Part I
Section 72.--Annuities; Certain Proceeds of Endowment and Life Insurance
Contracts
Rev. Rul. 2002-62
SECTION 1. PURPOSE AND BACKGROUND
.01 The purpose of this revenue ruling is to modify the provisions of
Q&A-12 of Notice 89-25, 1989-1 C.B. 662, which provides guidance on what
constitutes a series of substantially equal periodic payments within the
meaning of 72(t)(2)(A)(iv) of the Internal Revenue Code from an individual
account under a qualified retirement plan. Section 72(t) provides for an
additional income tax on early withdrawals from qualified retirement plans (as
defined in 4974(c)). Section 4974(c) provides, in part, that the term
"qualified retirement plan" means (1) a plan described in 401 (including a
trust exempt from tax under 501(a)), (2) an annuity plan described in 403(a),
(3) a tax-sheltered annuity arrangement described in 403(b), (4) an individual
retirement account described in 408(a), or (5) an individual retirement annuity
described in 408(b).
.02 (a) Section 72(t)(1) provides that if an employee or IRA owner receives any
amount from a qualified retirement plan before attaining age 59 1/2, the
employee's or IRA owner's income tax is increased by an amount equal to
10-percent of the amount that is includible in the gross income unless one of
the exceptions in 72(t)(2) applies.
(b) Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part
of a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the employee or the joint
lives (or joint life expectancy) of the employee and beneficiary, the tax
described in 72(t)(1) will not be applicable. Pursuant to 72(t)(5), in the case
of distributions from an IRA, the IRA owner is substituted for the employee for
purposes of applying this exception.
(c) Section 72(t)(4) provides that if the series of substantially equal
periodic payments that is otherwise excepted from the 10-percent tax is
subsequently modified (other than by reason of death or disability) within a
5-year period beginning on the date of the first payment, or, if later, age 59
1/2, the exception to the 10-percent tax does not apply, and the taxpayer's tax
for the year of modification shall be increased by an amount which, but for the
exception, would have been imposed, plus interest for the deferral period.
(d) Q&A-12 of Notice 89-25 sets forth three methods for determining whether
payments to individuals from their IRAs or, if they have separated from
service, from their qualified retirement plans constitute a series of
substantially equal periodic payments for purposes of 72(t)(2)(A)(iv). (e)
Final Income Tax Regulations that were published in the April 17, 2002, issue
of the Federal Register under 401(a)(9) provide new life expectancy tables for
determining required minimum distributions.
SECTION 2. METHODS
.01 General rule. Payments are considered to be substantially equal periodic
payments within the meaning of 72(t)(2)(A)(iv) if they are made in accordance
with one of the three calculations described in paragraphs (a) - (c) of this
subsection (which is comprised of the three methods described in Q&A-12 of
Notice 89-25).
(a) The required minimum distribution method. The annual payment for each year
is determined by dividing the account balance for that year by the number from
the chosen life expectancy table for that year. Under this method, the account
balance, the number from the chosen life expectancy table and the resulting
annual payments are redetermined for each year. If this method is chosen, there
will not be deemed to be a modification in the series of substantially equal
periodic payments, even if the amount of payments changes from year to year,
provided there is not a change to another method of determining the payments.
(b) The fixed amortization method. The annual payment for each year is
determined by amortizing in level amounts the account balance over a specified
number of years determined using the chosen life expectancy table and the
chosen interest rate. Under this method, the account balance, the number from
the chosen life expectancy table and the resulting annual payment are
determined once for the first distribution year and the annual payment is the
same amount in each succeeding year.
(c) The fixed annuitization method. The annual payment for each year is
determined by dividing the account balance by an annuity factor that is the
present value of an annuity of $1 per year beginning at the taxpayer's age and
continuing for the life of the taxpayer (or the joint lives of the individual
and beneficiary). The annuity factor is derived using the mortality table in
Appendix B and using the chosen interest rate. Under this method, the account
balance, the annuity factor, the chosen interest rate and the resulting annual
payment are determined once for the first distribution year and the annual
payment is the same amount in each succeeding year.
.02 Other rules. The following rules apply for purposes of this section.
(a) Life expectancy tables. The life expectancy tables that can be used to
determine distribution periods are: (1) the uniform lifetime table in Appendix
A, or (2) the single life expectancy table in 1.401(a)(9)-9, Q&A-1 of the
Income Tax Regulations or (3) the joint and last survivor table in
1.401(a)(9)-9, Q&A-3. The number that is used for a distribution year is
the number shown from the table for the employee's (or IRA owner's) age on his
or her birthday in that year. If the joint and survivor table is being used,
the age of the beneficiary on the beneficiary's birthday in the year is also
used. In the case of the required minimum distribution method, the same life
expectancy table that is used for the first distribution year must be used in
each following year. Thus, if the taxpayer uses the single life expectancy
table for the required minimum distribution method in the first distribution
year, the same table must be used in subsequent distribution years.
