What the SECURE Act means for annuities
Measure's provisions are a big win for annuity providers and those who see the need for more lifetime income options in retirement plans.
The SECURE Act, which was approved by the House Tuesday, would impact annuities in a number of ways, but I want to focus on two, starting with a provision that changes how annuities would be treated, which can be found in Sec. 204 of the act.
The provision’s goal is to help relieve fiduciaries’ responsibilities in selecting and reviewing annuity providers and annuities to ease the burdens of getting annuities into 401(k) plans. Seen as a huge gift to the annuity world, this is a big win for annuity providers and those who believe retirees need more lifetime income options in their retirement plans.
Fiduciaries wouldn’t be required to select the lowest-cost product for their plans. The provision would allow them to meet their fiduciary requirements if they choose an annuity provider who’s in good standing with state regulators. They’re no longer pressured to do a full due diligence review on the products and provider, although I still suggest fiduciaries do so.
The other annuity provision I want to discuss circles back to stretch distributions. The act’s stretch provision would eliminate most beneficiaries’ ability to stretch distributions from IRAs and defined-contribution plans over their life expectancy — excluding spouses, who can still take advantage of stretch strategies.
If stretch distributions were removed, any annuity contract held within a defined-contribution plan or individual retirement account would fall into the 10-year distribution period for non-spouse beneficiaries. This would be a big problem for IRAs and 401(k)s holding certain types of annuity contracts.
However, a provision in Title IV, Section 401(a)(4) of the act provides an exception for certain existing annuity contracts. The bill states that certain qualified annuity contracts meet the exception. To meet the exception, they must be commercial annuities that make payments over the life of the employee or life of the employee and a designated beneficiary’s life.
In addition, the annuity would need to make payments before the enactment of the SECURE Act (Jan. 1, 2020) or an irrevocable election before that date.
Grandfathered annuities under the SECURE Act would pay for the lifetime of two people. An example is a single premium immediate annuity or annuity in payout that would continue payouts to children or grandchildren over their lives. As long as the annuities meet the grandfathering rules, there should be no issue.
However, new annuities or annuities without a definitive payout decision wouldn’t fall under the grandfathering rules. According to annuities expert Gary Mettler, annuity contracts’ ability to pay out over two non-spousal lives will only remain possible if the non-spousal individual qualifies as an eligible designated beneficiary.
Under the SECURE Act, an eligible designated beneficiary is an individual who is either disabled or chronically ill (as defined by the IRS) or any individual who is no more than 10 years younger than the IRA owner.
If the non-spousal annuitant is within the 10-year age range, the annuities could still be placed for siblings and significant others. Annuities paying out to the surviving spouse will be OK.
Some dollar limit might also be exempted if the SECURE Act were revised or the Senate version of the Retirement Enhancement and Savings Act were passed. This is what Mr. Mettler hopes for. While he sees some opportunities for better planning under the SECURE Act, he also sees significant challenges for certain annuities, especially single premium indexed annuities, under the current legislation.
New annuities sold with joint non-spouse beneficiaries moving forward in IRAs might not be able to adhere to the 10-year distribution rules. These annuities would need some cash-out or modification feature moving forward. This could be a real issue for some annuities currently inside of IRAs without this option or annuities that are sold after the SECURE Act.
The SECURE Act might not secure retirement for everyone, but it does offer some commonsense changes. The gut reaction to the bill is that the huge impacts on the stretch IRA distributions and annuities are for the better.
Still, the bill is not the completely positive outcome for annuities that some might expect. Its passage in the Senate isn’t guaranteed either.
Despite its moderate strength and uncertain future, it’s important to know retirement planning will change. Understanding how now will help your clients and their beneficiaries in the long run.
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