IRS Distribution Codes

[Guest mikeak]

Trying to clarify 1099R codes (Box 7) for Lump Sum payment from DB plan. Following are some scenarios and what I think are the codes for each. Feedback, please.

Ex. 1: Employee terminates in Jan., turns 54 in Feb., takes distribution in Mar. Code = 1 (Early distribution, no exception)

Ex. 2: Employee terms in Jan., turns 55 in Feb, takes distribution in Mar. Code = 2 (Early distribution, exception applies)

Ex. 3: Employee terms in Jan., turns 50 in Feb., takes distribution in Mar. Check is sent to participant but made out to financial institution (e.g., Fidelity) Code = G (Direct Rollover)

[jaemmons]

In my opinion, #2 and #3 are correct. However #1 is inaccurate. A distribution made to a former employee after they terminate service and during the current or any subsequent calendar year in which he/she attains age 55 meets the exception rule. IRS Notice 87-13 addresses this issue.

[maverick]

It's my understanding that for the age 55 exception to apply, you must terminate employment during the year in which age 55 is attained. If you terminate while 54 (and don't turn 55 during the year of termination), then take a dist in the year you turn 55, the 10% penalty applies.

[Michael Devault]

I agree with maverick. The language of section 72(t)(2)(A)(v) reads:

(v) made to an employee after separation from service after attainment of age 55.

In order for the exception to apply, you have to separate from service in or after the year in which you attain age 55. If you separate from service at 54, for example, you are forever unable to use the "age 55" exception to avoid the 10% penalty.

[jaemmons]

I stand corrected. In any event, the code for #1 should be changed to "2" since the exception does apply.

[BPickerCPA]

jaemmons,

Why do you say an exception applies? The termination is occuring in the year PRIOR to the year the employee attains age 55. The distribution is being taken in the year the employee attains age 54. Therefore, to my understanding, NO exception applies.

[jaemmons]

You are absolutely correct. I misread the 54 for a 55. Sorry for the miscommunication.