SEPP plan and “separation from service”
L1: SEPP plan and “separation from service”Assume a 72T SEPP plan isstarted Dec. 1, after “early retirement” at age 50. Is the IRS likely to scrutinize any short “separation of service”to determine whether it is a bona fide indefinite separation from service. Is there any IRS criteria to guide one who may be thinking about re-employment after starting a SEPP plan…possibly with the same company?…must there be a waiting period?…documentation? The goal of course is to NOT jeopardize the legitimacy of the SEPP plan.2014-06-16 22:57, By: heartysavor, IP: [184.108.40.206]
L2: SEPP plan and “separation from service”You can actually start a 72T SEPP plan with an IRA while still working if you choose, so there is no issue there that I know of, but if you are trying to “quit” so you can move money out of a current employer’s 401k to a rolloverIRA to start this SEPP, and then probably go back to work at same place, I can’t comment. What is the source of the funds for the SEPP plan in this scenario?
2014-06-17 04:07, By: Ken, IP: [220.127.116.11]
L3: SEPP plan and “separation from service”Ken is correct.
Of course, you did not so indicate, but it is possiblethat youinitiated the SEPP from the 401k plan itself. In that situation, if you returned to work with the same company you would not be able to continue the SEPP and have any contributions made to the 401k as that would bust the plan. It is not advisable to start a SEPP from a 401k plan since there are situations where you do not have control over various plan transactions and limitations.
For those who start a SEPP and early on discover that they do not need the distributions, it is best to bust the SEPP and stop distributions to preserve your IRA balance. Later on in the SEPP after the penalty waivers accumulate, you would probably be better off to complete the plan.
2014-06-17 04:32, By: Alan S, IP: [18.104.22.168]
L4: SEPP plan and & separation from serviceAssume a 72T SEPP plan isstarted with 1st paymentDec. 1, after “early retirement” at age 50. Assume direct rollover of all401K fundsin Company Ato2 IRAs for SEPP plan.Is the IRS likely to scrutinize any short “separation of service”to determine whether it is a bona fide indefinite separation from service. Is there any IRS criteria to guide one who may be thinking about re-employment with Company A after starting a SEPP plan…possibly part time, independent contractor, consultant?…must there be a waiting period?…documentation? The goal of course is to NOT jeopardize the legitimacy of the SEPP plan. Is there a clear cut definition of “separation from service” as it relates to a SEPP plan?2014-06-17 15:19, By: heartysavor, IP: [22.214.171.124]
L5: SEPP plan and & separation from serviceThere is no definition because “separation from service” issues do not in any way affect a SEPP plan. If you read Notice 2002-62 on this site you will see that separation is never mentioned anywhere. As pointed out earlier, you can have a SEPP while you are working and you can start a SEPP while working if you need to.
“Separation” as it relates to a specific employer should be defined by the employer (eg number of hours, duration etc). It relates to whether you can take a distribution from the 401k to begin with, whether you qualify for the penalty exception under the age 55 separation provisions and many other provisions of the plan.
It appears that someone is telling you that re employment could jeopardize your plan, but there is no truth to that. The only related problem that I can think of here is the employer stating that you were never eligible for the IRA rollover in the first place and wants the IRA funds transferred back into the plan. While that would bust your plan, it could not happen without a company error in distributing funds in the first place.
You need to provide more info to us why you are concerned with re employment affecting your plan, so we do not have to think of highly unlikely hypothetical situations that could affect your plan such as the one above. The IRS does not care whether you have a SEPP plan with current employment or not. Plenty of people have found that their SEPP distributions are no longer adequate to cover their expenses and have therefore sought part time or full employment to supplement the SEPP distributions.2014-06-17 16:11, By: Alan S, IP: [126.96.36.199]
L6: SEPP plan and & separation from serviceThere are several aspects of your situation, and the rules, that apparently you may not understand :
1. Prior to the year in which you are, or will become, age 55, the “separation from service” exception does not apply.
2. Since you said you are age 50, nothing else in your query applies at this time.
3. When you “separate from service at 55”, the rules mean separating voluntarily or unvoluntarily FROM THE EMPLOYER OF YOUR 401-K PLAN.
4. If you go to work for a different employer, or self-employed, it would not affect your “separation from service” status.
5. As previously mentioned, re-employment by that employer might cause a problem, but you have to check with the administrator of your employer’s plan to determine TEIR RULES.
6. Once you start a SEPP 72-T plan, it must continue for the longer of age 59 1/2 or 60 months + 1 day. Working anywhere will not change your ability to start a SEPP 72-T plan, or to continue an existing one.
7. If you stop or change a SEPP 72-T plan because you want or need more or less money to be distributed will “bust” the plan, and subject you to the 10% penalty on all cumulative distributions, retroactively to the beginning of the plan, up to age 59 1/2.
8. As mentioned earlier, 401-K distributions are not SEPP 72-T distributions.
9. You might be better served if your 401-K plan allows you to take loans (usually up to $ 50,000), which you must repay by the 5-year anniversary date of each loan. These are tax free, but you must repay them to YOUR 401-K with after tax dollars.
Based upon all of your questions, I suggest that you meet with your tax practitioner or financial advisor, as long as they are knowledgeable in this area, or with someone else who is qualified to advise you on various options, and to devlop a PLAN.2014-06-17 20:10, By: dlzallestaxes, IP: [188.8.131.52]
L2: SEPP plan and “separation from service”I’m not too familiar with this, but may be worth looking into for your situation. It’s called “sham termination”.2014-06-18 14:00, By: brkr12002, IP: [184.108.40.206]