Qualified longevity annuity contracts, or QLACs, were first introduced into the market in 2014. The concept is fairly straightforward. The QLAC is a type of deferred annuity purchased with retirement plan dollars to provide income security late in life. As an incentive, any QLACs purchased within the contract are not counted when determining the account value at year-end for required minimum distribution calculation purposes.
On the other hand, the value of a QLAC strategy was limited by the rules governing these types of contracts. The Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act changed the game and expanded the rules governing these types of longevity insurance contracts, increasing the value of these contracts and providing clarity for tax years 2023 and beyond.
QLACs: The Basics
A QLAC is a type of deferred annuity purchased with retirement plan dollars. Annuity payments are deferred until the client reaches old age (payments must generally begin no later than the month following the month when the client reaches age 85, although they can begin earlier). The annuity payments are guaranteed, meaning that the client will hedge against longevity risk in addition to reducing current RMDs.
QLACs are beneficial in that the value of the QLAC is excluded when the owner calculates RMDs. This, of course, allows the client to reduce ordinary income tax liability once RMDs kick in by reducing the overall account value used to calculate required annual distributions.
Under the original rules governing QLACs, taxpayers were limited to purchasing a QLAC with an annuity premium value equal to the lesser of:
- 25% of their account value, or
- $145,000 (as adjusted for inflation in 2022).
The 25% limit was applied separately to separate employer plans, but in aggregate when it came to IRAs.
