Life and Death Planning for Retirement Benefits

Chapter 9: Distributions Before Age 59 ½

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Note that the ending date of the five years is not simply the date of the fifth year’s payment. The five years ends on the fifth anniversary of the first payment. Arnold , 111 T.C. No. 250 (1998).

Exceptions for death or disability

If the series is modified “by reason of death or disability” there is no penalty. § 72(t)(4)(A) . Presumably death automatically ends the requirement of continuing the series, since death benefits are exempt from the penalty; ¶ 9.4.01 . Presumably the same is true of a total disability that justifies penalty-free distributions; see ¶ 9.4.02 . Whether a modification that was “caused by” any lesser disability would escape the penalty remains to be seen. One type of change in the series is specifically permitted: Changing to the RMD method” of computing the payments ( ¶ 9.2.05 (A)) will not be considered a modification. Rev. Rul. 2002- 62 allows a participant using the annuitization or amortization method to change (permanently) to the RMD method; see § 2.03(b) of the Rev. Rul. for details on making this switch. Because the RMD method requires annual revaluation of the account balance, a downturn in the account value will translate, under the RMD method, into a reduction in the subsequent year’s payment. Thus, the series payments will shrink along with the account value and the account will never run dry. Similarly, if the investments perform substantially better than the growth assumption used in designing the SOSEPP ( ¶ 9.2.10 ), switching to the RMD method allows the participant to increase his payments to capture some of that investment growth. Generally, taking an “extra” payment out of your IRA over and above the prescribed SOSEPP payments would be considered a modification of the series (see ¶ 9.3.07 (B)), but not necessarily always. A. Qualified hurricane distributions. Taking a qualified hurricane distribution ( ¶ 9.4.13 ) over and above the participant’s SOSEPP payments is not a modification of the SOSEPP. Notice 2005-92 , I.R.B. 2005-51 , Section 4(H). B. Other payments that qualify for another exception. If the extra distribution qualifies for some other penalty exception, the extra payment is not a modification of the SOSEPP, according to G.T. Benz, Dec. 7,810, 132 TC 15 (5/11/09). C. Administrative error. The IRS generally will rule that there is no modification when a change in the SOSEPP is caused by an administrative action or error of the SOSEPP-paying financial institution; see ¶ 9.3.06 (A), (E). However, there is no Revenue Ruling, regulation, or other authority supporting this as a general exception, leaving participants with the unpleasant choice of either applying for their own ruling (expensive) or relying on other peoples’ PLRs (with attendant uncertainty). Changing to RMD method after the SOSEPP commences When taking an extra payment is not a modification

What other changes do NOT constitute a modification?

Converting a SOSEPP-supporting account to a Roth IRA does not constitute a modification; see ¶ 8.3.03 for details. The following other types of changes in a SOSEPP have