New SEPP Rules

Submitted by Kevin O'Hearn on Tue, 2023-02-07 16:24

Hello,

There are some changes related to 72t/SEPP plans in the new SECURE Act 2.0 legislation. One of them seems to relax some of the transfer/rollover rules while running a SEPP plan. It appears that as long as the annual SEPP distributions are satisfied, clients can do partial/rollover transfers of accounts subject to SEPP plans without triggering a modification.

1. Is this correct?

2. Do you know if the new rules would allow for rollover/transfers coming into a SEPP plan account? Everything seems to indicate funds may be transferred out, but not necessarily transferred in?

Thank you.



Submitted by Alan - IRA critic on Tue, 2023-02-07 18:22

  1. Yes, this is correct. For the last 2 decades, RR 2002-62 stated that a 72t plan would be modified if “a transfer of portion of the account balance was made to another retirement plan.” No one knew exactly what that meant, and full or partial transfers between IRA accounts were done without issues under the belief that IRA accounts were of the same type. Very few attempted transfers to another “type” of plan, eg between a 401k and an IRA. In addition, IRS Regs allowed a 72t plan balance to be converted to a Roth IRA, which was a different type of retirement plan. Sec 323 of Secure 2.0 clarifies and lifts these restrictions, but note that all such transfers must still be made only to a qualified plan with no prior balance or the 72t would be modified as if a new contribution was made.
  2. No, transfers into an existing SEPP plan account would be adding new money and would modify both plans unless these accounts were already part of the same SEPP “universe”, meaning that the distributions were calculated on the combined balances of both accounts. Historically, a taxpayer set up a SEPP using two IRA accounts, perhaps one an IRA annuity, then take the annual distributions solely from the non annuity IRA.
  3. It will now clearly be allowed to start a SEPP with an IRA, then transfer part of the balance into a new IRA annuity account. The annual distributions shown on the 1099R for both these accounts must equal the SEPP calculation. 
  4. Remember that “simple” is still best when it comes to SEPPs because complexity can lead to errors and even if the taxpayer does not make an error, more complex reporting could attract IRS attention to the plan, and the less of that the better.

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