Life and Death Planning for Retirement Benefits

Chapter 9: Distributions Before Age 59 ½

433

down) with investment performance. The advantage of annual revaluation is that the account will never be wiped out by the SOSEPP payments, as can occur with the fixed payments usually used under the other two methods. The drawback of the RMD method (or any method that employs annual recalculation) is the unpredictability of the payments. B. Amortization method: Under this method, the participant chooses a reasonable interest rate ( ¶ 9.2.10 ), and a life expectancy table ( ¶ 9.2.07 – ¶ 9.2.09 .), then takes regular payments as if the account were a self-amortizing level payment mortgage (except that he is receiving, rather than making, the payments). Once the amount of the first payment is determined, the payments never vary, regardless of the investment performance of the account (unless annual recalculation is used; see ¶ 9.2.06 ). If using the amortization method, the participant has the option, in any year after the first year, to switch to the RMD method. See ¶ 9.3.04 . C. Annuitization method: Under this method, the participant chooses a reasonable interest rate ( ¶ 9.2.10 ), and single or joint life expectancy ( ¶ 9.2.07 ), then divides the account balance by an annuity factor, as if the account were being annuitized over the applicable life expectancy. “The annuity factor is derived using the mortality table in Appendix B [of Rev. Rul. 2002-62] and using the chosen interest rate.” Once the amount of the first payment is determined, the payments never vary, regardless of the investment performance of the account (unless annual recalculation is used; see ¶ 9.2.06 ). If using the annuitization method, the participant has the option, in any year after the first year, to switch to the RMD method. See ¶ 9.3.04 . The three methods are not the only possible ways to design a SOSEPP; however, if varying from these pre-approved models it is necessary to obtain advance approval from the IRS via a private letter ruling. See IRS FAQs ( ¶ 9.2.03 ), last question. The IRS has issued several letter rulings blessing SOSEPP designs that incorporated annual adjustments (to reflect changes in the account balance and/or interest rate), within the amortization or annuitization method. See PLRs 2004-32021, 2004-32023, 2004-32024, 2005- 51032, 2005-51033, 2005-44023, and 2009-43044. The key to the IRS’s approval in these rulings is that approval is sought IN ADVANCE, before the participant starts taking any distributions, and even though the payments will vary in amount, the payment is determined the same way each year. Someone who has already started a fixed-payment SOSEPP using the amortization or annuitization method cannot later change to a recalculation method; see ¶ 9.3.07 (D). The participant must choose a single or joint life expectancy period for the hypothetical duration of his SOSEPP. The choice is among three life expectancy tables if the participant is using the RMD or amortization method (“A”), or among two (three?) “factors” if using the annuitization method (“B”). The choice of payout period is irrevocable if the SOSEPP commenced after 2002. Rev. Rul. 2002-62, § 2.02(a), last two sentences. See ¶ 9.2.08 – ¶ 9.2.09 for more on these tables. A. Three tables for RMD or amortization method. Rev. Rul. 2002-62 provides that a taxpayer using the RMD or amortization method must select one of three life expectancy Variations on the three methods Choose single or joint life expectancy