Life and Death Planning for Retirement Benefits

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Chapter 9: Distributions Before Age 59 ½ 415
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).
9.3.03 Exceptions for death or disability
If the series is modified “by reason of death or disability” there is no penalty.
Presumably death automatically ends the requirement of continuing the series, since death benefits
are exempt from the penalty; Presumably the same is true of a total disability that justifies
penalty-free distributions; see Whether a modification that was “caused by” any lesser
disability would escape the penalty remains to be seen.
9.3.04 Changing to RMD method after the SOSEPP commences
One type of change in the series is specifically permitted: Changing to the RMD method”
of computing the payments 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 , switching to the RMD method allows the
participant to increase his payments to capture some of that investment growth.
9.3.05 When taking an extra payment is not a modification
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 B)), but not
necessarily always.
A. Qualified hurricane distributions. Taking a qualified hurricane distribution
over and above the participant’s SOSEPP payments is not a modification of the SOSEPP.
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; se 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).
9.3.06 What other changes do NOT constitute a modification?
Converting a SOSEPP-supporting account to a Roth IRA does not constitute a
modification; see for details. The following other types of changes in a SOSEPP have