance.
  • A QLAC could function as an SPIA purchased late, and would be a good investment for those in good health with much above average life expectancy at the time of purchase. It could also partially address the lack of LTC insurance by delaying RMDs until the years when LTC is more likely and those expenses could be deducted from the higher taxable income being received.

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