This blog was last updated on November 15, 2016
As many people grow older, they become concerned that they may outlive their monetary resources. The IRS created Qualified Longevity Annual Contracts (QLAC) to address this issue and provide peace of mind to those affected. Form 1098-Q is used to report premiums paid on QLACs.
QLACs guarantee that funds in a qualified retirement plan — like a 401(k) — can be turned into lifetime income without violating minimum distribution rules for those who are 70.5 years old or older. Those who qualify for QLACs can only receive these benefits if they follow rules set by the IRS. Annual distribution is based on the value of the account in question at the end of the preceding year.
A QLAC is an annuity contract that is purchased from an insurance company for an employee under any plan, annuity, account, or eligible governmental plan. There are a number of requirements applicants must satisfy using the 1098-Q form.
Premiums satisfy the limitations requirements if they do not exceed the $125,000 or 25 percent of the purchaser’s account balance. Purchasers are restricted to the lesser amount of these two parameters.
Premiums that exceed the above amounts will not be accepted as QLACs unless the excess amounts are returned to the non-QLAC portion of a purchaser’s accounts. However, if these amounts are returned by the end of the calendar year following the year in which the premium was originally paid, the contract will be considered satisfactory.
Additional requirements include a provision that distributions under the contract must commence before a specified annuity starting date, which is to be no later than the first day of the month after the purchaser’s 85th birthday. The contract also cannot make any commutation benefit, cash surrender right, or other similar feature available. No additional benefits are provided under the contract after the death of the employee.
When the contract is issued, it must be stated that it is intended to be a QLAC. It cannot be a variable contract, an indexed contract, or similar contract, except to the extent provided by the commissioner.
What happens when the purchaser dies?
When the purchaser of a QLAC passes away, there are several different ways to distribute benefits.
- His or her surviving spouse is the sole beneficiary
- His or her surviving spouse is not the sole beneficiary
- Multiple beneficiaries
- Alternate options
When the first option is in play, the distribution is fairly simple so long as annuity payments are not in excess of 100 percent of that which is payable to the purchaser. However, things get more complex in other scenarios: The only benefit allowed when the surviving spouse is not the sole beneficiary is a life annuity payable not in excess of the applicable percentage of the annuity payment. In a case where multiple beneficiaries are designated, they will split the amount where the annuity payment is not in excess of 100 percent of that which is payable to the purchase.
As an alternate option, beneficiaries may also request that that the paid QLAC premium be returned instead of receiving a life annuity.
Who is required to file a 1098-Q?
Any person who issues a contract intended to be a QLAC that is purchased or held under any plan, annuity, or account is must file a 1098-Q with the IRS. The filer must furnish a statement to the participant on an annual basis. If the participant dies and the sole beneficiary under the contract is his or her spouse, the filer would still have to submit a 1098-Q and provide an annual statement to the spouse.
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Follow the link to view the variations of 1098-Q forms. List of 1098-Q Forms
The research for this post was conducted by Mitchell Manor and Adam Rivera
