SEPP Program Risk Management

L1: SEPP Program Risk ManagementMany of the questions on this board are well reasoned and often critical because they relate to specific facts & circumstances which a potential SEPPer is planning to implement. As a result, many of the questions (to all of which Gfw & I will continue to provide our best answers) are phrased as: “Can I do or use ……?”.In some instances there are definitive answers; in many instances there are not. Unfortunately, the IRS has not provided a lot of guidance on 72(t) issues. Thus, there is some white, some black and a lot of grey. Grey = risk. The “risk” is that at some undesirable date in the future, a SEPPer is audited and learns that his or her SEPP plan is found to be not in compliance and therefore the 10% surtax will be imposed. Some examples:1. I want to use a fourth computational method not discussed in Notice 89-25. The risk is obviously extremely high.2. I want to launch two SEPP programs from two discrete & different IRAs. The risk is low.3. I want to take an additional “medical exception” withdrawal from an existing SEPP IRA. The risk is at least moderate.We could go on and on asking 20 – 30 questions which are most often taxpayer circumstance specific. However, there are two things everyone can do. One, you can quantify the risk; it is rather easy to do the math on an approximate basis. Once you know the dollar value of the risk you can decide what to do about it by asking one simple question: “If audited (presume 100%) how will I feel if I have to write that check or will I even be able to write that check?”. Two, you can mitigate or manage the risk in at least three ways:1. You can, so to speak, “self-insure”, holding the risk unto yourself and maybe therefore designing a SEPP program that is less risky once you know how many grey components or factors are in your SEPP program.2. You can transfer or insure the risk by receiving an “Opinion Letter” from a lawyer or CPA. An opinion letter insures the SEPP program design against the IRS deciding at some later date that your program is not in compliance. However, SEPP program insurance is only as good as the issuer. Unfortunately, The Hartford or Aetna do not issue SEPP policies. Therefore, should you chose to go this route, it is very appropriate to have a frank discussion with your professional about the language of the opinion letter as well as his or her expertness, insurance, etc.3. You can eliminate the risk by obtaining a private letter ruling from the IRS. This is ultimate “get of jail free card” and is therefore the most expensive of the alternatives. When do you need a PLR? The most obvious tip-off is when your professional says: “Don’t do it” or “You’ll not see my John Hancock on an opinion letter for this plan”.I would advise all potential SEPPers to at least go through this exercise before commencing a SEPP program so that you can sleep well tonight and you can sleep well 3 – 5 years in the future.TheBadgerwjstecker@wispertel.net 2002-08-07 08:25, By: TheBadger, IP: [127.0.0.1]