10% early withdrawal penalty - plan terminations.

[Guest SeanT]

Is a forced lump-sum distribution for a plan, after it has been granted IRS approval to terminate, subject to the 10% early withdrawal penalty?

I have a client with many participants (all of whom have account balances >$5K) who think that this money should not be considered an early withdrawal on the grounds that the employer is terminating the plan.

I believe that this money is subject to the 10% penalty but have been unable to find any supporting documentation.

thanks,

Sean

[BFree]

It seems you and your client agree that absent a plan termination, these distributions would be subject to the normal 10% penalty for withdrawal before a certain age.

You are looking for confirmation that the 10% excise is waived. It doesn't exist. Tell them to open IRAs and roll the money over.

[Richard Anderson]

Code section 72(t)(2) lists exceptions to the 10% early withdrawal penalties. Plan termination is not one of the exceptions.

72(t)

(2) Subsection not to apply to certain distributions

Except as provided in paragraphs (3) and (4), paragraph (1)

shall not apply to any of the following distributions:

(A) In general

Distributions which are--

(i) made on or after the date on which the employee

attains age 591/2,

(ii) made to a beneficiary (or to the estate of the

employee) on or after the death of the employee,

(iii) attributable to the employee's being disabled

within the meaning of subsection (m)(7),

(iv) part of a series of substantially equal periodic

payments (not less frequently than annually) made for the

life (or life expectancy) of the employee or the joint lives

(or joint life expectancies) of such employee and his

designated beneficiary,

(v) made to an employee after separation from service

after attainment of age 55,

(vi) dividends paid with respect to stock of a

corporation which are described in section 404(k), or

(vii) made on account of a levy under section 6331 on

the qualified retirement plan.