Section 72(t) of the Internal Revenue Code (the “Code”) imposes a 10-percent additional tax on early distributions from a qualified retirement plan (i.e., a plan described in Section 401(a) of the Code or a 403(b) plan) or an IRA. However, under an exception provided in Section 72(t)(2)(A)(iv), certain individuals receiving substantially equal periodic payments from a plan or IRA are not subject to the additional tax. The IRS has provided three methods for making a distribution in the form of substantially equal periodic payments and therefore meeting this exception. One method, the required minimum distribution method or “RMD method”, uses rules similar to those under Section 401(a)(9) of the Code to determine the amount of the payments required each year. If a series of substantially equal periodic payments from a plan or IRA stops or is otherwise modified (other than by reason of death or disability) prior to age 59½ or 5 years after they start, all of the payments made are subject to a recapture tax under Section 72(t)(4).
Now consider Section 401(a)(9)(H) of the Code, which was added to the Code by the Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”), and which waives, for 2009, minimum required distributions under Section 401(a)(9). The question arises as to whether this waiver allows a recipient to forgo, for 2009, the periodic payments being made in a series from a plan or IRA under the RMD method, and still meet the exception to the additional tax in Section 72(t)(2)(A)(iv). The IRS says “No” in Notice 2009-82. Section 401(a)(9)(H) does not apply to such payments. Accordingly, if they are stopped in 2009 (other than because of death or disability) prior to age 59½ (or prior to 5 years from the date of the first payment), all of the payments made under the series are subject to the recapture tax under Section 72(t)(4).