Early Withdrawal Penalty

[Pension RC]

I work on a mid-sized DB plan that generally doesn't pay lump sums, but has opened up a lump sum window until the end of the year. One terminated participant, who would like to take the lump sum, was born on 7/1/1960. Therefore, he will complete 59 1/2 years on 12/31/2019. If his distribution is not processed until 12/31/2019, can he avoid the early withdrawal penalty?

Thanks for any responses!

[david rigby]

Does participant expect to receive a cash distribution?  What if he takes the distribution as a rollover?  

[XTitan]

I thought 59 1/2 followed the rules for 70 1/2 which is 6 months following the 70th anniversary of the individual's birth as per Treas. Reg. 1.401(a)(9)-2, Q&A 3:  

Q-3. When does an employee attain age 70 1/2?

A-3. An employee attains age 70 1/2 as of the date six calendar months after the 70th anniversary of the employee's birth. For example, if an employee's date of birth was June 30, 1933, the 70th anniversary of such employee's birth is June 30, 2003. Such employee attains age 70 1/2 on December 30, 2003. Consequently, if the employee is a 5-percent owner or retired, such employee's required beginning date is April 1, 2004. However, if the employee's date of birth was July 1, 1933, the 70th anniversary of such employee's birth would be July 1, 2003. Such employee would then attain age 70 1/2 on January 1, 2004 and such employee's required beginning date would be April 1, 2005.

If that's the case, then in your example, 59 1/2 would be 1/1/2020.

[Peter Gulia]

Pension RC, if this participant’s question is whether a distribution (if not rolled over) is or isn’t subject to an additional income tax on a too-early distribution, sorting out what “the date on which the [participant] attains age 59½” means might involve a series of questions:

 

Considering the payer or other service provider that does the Form 1099-R, what measurement rule would it (perhaps by using software) apply, likely using the plan’s records of the distributee’s birthdate and the distribution’s date, to discern whether the distributee had or had not attained age 59½ on the distribution’s date?

 

If a Form 1099-R would code the distribution as an early distribution, is the distributee ready to file his tax return based on a position inconsistent with the Form 1099-R?

 

If the IRS detects a mismatch and asks for the taxpayer’s explanation, how confident would he be in defending his tax-return position?

[Luke Bailey]

I have only the following to add to what Peter says above: I researched this once and concluded that there was no interpretive gloss, anywhere, on 59-1/2, e.g., there are no regs even proposed for 72(t). So I think 59-1/2 is probably your birthday plus 182-1/2 (or 183 if a leap year). Peter's practical points are more important though, i.e. it is what is going to be in the eye of the beholder of the 1099-R.

[Peter Gulia]

Glancing at my old-fashioned paper calendar (and without checking whether ACCO Brands counted correctly), its display for July 1, 2019 shows 182 days elapsed and 183 remaining.

Absent a rule or regulation that interprets IRC 72(t)(2)(A)(i), one might imagine a taxpayer arguing that 183 is at least half of 365.

[Bri]

And of course, if he's a terminated participant, the real question is whether he terminated prior to the year he attained age 55.