HEART and Qualified Reservist Distributions

[Guest Statler]

A question on the interaction of the Qualified Reservist Distributions under PPA and the distributions for deemed severance from employment under HEART.

Senerio

A plan does not allow for Qualified Reservist Distributions, but does allow for distributions for deemed severance. Participant takes a distribution under the deemed severance but also meets the requirement for a Qualified Reservist Distribution. Does he owe the 10% penalty tax?

My thoughts are that since PPA is written that the Qualified Reservist Distributions is "any distributon to an individual" and does not specify that the distribution must be allowed by the plan, the participant would get the penalty waiver. He would use the 5329 to show that he qualified for the waiver.

Does this sound reasonable, or am I missing something big?

Thanks

[401K_AZ]

See Internal Revenue Bulletin: 2010-6

Q-15. If an individual is eligible under a plan to receive a distribution under § 401(k)(2)(B)(i)(I) as a result of a deemed severance from employment under § 414(u)(12)(B), and is also eligible under the plan to receive a qualified reservist distribution within the meaning of § 72(t)(2)(G)(iii), as permitted under § 401(k)(2)(B)(i)(V), what treatment applies to a distribution that could be made under § 401(k)(2)(B)(i)(I) or under § 401(k)(2)(B)(i)(V)?

A-15. If an individual receives a distribution that meets the definition of a qualified reservist distribution under § 72(t)(2)(G)(iii), the distribution will be treated as a qualified reservist distribution, even if the distribution would also have been permitted as a result of a deemed severance of employment under § 414(u)(12)(B). For example, if a plan provides for qualified reservist distributions and for distributions on deemed severance under § 414(u)(12)(B), a distribution to an individual that could be either type of distribution will be treated as a qualified reservist distribution. In that case, the distribution would not be subject to the 6-month restriction on elective deferrals or to the 10-percent additional income tax of § 72(t). The rules applicable to qualified reservist distributions are discussed in Section IV, below.