Pension Protection Act 2006 – Excess Distrib.

L1: Pen. Prot. Act 2006 – Excess Distrib. This is very complex – I have been required to take out some of my IRA rollover money from an acct. that is set up to receive 72(t)(2)(A) payments under the amortization method. This forced “modification” could subjext me to 10% premature distribution penalty / disallow the 72(t) payment plan. Any suggestions? Thanks – Mark E.
Miscellaneous Pension Protection Act Changes
Q-4. What special correction method is available to correct a 303 excess distribution made prior to September 1, 2006?
A-4. A special correction method is available for a 303 excess distribution made prior to September 1, 2006, provided the correction is completed by March 15, 2007. Under the special correction method, a plan may use the EPCRS correction method for a 415(b) excess distribution (as described in section 2.04(1) in Appendix B in Rev. Proc. 2006-27, even if the plan does not otherwise meet the requirements of Rev. Proc. 2006-27, including the special requirements for self correction) with the following modifications. The excess amount (i.e., the amount by which the distribution actually made exceeds the distribution permitted using the interest assumption specified in 415(b) as amended by PPA ’06) is not required to be returned to the plan (as otherwise required under the EPCRS correction method). Instead, a plan must issue two Forms 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) to a participant who has received a 303 excess distribution. The first Form 1099-R should include only the amount that would have been distributed had the benefit payable been adjusted using the interest assumptions specified in 415(b) as amended by PPA ’06. The second Form 1099-R should include only the excess amount that was distributed, and should include code E۝ in box 7 to identify the amount as an excess distribution. As provided in the EPCRS correction, this excess amount is not an eligible rollover distribution, and therefore must be included in gross income in the year distributed from the plan. 2007-03-14 08:52, By: Mark E, IP: [70.88.112.173]

L2: Pen. Prot. Act 2006 – Excess Distrib.Apparently, your DB pension plan raised the interest rate on which your LSD was calculated after you rolled over the plan to an IRA and set up your 72t plan.
I”m fishing a little here to see if this squares with what other advice you are getting. However, if no funds are to be returned to the plan, and you are to report income from the “E” coded 1099R on line 16 of Form 1040, it appears to me that nothing on your 1040 will indicate a plan modification. Your 72t distributions are reported on line 15, and your IRA will not be distributing any more than your original 72t calcs. However, you will have an additional taxable amount from line 16 and will have to pay those taxes as expenses you did not anticipate.
The other plan 1099R you will report as a rollover on line 16, leaving the “E” coded one as the taxable amount on line 16b. I don”t see any of this involving your 72t IRA account since it appears you don”t need to take an extra distribution from it.
OK, what am I missing?
2007-03-14 17:17, By: Alan S., IP: [24.116.66.98]

L2: Pen. Prot. Act 2006 – Excess Distrib.Hi Allen,
Thanks for the reply! Yes, the PPA of 2006 requires a higher interest rate when calculating a lump-sum equivalent for a pension buy out. At the beginning of the year the applicable rate (GATT rate or 30 yr treasury) was 4.46. The PPA required the D.B. Plan to use 5.5% – OUCH – a big difference. The “overpayment” was about 10%. Thank goodness we were able to keep the money, but it could not stay in the IRA account – it was technically not eligible as an IRA rollover.
My understanding is that once an account balance is established and an individual calculates the 72(t) payment, they are not permitted to invade this account balance whatsoever. They are not allowed to take extra money out and are even allowed to add money to the account.
In this case I took a significant amount out. I have not changed my monthly payments as of yet since I did not want to make any more changes until I can sort this out. However, the account balance will not sustain the existing distribution rate. In addition, I can not afford to drop all the way down to the RMD method. I will send anther letter I sent to the plans office to help explain thedilemma I have asked the D.B. Plan to intercede with the IRS on behalf of the recent retirees affected by this retroactive legislation. I believe an IRS PLR is difficult to obtain and expensive. I thought the D.B. Plan might be able to expedite the issue.
Thanks again!!! Mark E.

2007-03-15 06:32, By: Mark E., IP: [70.88.112.173]

L2: Pen. Prot. Act 2006 – Excess Distrib.Re: PPA 2006 / IRS penalties related to 72(t)(2)(A)

Dear

Please see the attached IRS information related to the excess pension distribution۝ as per the PPA of 2006. In addition, please review the attached IRS information related to IRA retirement income utilizing 72(t)(2)(A) exception to 10% penalty prior to age 59 _.

As per my retirement income planning, I have established a 72(t) income plan a series of substantially equal periodic payments. The IRS guidelines are quite clear that there are very few allowable subsequent modifications۝:

Due to Death
Due to Disability
One time reduction to the RMD method (which is unacceptable)

As a recent retiree, I was required by retroactive law۝ to remove significant funds from my IRA rollover and subsequently modify۝ the 72(t)(2)(A) plan.

I have spoken with the IRS regarding this matter and they could not make a ruling related to this unusual case. Their only assistance was to refer me to their website. My contact person was Ms. Charles, ID# 5907301, Jacksonville, FL, IRS – Tax Law Dept. for IRAs and Pensions.

I respectfully request the Pension Plans Department obtain an IRS ruling related to this forced۝ subsequent modification. Otherwise, I will be subject to significant penalties 10% premature distribution penalties and interest. I need to be allowed to recalculate the 72(t) income based on the eligible IRA account balance. I request you do this on behalf of all recent retirees who are were subject to the excess distribution۝ related to the PPA of 2006. You prompt response and attention to this matter is critical to my retirement income security. Thank you in advance for addressing this very important issue.

Sincerely yours,2007-03-15 06:35, By: Mark E, IP: [70.88.112.173]

L2: Pen. Prot. Act 2006 – Excess Distrib.If I were you, I would be livid over this. As I see this, 2006-27 was issued prior to the PPA and even so is concerned with plan corrections, not with the impact of those procedures on the employee. Despite that, several of those procedures do actually contain provisions for plans to make contributions (QNEC) to ameliorate the negative affects for the employee. I can”t find anything yet about this situation, but am sure some form of justice will eventually surface. You might not even have taken the lump sum if you knew the interest rate was high enough to wipe out 10% of the lump sum. And Section 303 of the PPA was actually retroactive to Jan, 06, totally blindsiding anyone that took a lump sum. The fact that you also set up a 72t just adds further damage to the situation. Sorry I have not found anything helpful yet, but don”t give up. This is too ridiculous to stand as it is without some relief. Hopefully, someone will request a PLR.2007-03-15 22:19, By: Alan S., IP: [24.116.66.98]