Finishing SEPP & Form 1099R

L1: Finishing SEPP & Form 1099RHello, All:
I started my SEPP plan on 3/15/2005 and it will end on 3/15/2010.I receive quarterly payments, so 2005 included the full annual amount. I will be 60.5 when the SEPP plan ends.
The IRA that funds my SEPP plan is with Vanguard. Like most other custodians, Vanguard does not issue a code of 2 in box 7 of the 1099R form. I questioned them about the 1099R that they will issue for 2010, since my SEPP plan ends during that year. My thought was they they should send out two 1099Rs, one for the SEPP plan wrap-up and one for the rest of that year. Vanguard says that they will only send a single 1099R for that year, part of which includes my regular SEPP plan payments and part including any after SEPP plan payments.
Personally, this looks like an opportunity for a problem to occur. Is this a non-issue that filing my usual form 5329 resolves or are there other hoops that must be jumped through in order for the IRS to not have an issue with a single 1099R that includes both SEPP and non-SEPP withdrawals? Do I need to continue my SEPP plan payments for all of 2010 so that no non-SEPP plan payments appear on the 1099R for that year? This would not be a financial hardship but I would just as soon end the plan as soon as IRS rules allow.
I know that this issue will not come up for a while but I have been thinking about it and would like to have a resolution for it when it does arrive. Thanks for any input on this.
Ed
2007-11-11 08:15, By: Ed_B, IP: [67.170.159.37]

L2: Finishing SEPP & Form 1099REd,
There is no reason to extend your modification date because of a custodian”s coding practices. You would just need to gear your 5329 only to the dollars coded early, and ignore the dollars coded as normal (7).
We really don”t know whether Vanguard is saying that they will not underwrite your calculations but recognize your SEPP, or whether they are ignoring the entire issue. That will be more clear for 2009, which is the year you pass 59.5, and dollars you distribute after that datewould normallybe coded 7 rather than 1 if the SEPP were ignored. But if Vanguard is partially recognizing your plan, you would get only one 2009 1099R coded as early. That means they did keep a record of your initiation date and therefore know that your plan does not end until 2010, so coding the entire year as early would be consistent with that. Therefore, the rationale of custodians becomes somewhat more transparent in the year the taxpayer hits 59.5, but for the taxpayer proper completion of the 5329 calls for reacting to what they get from the custodian.
Since the Inst for 1099R seem to put more responsibility on the custodian for proper coding, eventually the IRS may feel compelled to put some pressure on custodians to underwrite these plans and reflect their conclusions in the 1099R forms they issue. Perhaps it was the approval of re calc plans that is causing most of the custodians to throw in the towel on underwriting these plans. Rather than lose the 72t business, they are happy to keep the IRAs, but are telling the taxpayers that it is solely the taxpayer”s job to document compliance with the IRS. I don”t think we know if there is a pattern of increased IRS inquiryof self claimed exceptions vrs custodian coded exceptions, but it might be expected that there would be.2007-11-11 11:23, By: Alan S., IP: [24.116.165.60]

