SECURE Act and the Expanded Flexibility of Lifetime Income Annuity Options: Important Considerations

Three provisions in the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”) aim to encourage adoption of guaranteed life income products by defined-contribution plans and participants by addressing perceived shortcomings of these products by DC plan sponsors.  These provisions also aspire to increase awareness among participants of the importance of viewing retirement account balances as an income stream rather than just a total sum.

Options for Lifetime Income

The SECURE Act has added new lifetime income disclosure requirements to benefit statement rules under ERISA.  The law requires that a participant’s total accrued benefit be expressed as a lifetime income stream in the form of a single life annuity.  If the participant has a same-age spouse, the total accrued benefit must be expressed as a qualified joint and survivor annuity.  These lifetime income stream disclosures must be provided in one benefit statement during each 12-month plan period.

This new requirement does not apply until the Department of Labor issues interim final rules to include several assumptions, including lifetime income conversion and model lifetime income disclosures.  The statutory deadline to issue these interim final rules is December 20, 2020.

Fiduciary Safe Harbor

Previously, plan providers have been reluctant to offer guaranteed lifetime income products due to subjectively worded standards in the 2008 Safe Harbor regarding the selection of annuity providers.  The SECURE Act provides a new, optional safe harbor for insurers when selecting a guaranteed life income contract (“GRIC”) as part of an individual plan.  A GRIC is defined as:

an annuity contract for a fixed term or a contract (or provision or feature thereof) which provides guaranteed benefits annually (or more frequently) for at least the remainder of the life of the participant or the joint lives of the participant and the participant’s designated beneficiary as part of an individual account plan.

A plan provider’s fiduciary duties when choosing a GRIC provider can now be satisfied by:

  • Ensuring the insurer is licensed to offer GRICs.
  • Ensuring the insurer has not had their license revoked or suspended, has filed audited financial statements according to the laws of the state where it is domiciled, has maintained the necessary financial reserves to satisfy the statutory requirements in every state in which it does business, and is not operating under an order of supervision, rehabilitation or liquidation.
  • Confirming that the insurer undergoes a financial examination by the insurance commission of its home state every five years.
  • Requiring that the insurer notifies the fiduciary of any change in circumstances that occur after the above representations have been made which would render those representations untrue at the time a GRIC is issued.

In addition, a fiduciary is not under any constraint to choose the lowest cost contract, and may take additional factors into consideration when assessing contract value, including the contract’s features and benefits and insurer attributes.

Having satisfied these requirements, a fiduciary is relieved of liability for any losses that may result from an insurer’s failure to satisfy its financial obligations under the contract.

Lifetime Income Option Portability

Once a plan participant has chosen a lifetime income option, the annuity can be transferred in a direct trustee-to-trustee transfer between qualified plans, including IRAs, if the lifetime income option is removed from the original plan’s investment options.  The transfer must be made within a 90-day period that ends on the date when the lifetime income investment is no longer an option under the plan.

We help organizations set up the benefits plans that are right for their members, put processes in place to ensure regulatory compliance, and keep those benefit plans updated based on changes in laws and regulations. To learn more about the services we offer at Hall Benefits Law, call 678-439-6236 today.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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