Annuities are a popular retirement instrument that people use to create stable income during retirement. Annuities are often purchased through insurance companies or brokerage firms. A group annuity is one that is offered by an employer to provide benefits for employees under a retirement plan, according to the International Risk Management Institute. All group annuities should follow all rules for qualified retirement plans.
Group annuities are considered qualified if they follow IRS guidelines for inclusion with a qualified retirement plan. According to the IRS: “A qualified plan must satisfy the Internal Revenue Code in both form and operation.” The IRS has strict rules for employers about qualified retirement plans. There are multiple types of retirement plans that may include annuities, such as 401(k)s, 403(b)s and IRAs.
Understanding Group Annuity Retirement Plans
Group annuity contracts are those that are selected by an employer to be offered for employee retirement benefits. Group annuities are especially popular for nonprofit and public-sector organizations such as public schools, charities, hospitals, etc. Employers may contribute to these retirement plans, or they can be funded by employees. The general benefit of annuities is that they are guaranteed by insurance companies and offer periodic payments or lump sums for retired employees.
While pensions may have high costs to establish and manage for a smaller employer, group annuities can provide a more cost-effective option. There are also a variety of annuities available that can provide a range of protection as indicated by the insurance company Mutual of Omaha. Many companies in recent times have switched from pension plans to annuities through a "pension risk transfer" to lower administrative costs and reduce expenses from their balance sheets.
How Group Annuity Contracts Work
Here again, group annuities must follow the guidelines for qualified plans. This means that the annuity should be funded with pre-tax dollars that fall within the IRS limits for annual contributions. Withdrawals for a group annuity must begin when the annuitant reaches 72, or 70 1/2 if prior to 2019. Some annuities also provide death benefits for beneficiaries such as surviving spouses.
Group annuities are taxable as ordinary income upon distribution because they are funded with tax-deferred money. Employees can choose to withhold taxes or pay them at the end of the year.
There are two primary types of annuities – fixed and variable – and each type depends on the underlying investment. Fixed annuities are fairly simple, as they are based on rates of growth determined by the issuing company, while variable annuities are pegged to variable investments such as stocks or mutual funds. Variable annuities are also riskier. Depending on the plan, annuitants may choose between periodic payments across their lifetime or a lump-sum payment.
Looking at Group Annuity Considerations
While the SECURE Act expanded the ways in which annuities can be included in retirement plans, there are still some important things to consider. A major consideration when selecting a group annuity for a business is the provider. Since annuities do not have federal guarantees, it is important to select a company that will not only offer a good rate but that will also be around to pay out the annuities.
Another key factor is whether the group annuity policy will satisfy ERISA (Employee Retirement Income Security Act of 1974) standards for employer-sponsored retirement plans. Other considerations are liability protection and the associated costs.
Hashaw Elkins is a financial services and tax professional, as well as a project management consultant. She has led projects across multiple industries and sectors, ranging from the Fortune Global 500 to international nongovernmental organizations. Hashaw holds an MBA in Real Estate and an MSci in Project Management. She is further certified in organizational change management, diversity management, and cross-cultural mediation.