I have heard two different answers to this question. 1099R Instructions read as follows: Code 2 - Early distribution, exception applies. "A distribution from a qualified retirement plan after separation from service where the taxpayer has reached age 55"

I have an employee whose position was terminated on 2-28-05, he has not yet made a distribution from the Plan, but is going to cash out. He will turn 55 on 5-2-05.

Does the exception apply only if the employee is 55 at the date of termination or does it apply when the distribution actually occurs? I have had two people read it completely different.

Thanks.

See IRS Notice 87-13. The exception under section 72(t) applies if the particpant terminates employment in the year the participant attains age 55.

The person must terminate after attaining age 55. The distribution date is irrelevant. You could look in the code for guidance if you feel the instructions to the 1099 forms aren't clear.

See? This is what I mean - it is interpreted differently by those who read it.

No, not interpreted differently, just not clear on my part. QDRO is correct on the cite that interprets the code. It is the termination in the year of attaining age 55. Either way though, it's not the date of distribution.

Here is the Q & A From Notice 87-13 for clarification.


Q-20: What additional tax on early distributions from qualified retirement plans applies under section 72(t) (as added by TRA'86)?

A-20: Section 72(t) (as added by TRA'86) applies an additional tax equal to 10 percent of the portion of any "early distribution" from a qualified retirement plan (as defined in section 4974© of the Code) that is includible in the taxpayer's gross income. A distribution (including deemed distributions under section 72(p)) is treated as an "early distribution" unless it is described in section 72(t)(2)(A) (taking into account sections 72(t)(3) & (4)). A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55.
A distribution that is an "early distribution" will not be subject to the additional tax to the extent provided under section 72(t)(2)(B) (relating to deductible medical expenses under section 213), section 72(t)(2)© (relating to certain distributions from employee stock ownership plans), or section 72(t)(2)(D) (relating to distributions pursuant to qualified domestic relations orders). The determination of whether the additional tax under section 72(t) applies to a distribution to be made without regard to whether the distribution is treated as a mandatory distribution for purposes of section 411(a)(11) or section 417(e).

The payor (or, if applicable, plan administrator) is not liable under section 3405 to withhold any amount on account of the additional income tax imposed under section 72(t). However, the taxpayer may have estimated tax liability with respect to such additional income tax.

in other words you can't quit age 50 and then start collecting at age 55 and avoid the penalty.
and in other words, the concept works much the same way as catch up eligible employees. as long as you turn the magic age during the calendar year, you are ok.

Great, thank you for the clarification!

While the 1987 ruling was clear, I suspect that it has been made obsolete in actual practice. I can't cite the source yet, but I believe the IRS now allows the exception for someone who previously terminated before 55 and is taking their distribution at or after 55. You should also consult the IRS publication on distributions.

IRS cannot change statutory requirement that penalty does not apply to a distribution only if employee separates from service after attaining age 55. See Pub 575, P 28.