Fidelity changes policy on SEPP coding

L1: Fidelity changes policy on SEPP codingJust got a letter from Fidelity advising they will no longer provide the code ” 2 ” relating to SEPP”s on the 1099R. Effective 1-1-2007,all payments from a SEPP will be coded as a ” 1 ”
So, it doesn”t matter if you do the recalculation of not, you won”t lose the coding; you have already lost it. All payments will be coded as a ” 1 “. The letter did not address the fact concerning the age/five year requirement. It appears that any distribution under the SEPP provision will get a code ” 1 “.
Interestingly, Fidelity states ” . . . a change in the IRS tax reporting rules” and a change in Fidelity policy has prompted this information reporting change.
Has there been a change?

2006-11-19 05:08, By: GRT, IP: [24.145.246.83]

L2: Fidelity changes policy on SEPP codingThe 2006 1099R instructions just came out and there is absolutely no change from 2005 with respect to coding SEPP distributions. Code 2 is still specified for valid SEPPs.
There does not appear to be any change in IRS directives, but the herd mentality is alive and well with the trend among major financial institutions toward discontinuing SEPP exception coding and thereby washing their hands of any responsibility for qualifying any particular SEPP plan. It would be nice if one of these firms would actually simply disclose the specific reason for this trend, but since they are not, one might assume that the reason would not appear customer oriented. I think Vanguard just announced the same decision.
I think I”ll call both of them this week and see what I can find out. I don”t have a SEPP with them but do have accounts with both firms. Can”t pretend to contemplate a SEPP either to get info – since am past the magic age!
My guess would be that some firm got fined or warned by the IRS, and when they contemplated the work it would require to properly qualify all their SEPP customers, they decided using the 1 code would be better received than a fee to cover the document review. Just a guess…………
2006-11-19 13:15, By: Alan S., IP: [24.116.66.98]

L2: Fidelity changes policy on SEPP codingThis news makes one wonder if there”s an opportunity for setting up a firm which specializes in SEPP distributions with proper coding on the 1099-R (with the proper safeguards, of course). If the big players in the industry decide to wash their hands of the matter, it could be a niche market.2006-11-19 13:37, By: SPECTEC, IP: [206.113.214.171]

L2: Fidelity changes policy on SEPP codingSPECTEC – if the ”big players” wash their hands, there is probably a very good reason.
Questions…

Since only the firm that issues thedistribution can issue the 1099, do you have any ideaof what is involved in becoming an accepted Trustee/Custodian and the liabilities that you assumeif you actually get approvedby the IRS?
Do you have any idea of the penalties for issuing an incorrect 1099?
If the IRS has found a Trustee/Custodian that issues a bad 1099 code of ”2”, how hard would it be do do an audit of all SEPP returns that have had a code of ”2” on their 1099 for the last 3 years?
If I was the IRS and I wanted to collect a few extra dollars I might very well do a mailing to all returns that had a 1099 code of ”2” in box ”7” for the last 3 years – yes their computers are that good.Since most plans can”t be verified after the first year, they could probably collect from both the SEPP owner and the Custodian/Trustee.
Bottom line is that if your docs are in good shape, you have no problem regardless of the code. And, if your docs aren”t in good shape you could have a problem regardless of the 1099 code.
2006-11-19 14:09, By: Gfw, IP: [24.148.85.129]

L2: Fidelity changes policy on SEPP codingIn typing hastily, I apparently led you to believe that I was considering becoming a custodian/trustee. That was not the case – I was simply pointing out that if the free market works in its normal manner, some smaller companies might recognize a market niche and avail themselves of the opportunity to snare some business from the biggies.
While I don”t know the specifics of the penalties which can be imposed on the custodian/trustee, I do have the ability to enable me to look them up if I were interested. I am only a tax preparer who gets frustrated watching the antics of custodians/trustees who are eager to get their clients” money and charge fees for their services, but then refuse to do their job. I also face penalties for a host of tax-related actions, but I choose to do my job properly in order to insure that my clients get the services I charge them for while avoiding penalties assessed against them or me. If I try to bail out on my responsibilities, my clients will go somewhere else, as they should.
As to your last couple of points, if this whole thing so so terribly complex and unfathomable, even for custodians/trustees with huge legal & tax departments they tout when trying to entice their clients to invest with them, then perhaps SEPP”s should simply be done away with altogether in order to keep everybody safe from penalties (especially the custodians/trustees).2006-11-19 19:20, By: spectec, IP: [24.74.144.108]

