Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

are equal, regular, payments designed to continue over the applicable time period. See Notice 87- 16, 1987-1 CB 446, A-12, and PLR 9805023. For how to get around this limitation; see ¶ 9.2.12 .

Notice 89-25 (A-12) and its successor, Rev. Rul. 2002-62

Notice 89-25, 1989-1 CB 662, A-12, laid out three methods a participant could use to compute the payments in his SOSEPP. Revenue Ruling 2002-62, 2002-42 I.R.B. 710, which supercedes Notice 89-25, A-12, continues the same three methods but changes the rules regarding which life expectancy tables, interest rate, and account balance may be used in designing a SOSEPP; see ¶ 9.2.05 . Rev. Rul. 2002-62 applies to any SOSEPP commencing after 2002. The IRS posted a document called “Retirement Plans FAQs regarding Substantially Equal Periodic Payments” at its web site, which is “for general information only and should not be cited as any type of legal authority”; see http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs- regarding-Substantially-Equal-Periodic-Payments . The first step in initiating a SOSEPP is to decide what size payments the participant wants to take. Ideally, the payments desired will not require the participant to use his entire plan balance. With the help of an actuary, the participant determines what size of IRA would be required to support a SOSEPP of the amount he wants, and that amount is transferred into a separate IRA from which the SOSEPP payments are made. This leaves the balance of his funds in a plan or IRA that is not involved in the SOSEPP and which is therefore available for the participant’s later needs to, e.g. , take an extra payment (on which he would pay the 10 percent penalty) without being deemed to have impermissibly “modified” the SOSEPP ( ¶ 9.3.01 ) or even to start another SOSEPP ( ¶ 9.2.13 ). The participant must make several choices about the design of the series: Choose one of the three permitted methods. ¶ 9.2.05 . Choose a life expectancy table. ¶ 9.2.07 – ¶ 9.2.09 . If using the amortization or annuitization method, choose an interest rate ( ¶ 9.2.10 ) and decide whether or not to use “annual recalculation” ( ¶ 9.2.06 ). Choose an initial account balance valuation date. ¶ 9.2.11 . Decide whether payments will be monthly, quarterly, or annually. The “periodic payments” must be paid at regular intervals at least annually. Rev. Rul. 2002-62, § 1.02(b). Though Rev. Rul. 2002-62 and its follow-up “FAQs” ( ¶ 9.2.03 ) use only annual payments in their examples, monthly payments are apparently also popular (see, e.g. , PLRs 2002-14029, 2002-14034, 2002-03072). A. The participant has a choice of three IRS-approved methods for the design of his SOSEPP: RMD method. Under the RMD method,” the “series” payments are calculated in the same manner as lifetime required minimum distributions under § 401(a)(9) (called RMDs” elsewhere in this book, RMDs” by the IRS): The account balance (revalued annually) is divided by a life expectancy factor each year to produce the required payment. See ¶ 1.3.01 . Since the youngest age covered under the “real” RMD table (see Table 1, Appendix A ) is 70, the IRS created a special under-age-60 RMD table” for users of this method. See ¶ 9.2.07 (A). “Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payments are redetermined for each year.” Rev. Rul. 2002-62, § 2.01(a). Because this method requires annual revaluation of the account, payments fluctuate (both up and Steps required to initiate a SOSEPP The three methods: RMD, amortization, annuitization