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IRS Issues Guidance Permitting Plans to Offer Target Date Funds with Longevity Annuities

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November 2014

The IRS released guidance permitting qualified defined contribution plans to offer target date funds (TDFs) that include longevity annuities (also known as deferred annuities) as investment options. As we previously mentioned, the IRS had modified the required minimum distribution rules applicable to defined contribution plans to permit plans to offer longevity annuities, which permit deferral of account balances up to an advanced age, such as 80 or 85, in an attempt to provide lifetime income options as life expectancies rise. Pursuant to the new guidance, plans can offer TDFs with longevity annuities, even those restricted to participants in particular age-bands, without violating the nondiscrimination rules of Code Section 401(a)(4), if certain requirements are satisfied.

According to the guidance, offering a TDF with a longevity annuity only to older participants may ordinarily violate the Code’s nondiscrimination rules because it may result in a right or feature of the plan being disproportionately offered to highly compensated employees (as a group, older employees are often higher paid than younger employees). However, the new rule states that the IRS will not consider such TDFs to violate the Code’s nondiscrimination rules if the following four conditions are satisfied: (1) the series of TDFs offered by the plan is designed to serve as a single integrated investment program under which the same investment manager manages each TDF and applies the same generally accepted investment theories across the series of TDFs; (2) some of the TDFs offered only to older participants contain longevity annuities and none of the longevity annuities provide a guaranteed lifetime withdrawal benefit or guaranteed minimum withdrawal benefit; (3) the TDFs do not hold employer securities that are not readily tradable on an established securities market; and (4) each TDF in the series is treated in the same manner with respect to rights or features other than the mix of assets (e.g. the fees and administrative expenses for each TDF are determined in a consistent manner). 

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