72t Partial Transfer and a SEP violation code 1

L1: 72t Partial Transfer and a SEP violation code 1Friends, I posted this back in November:
“I have a similar situation to Ron”s but with a twist. I am 59 (on 9-9-2006) and I have an IRA with Investment Company A (variable annuity) that is in a 72t distribution since 1-30-2000. I wish to transfer the bulk of my account to Company B but leave $1,500 with Investment Company A (because there is a substantial death benefit which would be kept if the contract remained in force with Company A). So can I make a partial transfer?
Incidently, an IRS representative told me that all payments had to be substantially equal so I can”t take a distribution now (for November and December payments) for the remainder of the year in order to prepare for the transfer (like the advice that was given to Ron), is this true? It didn”t sound like she knew what she was talking about.”
I was told in a reply that this was OK to do so I did it. The transfer worked out smoothly and the precise payments have begun at the new company and stopped at the old company. But now Company A sent me a1099r and shows a distribution code of 1. I called and talked to them and they said since there was a withdrawal there is a violation of theSEP and can not be coded anything but a 1.
Is this something to worry about? What do I do now? Please help, I”m awefully anxious.
Code382007-02-01 12:07, By: Code38, IP: [70.249.44.120]

L2: 72t Partial Transfer and a SEP violation code 1In any transfer year, the IRA Custodian will issue a code of 1 even if they stilloffer the ”2” code which most don”t. Just keepgood documentation on the transfers and file form 5329 to claim the exemption.
Payments must be substantially equal – but the reference is to annual payments – as long as the annual payment is taken in some form between 1/2 and 12/31 it should make no difference whether it is monthly, daily or whatever.
Hope this helps!

2007-02-01 12:20, By: Gfw, IP: [24.148.85.129]

L2: 72t Partial Transfer and a SEP violation code 1It might be disconcerting when both the IRS and the insurance company don”t sound like they are properly informed, but both agree!!
However, they ARE both wrong as Gfw has correctly verified. The IRS is going to be getting thousands of 5329 forms claiming the “02” SEPP exception because IRA custodians are distancing themselves from passing judgement on the rules. Yours will be just one of many.
Another issue is that 1099R forms are being issued when there is a direct transfer between IRAs and these are unnecessary. If not rescinded, the taxpayer must report the transfer on line 15 of Form 1040, and enter “Rollover” since there is no instruction to enter “Transfer”. The problem with that is the appearance that you have used your one rollover per 12 month period and restricts your options for the next 12 months for that account. The IRS rarely gets into the one rollover rule, and if they inquired, you could prove to them it was actually done by transfer, so your exposure here is just documentation rather than $s. But you should not be exposed to this in the first place.
2007-02-01 16:31, By: Alan S., IP: [24.116.66.98]