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Flexible final regs on longevity annuities

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The new Treasury Department regulations on longevity annuities have been promulgated as final. But you could call them “flexible final regulations,” since they include a sentence allowing for exceptions on one point. That may sound like an oxymoron but it’s not.

The exception statement occurs right at the end of a discussion that runs nearly 350 words long, in section 1D of the regulation.

As we reported in AnnuityNews , the regulation states that variable annuities (VAs) and fixed index annuities (FIAs) are excluded from becoming permitted longevity annuities under the new rules (or qualifying longevity annuity contracts (QLACs), as the government calls them). “However,” the document continues, “the final regulations also provide that the Commissioner may provide an exception to this rule in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin.”

That “however” sentence provides some valuable flexibility that certain annuity leaders will surely use.

In fact, as soon as the regulation came out, Kim O’Brien, executive director of the National Association for Fixed Annuities (NAFA), commented on the AnnuityNews website that, using the exceptions window, “NAFA intends to submit documentation that the ‘unpredictability’ of the non-guaranteed interest earnings in an FIA is no different than it is in a set rate fixed annuity.”

As the exception efforts get underway, this is a good time to reflect on the finality of government rules, regulations and, yes, laws.

On the one hand, the government gets a lot of flak for being too flexible. It wasn’t that long ago, for instance, when wags derided Congress for establishing a new “permanent” estate tax law in the American Taxpayer Relief Act of 2012. The grumbling then was, “yeah, it’s permanent until they change it.” And of course, there is no end to the derision over the Affordable Care Act’s change of the previous health care funding regime, and then the subsequent changes to the new system.

On the other hand, the government also gets a lot of flak for being too rigid — in the tax structure, in the labyrinth of benefits rules and regulations, in the access to certain types of information, and so on.

At times, the push-pull of flexibility and rigidity is downright maddening. Today, it’s one thing; tomorrow, it’s the opposite. It’s hard to know where the ground is.

Yet in this particular case, the “however” sentence seems wise and fair, being embedded as it is in a “final” regulation that is updating rules for today’s longer-lived population. Demographics have changed and the rules need to change accordingly, but with a careful eye on possible consequences and improvements. For that reason, the rules need to be bendable to some extent, and the exception avenue is a good way to make that possible.

In the insurance industry, the word “exceptions” can be a dream-come-true for insurance agents. That happens when agents place business that would have otherwise been rejected or rated sky-high if not for underwriting exceptions.

On the other hand, if carriers receive too many requests for exceptions, the underwriters get their backs up and no one gets exceptions for a while.

It might help to keep the insurance exception process in mind when seeking exceptions to this new and evolving area of QLAC longevity annuities.

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Connect with Linda →

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