Substantially Equal Payments 10% Penalty Exclusion on Pension Payments
L1: Substantially Equal Payments 10% Penalty Exclusion on Pension PaymentsQ: Do pension payments from an ERISA recognized defined benefit plan automatically qualify for the “substantially equal payments” general exclusion to the 10% early withdrawal penalty?
Example: Pension plan allows for early retirement beginning at age 52. If an employee has an age on the last day of the year of separation of 52 – 54.99, can they claim the “substantially equal payments” general exclusion or would they be subject to the 10% early withdrawal penalty since they have not yet reached age 55 at the end of the year of separation?
Please help!2014-08-08 21:51, By: JB, IP: [126.96.36.199]
L2: Substantially Equal Payments 10% Penalty Exclusion on Pension PaymentsNo, the exception only applies to public safety officers from governmental DB plans at age 50. Moreover, for others separating prior to the year they would reach55, the payments are also subject to penalty all the way to59.5 unless some other penalty exception applied.2014-08-08 23:30, By: Alan S, IP: [188.8.131.52]
L3: Substantially Equal Payments 10% Penalty Exclusion on Pension PaymentsI had a similar thought, Alan. In trying to provide back-up to this position, are you aware of any resource that addresses this topic, specific to defined benefit plans? The opposing view feels that all defined benefit plans qualify when the monthly payment is equal, even if a life expectancy calculation is not done.2014-08-09 18:42, By: JB, IP: [184.108.40.206]
L4: Substantially Equal Payments 10% Penalty Exclusion on Pension PaymentsNot aware of a completely direct citation, which limits us to penalty exceptions stated in the tax code.Most DB pensions are qualified plans and therefore subject to Sec72t penalty provisions. 72q has a separate immediate annuity exception without an age requirement, but that is for non qualified annuities, not qualified plans. Under 72t the ONLY payment calculation that applies is one of the 3 approved methods described in IRS RR 2002-62. If the DB pension has a lump sum option, it could be rolled over to an IRA and a 72t plan could be started anytime from the IRA including any other owned IRA balance.2014-08-11 23:38, By: Alan S, IP: [220.127.116.11]