Premature Distribution FAQs
Rev. 07/23/04, E-mail Alert 2004-15

What are some distributions that are not subject to the 10% premature distribution penalty?
Rev. 08/20/04, Email Alert 2004-17

• Substantially equal distribution rules paid in accordance with Notice 89-25 (as revised by Revenue Ruling 2002-62).
  
  
• Distributions to an alternate payee pursuant to a Qualified Domestic Relations Order.
  
  
• Distributions to beneficiaries upon the death of the participant.
  
  
• Distributions due to a participant's disability as defined in IRC Section 72(m)(7) which is analogous to the Social Security definition of disability.
  
  
• Corrective distributions, such as, excess deferrals, excess contributions, excess aggregate contributions, excess annual additions and ineligible employees/participants.
  
  

This Alert's FAQs are all related to exceptions to the 10% premature distribution penalty for distributions made to a participant or beneficiary under age 59½.
Rev. 07/23/04, E-mail Alert 2004-15

May 10-year averaging be used upon distribution of a lump-sum distribution from a qualified plan?

If a participant was born before 1936, the ten-year income averaging option remains available and is made by completing Form 4972. This option is also available to the beneficiaries of qualifying individuals. For those who are eligible, ten-year income averaging may provide a beneficial tax-saving alternative that should be evaluated with a professional advisor. Note that ten-year income averaging is not available for distributions from IRAs.

Is a lump-sum distribution from a qualified plan upon severance from service after attaining age 55 subject to a 10% premature distribution penalty?

No. If the distribution is the result of a termination of employment after the plan participant has attained age 55, there is no IRS premature distribution penalty. There is no equivalent “early retirement” exception for distributions from IRAs, which generally are subject to premature distribution penalties until the recipient reaches age 59½.

May a first-time homebuyer withdraw $10,000 from a qualified plan to use for the purchase of this first home and avoid the 10% premature distribution penalty?

No. This exception to the premature distribution penalty applies to IRAs only.

Bill Grossman, QPA

REVENUE RULING 2002-62

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Rev Ruling 2002-62 modifies Notice 89-25 Q&A 12 regarding the rules for substantially equal distributions begun prior to age 59½ that are not subject to a 10% penalty. Generally, the change is due to the need to include the new life expectancy tables that were issued as part of the minimum distribution regulations this year. In Notice 89-25 there are three methods of calculating the substantially equal payments prior to age 59½. These methods are the minimum distribution method, the amortization method and the annuitization method.

The following Rev Ruling 2002-62 changes are effective for substantially equal payments beginning in 2003; however, these changes may also be applied to substantially equal payments begun during 2002.

Rev. Ruling 2002-62 allows a one-time change from either the annuitization or amortization method to the required distribution method. Once the change is made the individual must stay with the required distribution method. In the ruling, the IRS makes clear that this one time change does not incur the 10% penalty.

The new Rev. Ruling requires the new life expectancy tables to be used when calculating substantially equal payments under the minimum distribution and amortization methods. Note that ages under 70 have been added to the Uniform Lifetime Table which is included in Appendix A.

Annuitization payouts are to be calculated using the mortality tables provided in Appendix B of Rev. Ruling 2002-62. For the annuitization and amortization calculation, the individual may choose any interest rate that is not more than 120% of the federal midterm rate.