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Substantially equal and eligible rollover contributions


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The following is being used as a "substantially equal" periodic payment over 10 or more years, to avoid 20% withholding. I'm not yet convinced it qualifies, but on the other hand, it seems reasonable that it should.

Participant terminates at age 65. Takes a 13 year payout (well over the 10 or more years required for the exception). Account is distributed as 1/13th the first year, 1/12th the second, etc.

It seems to me that in order to qualify, under Revenue Ruling 2002-62, this method would require establishing an initial LIFE EXPECTANCY, and similar methodology could then be used over that life expectancy. But I don't think you can arbitrarily use a lesser number for that same methodology. Opinions?

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My thoughts on this:

1.  Unless the intention is to roll all amounts over to an IRA, every penny of every payment is taxable as ordinary income anyway.  Not withholding the 20% just makes it that much harder to come up with the cash later to pay the taxes owed.  The 20% withholding is not a tax, it is an advance tax payment.  Wanting to get a distribution without making sufficient provision for withholding of the taxes that will, almost certainly, have to be paid strikes me as foolish.

2. This is all prior to the age at which minimum distributions are required.  Why don't they just roll the entire benefit/balance over to an IRA?  Are withdrawals from IRAs subject to minimum withholding?

3.  I suspect that a varying percentage of a varying balance is not going to meet the requirements for being substantially equal. 

Always check with your actuary first!

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How about 1.402(c)-2?

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Q&A 3 

(b) Exceptions. An eligible rollover distribution does not include the following:

(1) Any distribution that is one of a series of substantially equal periodic payments made (not less frequently than annually) over any one of the following periods—

(i) The life of the employee (or the joint lives of the employee and the employee's designated beneficiary);

(ii) The life expectancy of the employee (or the joint life and last survivor expectancy of the employee and the employee's designated beneficiary); or

(iii) A specified period of ten years or more;

 

 

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Q&A 5 

(d) Defined contribution plans. The following rules apply in determining whether a series of payments from a defined contribution plan constitute substantially equal periodic payments for a period described in section 402(c)(4)(A):

(1) Declining balance of years. A series of payments from an account balance under a defined contribution plan will be considered substantially equal payments over a period if, for each year, the amount of the distribution is calculated by dividing the account balance by the number of years remaining in the period. For example, a series of payments will be considered substantially equal payments over 10 years if the series is determined as follows. In year 1, the annual payment is the account balance divided by 10; in year 2, the annual payment is the remaining account balance divided by 9; and so on until year 10 when the entire remaining balance is distributed.

 

 

 

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