(b) Beneficiary under joint tables. If the joint life and last survivor table
in 1.401(a)(9)-9, Q&A-3, is used, the survivor must be the actual
beneficiary of the employee with respect to the account for the year of the
distribution. If there is more than one beneficiary, the identity and age of
the beneficiary used for purposes of each of the methods described in section
2.01 are determined under the rules for determining the designated beneficiary
for purposes of 401(a)(9). The beneficiary is determined for a year as of
January 1 of the year, without regard to changes in the beneficiary in that
year or beneficiary determinations in prior years. For example, if a taxpayer
starts distributions from an IRA in 2003 at age 50 and a 25-year-old and
55-year-old are beneficiaries on January 1, the 55-year-old is the designated
beneficiary and the number for the taxpayer from the joint and last survivor
tables (age 50 and age 55) would be 38.3, even though later in 2003 the
55-year-old is eliminated as a beneficiary. However, if that beneficiary is
eliminated or dies in 2003, under the required minimum distribution method,
that individual would not be taken into account in future years. If, in any
year there is no beneficiary, the single life expectancy table is used for that
year.
(c) Interest rates. The interest rate that may be used is any interest rate
that is not more than 120 percent of the federal mid-term rate (determined in
accordance with 1274(d) for either of the two months immediately preceding the
month in which the distribution begins). The revenue rulings that contain the
1274(d) federal mid-term rates may be found at
www.irs.gov\tax_regs\fedrates.html.
(d) Account balance. The account balance that is used to determine payments
must be determined in a reasonable manner based on the facts and circumstances.
For example, for an IRA with daily valuations that made its first distribution
on July 15, 2003, it would be reasonable to determine the yearly account
balance when using the required minimum distribution method based on the value
of the IRA from December 31, 2002 to July 15, 2003. For subsequent years, under
the required minimum distribution method, it would be reasonable to use the
value either on the December 31 of the prior year or on a date within a
reasonable period before that year's distribution.
(e) Changes to account balance. Under all three methods, substantially equal
periodic payments are calculated with respect to an account balance as of the
first valuation date selected in paragraph (d) above. Thus, a modification to
the series of payments will occur if, after such date, there is (i) any
addition to the account balance other than gains or losses, (ii) any nontaxable
transfer of a portion of the account balance to another retirement plan, or
(iii) a rollover by the taxpayer of the amount received resulting in such
amount not being taxable.
.03 Special rules. The special rules described below may be applicable.
(a) Complete depletion of assets. If, as a result of following an acceptable
method of determining substantially equal periodic payments, an individual's
assets in an individual account plan or an IRA are exhausted, the individual
will not be subject to additional income tax under 72(t)(1) as a result of not
receiving substantially equal periodic payments and the resulting cessation of
payments will not be treated as a modification of the series of payments.
(b) One-time change to required minimum distribution method. An individual who
begins distributions in a year using either the fixed amortization method or
the fixed annuitization method may in any subsequent year switch to the
required minimum distribution method to determine the payment for the year of
the switch and all subsequent years and the change in method will not be
treated as a modification within the meaning of 72(t)(4). Once a change is made
under this paragraph, the required minimum distribution method must be followed
in all subsequent years. Any subsequent change will be a modification for
purposes of 72(t)(4).
SECTION 3. EFFECTIVE DATE AND TRANSITIONAL RULES
The guidance in this revenue ruling replaces the guidance in Q&A-12 of
Notice 89-25 for any series of payments commencing on or after January 1, 2003,
and may be used for distributions commencing in 2002. If a series of payments
commenced in a year prior to 2003 that satisfied 72(t)(2)(A)(iv), the method of
calculating the payments in the series is permitted to be changed at any time
to the required minimum distribution method described in section 2.01(a) of
this guidance, including use of a different life expectancy table.
SECTION 4. EFFECT ON OTHER DOCUMENTS
Q&A-12 of Notice 89-25 is modified.
SECTION 5. REQUEST FOR COMMENTS
The Service and Treasury invite comments with respect to the guidance provided
in this revenue ruling. Comments should reference Rev. Rul. 2002-62. Comments
may be submitted to CC:ITA:RU (Rev. Rul. 2002-62, room 5226, Internal Revenue
Service, POB 7604 Ben Franklin Station, Washington, DC 20044. Comments may be
hand delivered between the hours of 8:30 a.m. and 5 p.m. Monday to Friday to:
CC:ITA:RU (Rev. Rul. 2002-62), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, D.C. Alternatively, comments may be
submitted via the Internet at Notice.Comments@irscounsel.treas.gov. All
comments will be available for public inspection and copying.
Drafting Information
The principal author of this revenue ruling is Michael Rubin of the Employee
Plans, Tax Exempt and Government Entities Division. For further information
regarding this revenue ruling, please contact Mr. Rubin at 1-202-283-9888 (not
a toll-free number).
END...