SEPP payout calculated using ESOP account balance prior to rollover to an IRA, now it won’t all be rolled out. Now what?
A client retired at 54 and has an ESOP. A 72t payout was calculated and begun assuming the entire account would be rolled out. Now it won’t be. The ESOP is now rolling out according to a schedule determined by the company with limited forward guidance for a total rollout. The payout is a fixed amortization on the original entire ESOP balance. What do we do now as we are 20 payments into the total 60 payments? A new rollout is forthcoming but won’t be the entire balance of the ESOP the client is entitled to.
Permalink Submitted by Alan - IRA critic on Mon, 2021-08-16 19:54
ESOPs are funded by employer contributions, but a rollout distribution is not an LSD and therefore the client does not qualify for a 72t (SEPP) plan. If the first payment was made in 2020, the 1099R should not show any NUA in Box 6, and Box 2a should show the full taxable amount. Sounds like there effective communication between client and the plan broke down in this case.
Another factor is whether client turned 55 before the end of the retirement year or not since that determines if the 10% penalty is waived due to the age 55 separation exception.
The ESOP will probably continue the rollout distributions as scheduled, but they are eligible for rollover to an IRA to eliminate the tax bill and the penalty if it would have applied. Client should check into whether future distributions can be directly rolled over, as that would eliminate mandatory 20% withholding.