http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments
“The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.”
“If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you m__ay not take a different distribution or alter the amount of the payment until July 1, 2011.”
As I understand it, you have to take the “substantially equal period payment” for five full years OR age 59.5, whichever is later.
So, to continue your example above: say John Doe takes his first SEPP payment of $50k on September 28, 2012, at age 58. He must continue to receive ONLY $50k until September 28, 2016. Any distributions in excess of $50k would be subject to the 10% penalty.
Also, since it is FIVE FULL YEARS, John Doe can’t take an additional distribution until day one of the sixth year. That is, since he takes his fifth payment on September 28, 2016, then he can’t withdraw additional funds until September 28, 2017. Beginning September 28, 2017, he can take as much as he wants, penalty-free. He has taken payments for five years, and is over the age of 59.5.
NOTE - Depending on the method of determining the SEPP amounts, the amount may not be “fixed” at exactly $50k. But hopefully the point is still understood.