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June 26, 2009

IRS Says Transfer Results in a Modification of a SOSEPP / 72(t): PLR 200925044

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The IRS recently issued private letter ruling (PLR) 200925044, in which they ruled that a partial transfer from an IRA (from which a SOSEPP /72(t)-Payment was being taken) resulted in a modification .
The Facts as Presented to the IRS
  • A 56 year-old taxpayer maintained two IRAs (IRA # 1 and IRA # 2) with Financial Institution A.
  • She started a series of substantially equal periodic payments (SOSEPP) from IRA # 1, using the amortization method.
  • She withdrew the required annual amount from 2002 to 2008.
In January of what the IRS refers to as Year-1 ( let’s call it 2008 to make it easier to follow), she consulted with her financial advisor as to whether she could convert some of the securities in IRA # 1 to cash, as the market downturn had resulted in significant losses on her IRA investments. Her advisor told her that she could convert a portion of the balance of IRA # 1 to cash, and since Financial Institution A did not offer certificates of deposit (CDs), she could deposit the cash to an IRA at another financial institution. Based on this advice, she transferred a portion of the balance from IRA # 1 to IRA # 3 at Financial Institution B. She also transferred the entire balance of IRA # 2 to IRA #3.
In May of 2008, she attempted to transfer the remaining balance off IRA # 1 to Financial Institution C, at which point a representative from that institutioninformed her that the partial transfer from IRA # 1 to IRA # 3 which she did in January had resulted in a modification of her SOSEPP.
During a subsequent conversation with her financial advisor, she was again informed that the transfer of her SOSEPP amount for 2008, from IRA # 1 to IRA # 3 resulted in a modification.
Her Request to the IRS.
She asked the IRS to rule that:
  • The partial transfer from IRA # 1 to IRA # 3 not be considered a modification
  • A proposed correction of reversing the partial transfer (that was made from IRA # 1 to IRA # 3) to IRA # 1, plus any applicable earnings, not be considered a modification.
The IRS’ Response
The IRS noted that the partial transfer – which was nontaxable- was made before the end of the SOSEPP period, (the end would be after five years has elapsed since the inception or until age 59 ½ , whichever is longer. You can use this calculator to determine the end-date of a SOSEPP). They further stated that the partial transfer resulted in a modification of the SOSEPP, and added that the modification could not be corrected by reversing the transfer.
The Results
As a result of the IRS ruling, she will be required to repay all of the 10% early distribution penalties that were waived under the SOSEPP program, plus interest. The IRS calculates the interest owed.
What Seems Unclear ( at least to us)
We understand that the transfer occurred before the SOSEPP end-date. But from what we understand, some SEPP experts opine that an IRA, from which a SOSEPP is being taken, can be split by transferring a partial amount to another IRA without causing a modification, providing:
  • The receiving IRA had no other assets, which means the transfer does not result in a commingling of amounts that were not included in the SOSEPP calculation
  • The SOSEPP amount that would be required had the account not split, is still taken from either one or both of the IRAs.
So, the question then becomes, is the IRS saying that this is a modification because the transfer occurred before the SOSEPP-end-date? Or is it because the transfer resulted in commingling with amounts that were not included  in the SOSEPP computation? En route to coming to their decision, they cited Revenue Ruling 2002-62, which states in part that “…a modification to the series of payments will occur if… there is … (ii) any nontaxable transfer of a portion of the account balance to another retirement plan…”.This may seem black and white at first glance, but the seeming unanswered question is “what is the definition of ‘another retirement plan’? “ We are sure our friends over at http://www.72t.net can provide some insights. For instance, take a look at their article on Changes to Account Balance. Keep an eye on their discussion forum to see if they discuss this PLR.
Pursuant to 26 USC § 6110(k)(3) , PLRS cannot be used or cited as precedent
Please feel free to comment ( below): registration required.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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