L2: Finishing SEPP & Form 1099RAlan:
Thanks for taking the time to reply to my query.
Only reporting the March SEPP plan distribution on the 5329 in 2010 sounds good to me. I was not sure what the deal there was, so thanks much for confirming the proper procedure.
I will reach age 59.5 on Feb. 6th, 2009, so it is likely that all of my SEPP plan distributions for 2009 will be coded with a “7” instead of the current “1”. I assume here that if my 59.5 date occurs at any time during a given quarter and I am taking quarterly payments, that all of the money distributed in that quarter would be coded as a “7”. Correct?
My thought, after a number of email exchanges, is that Vanguard is completely ignoring the SEPPs of their customers. I find this strange in view of the 7-8 page form that MUST be filled out to get the SEPP plan payments rolling. Vanguard includes a handy work-sheet that shows how to make the required calculations. I used that plus the calculator on this site to confirm the amount. In spite of all this paperwork, my SEPP plan distributions are not shown anywhere on my quarterly or annual statements as “SEPP distribution” or anything remotely similar. It simply says “periodic distribution”. All1099Rsshow “code 1”. The interesting thing here is that we also have a taxable account at Vanguard and we also take a small monthly systematic distribution from it for our health insurance.These distributions carry the same “periodic distribution” label as the SEPP plan distributions but were MUCH easier and simpler to set up. This has me scratching my head to discover why I went throughtheeffort of filling out the Vanguard SEPP form and doing the calculations. I have a SEPP plan but its parentage is not acknowledged.
I also contacted the IRS about this and their comment was “simply ask your custodian to properly code your 1099R”. Fat chance! There is nothing simple about this – most custodians simply refuse to do it. Apparently, the IRS is either unaware of this fact or they are ignoring it.
I can see where recalcs would cause additional difficulty in following the correct amount of the SEPP plan distributions. My plan does not recalc but they could well just be lumping them all together for simplicity.
My thought is that the IRS would like to streamline their operations / reduce their processing costs as much as they can and that a flood of 5329s is probably not helping much in that regard. I also would expect the IRS to, at some point, say to the custodians “OK, guys – enough is enough. Code the SEPP plans as “2”s from now on”, or something similar to that. Perhaps at that point, we will actually find out what all the trepidation on the part of the custodians with 1099R coding has been about.
The sense that I get from Vanguard”s communications is that there is a perceived liability issue here that is relieved via them ignoring SEPPs and coding all early distribution SEPP 1099Rs as “1”. Thiscould bethe Sgt. Shultz approach… we don”t know (if our customers have SEPPs) and we don”t WANT to know!
Ed2007-11-11 13:01, By: Ed_B, IP: [67.170.159.37]

L2: Finishing SEPP & Form 1099RI agree. Even with an explanation from a CSR at Vanguard or other custodian, that explanation may be just what they are told to say rather than the real reason. Without knowing, these actions suggest that some custodian was heavily fined for a SEPP that they coded with the exception and the IRS found otherwise.
With respect to the quarter you turn 59.5, the custodian should code according to the actual date the distribution is made vrs your59th birthday plus 183 days. If they are totally ignoring your SEPP as you suspect, and your first quarterly payment for 2009 is post age 59.5, then you will probably get just one 1099R for 2009 coded as normal (7). If so, 2008 may be the last year you will need a 5329.
I would not suggest attaching a 5329 to change post 59.5 distributions to a “2” since the IRS recommends a “7” if the plan is in compliance. So if you get the “7” for 2009 and 2010, you should not need a 5329 for those years.2007-11-11 16:04, By: Alan S., IP: [24.116.165.60]

L2: Finishing SEPP & Form 1099RYes, it was almost like Vanguard thinks that by giving a SEPP 1099R the proper 2 code they are somehow guaranteeing that the SEPP is in full IRS compliance. I can see their side of this issue but I can also see how they could easily resolve it if they chose to do so. I”m sure that one oftheir retirement specialists could look at my calcs and look at the amounts thatVanguard has routinely paid me to see that my SEPP is in compliance with the IRS rules. Schwab doesn”t seem to have any difficulty with this.
My 59.5 date falls in the middle of the 1st quarter of 2009 with the SEPP payment for that quarter coming about 5 weeks later.
Perhaps I misunderstood Vanguard but they seemed to say that they do not give out more than one 1099R per account per year. Iasked ifthey would send 2, 1 for before 59.5 and1 for after and the same for the final year, with some SEPP distributions and some not,but they say no. Doing so would seem to me to be the best way to describe the distributions but apparently they will leave that to me to clean up. If they would send 2 1099Rs for 2009 and 2010, no clean-up would be needed.
Excellent advice, as always, Alan. Thank you.
Ed2007-11-11 20:06, By: Ed_B, IP: [67.170.159.37]