Some great questions here, Chuck. I don't have any substantive thoughts on the underlying merits of your proposed substantially equal payment model, but I'll comment a bit on the administrative law aspects of this thread.
The primary authority for tax law is the Internal Revenue Code (IRC), codified in Title 26 of the United States Code (26 USC). Some provisions of the IRC provide that the Secretary of the Treasury may make regulations to supplement, modify, or clarify the general rules set out in the Code. When the Secretary acts pursuant to such a provision, the regulations made thereunder have the force of law (unless invalidated under the general principles of administrative law), and are not just "interpretations" of the statute.
For example, the wash sale statute (26 USC § 1091) provides that the Secretary may make regulations (i) specifying contracts or options that are not subject to the wash sale rule, and (ii) specifying which specific identifiable shares are not deductible losses in the case of a partial wash sale. If the Secretary exercises that regulatory authority, the regulations made pursuant to that authority have the force of law, unless you can persuade a judge that the regulations are clearly outside the scope of the grant of authority in the statute. It is a difficult case to make, but it
is possible for regulations to be invalid. The IRS actually publishes a Form that they require you to use for making such an allegation as part of your tax filing, Form 8275-R (Regulation Disclosure Statement).
However, in the case of the definition of the substantially equal payment regime, there is no relevant grant of regulatory authority contained in the statute. 26 USC § 72(t)(1) sets out the general rule that a distribution from a qualified retirement plan is subject to a 10% additional tax, subject to the exceptions contained in the remainder of the statute. 26 USC § 72(t)(2)(A)(iv) provides that distributions that 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 expectancies) of such employee and his designated beneficiary" are not subject to the 10% tax. That is the full extent of the requirement contained in the statute in terms of defining what a series of substantially equal payments means. The statute does not confer an explicit power on the Secretary to make regulations that define what kind of formulas will qualify. And the Secretary has not done so. The Secretary might have an argument for making such a regulation pursuant to 26 USC § 7805(a), which authorises "needful rules and regulations for the enforcement of [the Internal Revenue Code]", but no such regulation has been promulgated in this context.
What has happened is that the IRS has published a document (
Revenue Ruling 2002-62) which contains its opinions on what sort of payments might qualify for this exception to the 10% tax. This document is not a regulation entitled to the force of law. Under US administrative law, such documents are still entitled to a measure of deference ("
Skidmore deference") but not the same stringent deference granted to regulations with the force of law ("
Chevron deference"). In the past, the IRS has argued (unsuccessfully) that its revenue rulings are entitled to the force of law, but it apparently no longer takes that position. As explained by the IRS in
IRM § 4.10.7.2.6.1, "[r]ulings do not have the force and effect of Treasury Department Regulations". That said, you still wouldn't want to take a position contrary to a Revenue Ruling unless you were armed with a persuasive argument.
However, in this case, you don't need to take a position contrary to the Ruling because all the Ruling actually says is that
if you use one of the three methods described in the Ruling, then the IRS will consider you to have met the requirements of 26 USC § 72(t)(2)(A)(iv). The Ruling does not purport to limit what other methods might qualify. The Ruling also does not purport to require you to obtain a private letter ruling before using another method (and it's doubtful whether such a requirement would be legal, as it would have no statutory basis). When Congress wants to require a taxpayer to obtain a ruling in advance of a transaction, it says so explicitly in the statute (and there are many instances of this in the IRC, but none that apply here).
What the IRS is really saying on its website is that it would be
prudent to obtain a private letter ruling before beginning your purported series of substantially equal payments, because if you don't obtain such a ruling, the IRS might later find that your payments did not qualify, and then you'd have to pay the 10% tax plus other penalties mentioned below, unless you successfully challenged that determination. However, there is no requirement to obtain such a private letter ruling before beginning the payments, or ever. If you're feeling bold, you can begin the series of payments whenever you feel like it, using whatever terms you want, do not include the 10% tax on your tax return, and then, if audited, just be prepared to argue that your payments fit within the definition of 26 USC § 72(t)(2)(A)(iv).
If you use this strategy and you are unsuccessful, the statute provides a number of penalties that may apply to you. I won't describe them in detail other than to say that they exist and can be very substantial amounts of money. You can potentially avoid some but not all of the penalties by filing Form 8275 (Disclosure Statement) with your return. Please note that the law regarding the potential penalties is complicated and outside the scope of what I want to address in this post. The good news is that the penalties only apply if your tax position is found to be without merit. So long as your position carries the day, you're fine!
Personally, I might be willing to head into uncharted waters with an untested position and be prepared to defend it if challenged, but I would only do so after familiarising myself with all of the relevant case law and other authorities, and after satisfying myself that the argument was sound. I have not done that with respect to this topic. I offer no opinion in this post on whether a 4% rate has legal merit. This is all just casual information provided for conversational purposes and should not be relied on in planning your retirement strategy, or for any other purpose. I would not recommend that a typical person act on any of the information mentioned in this post.
I put a fair amount of effort into drafting these posts, often including significant research. This one took around an hour to write. Feel free to let me know if you find the information interesting or thought-provoking.