L2: Fidelity changes policy on SEPP codingGFW:
You posed three excellent questions in your above post. I ”ve been wondering what the “down side” is for custodians if they issue an incorrect 1099. Also your post implies possible (probable?) additional administrative burdens to remedy past errors. Could you elaborate?
You also said:
“Since most plans can”t be verified after the first year, they could probably collect from both the SEPP owner and the Custodian/Trustee.”
Why can”t most plans be verified after the first year?
Thank you,
Dave2006-11-19 20:51, By: DME, IP: [209.112.195.29]

L2: Fidelity changes policy on SEPP codingDave…

The financial penalties for improperly coding a 1099 are probably insignificant – to be honest, I really don”t know – I merely posed the question.

The big problem (as posted before) is that there really isn’t any guidance issued to help a Trustee/Custodian determine when a code of 2′ is proper. A second problem is the one I alluded to in the previous post. If improper coding is found, coding that can’t be justified, will records of other SEPP plans be automatically pulled for review. The penalty to the owner for busting’ a SEPP is pretty clear and goes up with each year that the SEPP exists and additional distributions are made.

The first year of a SEPP is easy and usually runs pretty smooth. Assuming that the design assumptions (interest rate, age, etc) are reviewed by the Trustee/Custodian at the time of implementation all should be ok.

However, even in the first year, there has to be a review on the date when the first distribution occurs to insure that the PLAN meets the requirements of 2002-62 and that the interest rate used was appropriate. There are just more administrative costs that really have nothing to do with managing money.

After the first year, the problem area comes when there is annual recalculation; or all funds are not held in one account; or the funds are with multiple Custodian/Trustees, etc. Now things get much more complicated. Now the Trustee/Custodian has to pull the file, review the initial assumptions and bring them forward to the current year. Even in a simple plan, the amount of the annual distribution must be verified to insure that the correct amount was actually distributed and that no additional funds were added.

Transfers (partial or complete) also complicate matters. In the year that the transfer occurs, there is really no way for either Trustee/Custodian (sender or receiver) to verify since each only has records for part of the year. What are the odds that the plan will remain with the initial Trustee/Custodian for the full term?

Just my thoughts.

2006-11-20 08:48, By: gfw, IP: [24.148.85.129]

L2: Fidelity changes policy on SEPP codingWell, have now found out from Fidelity what the change in the IRS reporting rules is.
Remember in the 1099R instructions back in 2004that the IRS left out the exception for SEPP for the use of code 2. The IRS later said that was an error and the exception was put back in for the 2005 instructionsand is also in the current instructions for 2006 reporting.
Fidelity is now making the change based on the reporting instructions for 2004, or so they say.

2006-11-20 11:24, By: GRT, IP: [24.145.246.83]

L2: Fidelity changes policy on SEPP codingJust one more comment on this change by Fidelity and I will let it go. My main problem was the fact they specifically identified a ” change in the IRS tax reporting rules “to make their internal policy change. Now, I find out that “change” goes back to information reporting for tax year 2004 and was even incorrect and subsequently corrected. BUT, since this change is effective 1-1-2007 maybe the IRS will leave the SEPP exception out of the instructions again, for code 2. It makes me wonder, as it did in 2004, if this REALLY WAS an error by the IRS at all.
Since I am recalculating my distributions each year I felt my code 2 was in danger of becoming a code 1. However, if I calculated my distributions using their online calculator which, by the way, gives the identical results as the calculator on this site, and complied with all the rules, I would be upset to lose the code 2 coding.
2006-11-20 12:03, By: GRT, IP: [24.145.246.83]

L2: Fidelity changes policy on SEPP codingI spoke with a Fidelity advisor about this letter. I was told that the change applied to 1099Rs isued after 2006 (i.e., distributions made1-1-07 and later). The reason given to mewas the pension act revisions passed earlier in 2006. Looks like that may not have been so.2006-11-28 08:32, By: jima, IP: [69.241.164.5]