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415 Limit

20% Federal Taxes -- Exception?

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Participant left employment due to disability, received a distribution of appx. $90,000. A W-2 was issued and in box 12, code "Z" was used. CPA is doing the participant's tax return and is questioning if there is an exception to the 20% federal tax because of the participant's disability.

Any input / citations would be greatly appreciated. Thanks!

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Guest Sieve

If this was a pension distribution, why was a W-2 issued? Pension distributions are on the 1099-R. Was this nonqualified deferred compensation or a disability payment?

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I'm assuming this is a distribution from a nonqualified plan. Disability is one of the 6 permissible distribution events under 409A. Why would the company report a distribution under code Z? Is disability not a distribution option under the plan? Heck, you say that he termed due to disability. Maybe the distribution was payable under the separation election?

I recall having arguments with a certain large payroll provider when 409A was enacted who used box 12 Code Z to report all distributions from 409A, regardless of whether they were distributions that violated 409A or not. Maybe it's a payroll issue?

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