Forums Support Library RPA – Retirement Plan Analyzer Private Letter Ruling 9241063

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    • Kathleen Reynolds
      Post count: 428

      July 16, 1992

      Refer Reply to: E:EP:PA

      In re: * * *

      Dear * * *

      This letter is in response to your request, in a letter dated May 8, 1990, for a ruling letter as to whether certain proposed distributions from Plan L to Participant G are part of a series of substantially equal periodic payments and are therefore not subject to the 10% additional tax imposed on early distributions under Internal Revenue Code (I.R.C.) section 72(t). This ruling replaces the prior ruling for this taxpayer dated June 7, 1991 ( PLR 9135060).

      According to the information received Taxpayer W was incorporated from December 1, 1972 to December 31, 1989 as a Professional Corporation with one employee, Participant G. Effective December 1, 1972, Plan L was established and during its existence had only one participant, Participant G. Plan L was amended effective November 1, 1984 to cease any future allocations under the Plan. Participant G retired from employment with Taxpayer W in November 1988 at the age of 50. Participant G’s date of birth is January 5, 1938. Plan L has been an ongoing plan since the amendment to cease allocations and Forms 5500 for the Plan have been filed for all subsequent plan years. Participant G would like to begin receiving distributions from Plan L with the annual distribution amount to be determined by amortizing his account balance over the number of years equal to his life expectancy (obtained from Table V in the Income Tax Regulations (Tres. Reg.) section 1.72-9) at an assumed interest rate of earnings equal to the Long Term Federal Rate used for purposes of I.R.C. section 1288(b). The annual amount would be distributed as a single payment on January 1.

      I.R.C. section 402(a) provides that the amount actually distributed to any distributee by any employees’ trust described in I.R.C. section 401(a) shall be taxable to him, in the year in which so distributed under I.R.C. section 72.

      I.R.C. section 72 provides rules for the taxation of amounts received as annuities, endowments, or life insurance contracts and distributions from qualified plans.

      I.R.C. section 72(t)(1) provides for the imposition of an additional 10% tax on early distributions from qualified plans, including IRAs. The additional tax is imposed on that portion of the distribution which is includible in gross income. I.R.C. section 72(t)(2)(A)(iv) provides that I.R.C. section 72(t)(1) shall not apply to distributions made to an employee which are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his beneficiary.

      I.R.C. section 72(t)(4) provides that the 10% tax of I.R.C. section 72(t) will apply if the series of payments is subsequently modified (other than by reason of death or disability) before the later of (1) the close of the 5-year period beginning with the date of the first payment, and (2) the employee’s attainment of age 59-1/2. In such a case, the taxpayer’s tax for the first taxable year in which such modification occurs shall be increased by an amount determined under regulations, equal to the tax which would have been imposed except for the I.R.C. section 72(t)(2)(A)(iv) exception, plus interest for the deferral period.

      Tres. Reg. section 1.72-9 provides tables that are to be used in connection with computations under I.R.C. section 72 and the regulations thereunder. Included in this section are tables giving life expectancies for one life (Table V) and joint life and last survivor expectancies for two lives (Table VI).

      The proposed method for determining periodic annual payments is to determine an annual payment as of January 1 of the distribution year by amortizing the account balance under the Plan as of December 31 of the prior year over a number of years equal to the life expectancy of Participant G determined as follows: For the initial distribution, the life expectancy is to be that stated in Table V of Tres. Reg. section 1.72-9 using the participant’s age as of January 1 of the initial distribution year. In subsequent distribution years, the life expectancy shall be one year less than the prior year’s life expectancy. The assumed interest rate of return used to compute the annual payments is equal to the Federal Long-Term Rate (compounded annually) which is used for purposes of I.R.C. section 1288(b) and which is in effect for December of the prior year. The annual distribution amount will be recalculated each year in the same manner using the applicable interest rate and life expectancy. The life expectancy and the interest rate used are such that they do not result in the circumvention of the requirements of I.R.C. section 72(t)(2)(A)(iv) and I.R.C. section 72(t)(4) (through the use of an unreasonably high interest rate or an unreasonable life expectancy).

      Accordingly, we conclude that the proposed method (as modified) of determining periodic payments results in substantially equal periodic payments within the meaning of I.R.C. section 72(t)(2)(A)(iv). Accordingly, such payments will not be subject to the additional tax of I.R.C. section 72(t) unless I.R.C. section 72(t)(4) requires that the tax be paid.

      Sincerely yours,

      James E. Holland, Jr.

      Chief, Pension Actuarial Branch

      Date: May 1, 1992

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