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IRS proposes rules to help retirees make their 401(k) funds last longer

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in Centerpiece,Compensation and Benefits,Human Resources

retirement piggy bankEven if they’ve been diligently socking away money in their 401(k) plans, employees who are about to retire are no doubt nervous about their financial futures. The nagging question: With retirees living longer, will their retirement savings last as long as they do?

Believe it or not, the IRS wants to help. Under a recently released IRS guidance package, you can play an active part in helping retirees manage this so-called longevity risk.

Spread out 401(k) payouts

Annuities aren’t new. Neither are traditional defined-benefit plans, which pay out pension benefits every month, instead of in a lump sum. But both have fallen out of fashion.

The proposed guidance seeks to allow employers to offer soon-to-be retirees a wider range of choices with regard to how they receive their 401(k) retirement benefits.

Proposed regulations would allow 401(k) plans to offer longevity annuities, sometimes called deeply deferred annuities, which would kick in when a retiree reaches an advanced age, such as 85.

The regs would alter the 401(k) minimum distribution rules, so that an annuity that begins by age 85, and that costs no more than the lesser of 25% of an em­­ployee’s account balance or $100,000, could be disregarded when calculating the minimum distribution rules.

To ensure that retirees couldn’t cash out early, longevity annuities would have to satisfy certain limits on cash-out options and death benefits.

The regs are proposed to become effective for annuity contracts purchased and required minimum distributions calculated after final regs are issued, which should happen in late summer.

Your 401(k) administrator can help you determine what’s possible under your current plan, or what changes will be necessary to take advantage of the new regs.

The pertinent guidance is 77 F.R. 5443

401(k)s and terminations

Another new IRS regulation is designed to make it easier on terminating em­­ployees who might normally cash out their 401(k) plan assets and make direct rollovers to a mutual fund of their choice. The new ruling gives some of those employees another choice.

Employers with both 401(k) plans and defined-benefit pension plans may accept direct rollovers of ­employees’ 401(k) plan assets. Proviso: The defined-benefit plan must convert lump-sum direct rollovers to annuities that are actuarially equivalent to the amounts the plan received, based on specific actuarial assumptions.

These actuarial assumptions are the same ones that are used to convert annuity benefits to lump sums. This ruling applies with respect to rollovers beginning Jan. 1, 2013, but you may rely on it before that time. (Rev. Rul. 2012-4, IRB 2012-8)

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