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I have an ESOP client that normally makes you wait 5 years in order to get a distribution via 5 installments.  They however have a provision that if a person terminates and then is ruled disabled they can be paid the year after the disability ruling. 

I just took over this plan.  A person terminated in 2012.  They were ruled disabled in 2014.  They got their first payment in 2015.  The firm that prepared the 1099-Rs in the past gave this person a code of 3. 

I am just not finding any guidance on this.  Do you have to terminate because of disability or merely be paid because of disability in order to get a code of 3?  It matters as the person is <59.5. 

Back when I did 401(k) plans if a person terminated and refused to take a distribution for years and then became disabled I don't recall making such a person a code 3. 

Thanks

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I think if they meet the definition of disability under the Plan and are taking a taxable distribution then you would code it 3 as a disability distribution.

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ESOP Guy:

The board of Trustees may have ruled on the disability in 2014, but did the ruling declare the Participant disabled as of their separation of service date in 2012.

Generally, most of the plans that we provide services to  stipulate or define  that disability must occur on or before the separation of service of the Plan Participant.

My guess is that is probably what occurred with your client.

 

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4 hours ago, A Shot in the Dark said:

ESOP Guy:

The board of Trustees may have ruled on the disability in 2014, but did the ruling declare the Participant disabled as of their separation of service date in 2012.

Generally, most of the plans that we provide services to  stipulate or define  that disability must occur on or before the separation of service of the Plan Participant.

My guess is that is probably what occurred with your client.

 

This plan is odd but the plan language is very clear if you do a regular termination and then AFTER that are ruled disabled (not retro back to the date of termination) that triggers a faster start of payments.  Very rare but very clear in this case what the plan says. 

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There are no regs. I have also searched for other guidance sources (e.g., in the 1099-R instructions, the IRM, etc.) and come up empty . Section 72(t)(2)(A)(iii) is all we have, and it is the solemn command of the U.S. Congress, after all. It says the distribution has to be "attributable" to the employee's "being" disabled under 72(m)(7). So I'd say you are fine, here, ESOP Guy.

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