Age 55 Distribution 10% Penalty Exception Question

[Guest jvgatty]

Help! I can't find an answer to this at all. I have a company that will be terminating its plan and then shuttering its doors. In fact the two remaining employees (one age 56) have already separated from service. So my question is, can the 56 year old separated participant avoid the 10% penalty if he receives his distribution as a plan termination distribution or does he have to receive it as a "separation from service" distribution.

I am trying to minimize the administration expense for the employer (ie one distribution for a participant as opposed to two) but also don't want to limit the opportunity for a participant who is now umemployes at the age of 56.

Any insights will be very helpful.

Thank you,

Jeanne :angry:

[masteff]

as a plan termination distribution or does he have to receive it as a "separation from service" distribution.

You're creating a distinction that does not exist in IRS Code 72(t)(2)(A). The Code does not care what name the plan gives to the distribution. It merely cares that it is a distribution "made to an employee after separation from service after attainment of age 55". The word "after" denotes a threshhold, not a causality.

[mbozek]

Help! I can't find an answer to this at all. I have a company that will be terminating its plan and then shuttering its doors. In fact the two remaining employees (one age 56) have already separated from service. So my question is, can the 56 year old separated participant avoid the 10% penalty if he receives his distribution as a plan termination distribution or does he have to receive it as a "separation from service" distribution.

I am trying to minimize the administration expense for the employer (ie one distribution for a participant as opposed to two) but also don't want to limit the opportunity for a participant who is now umemployes at the age of 56.

Any insights will be very helpful.

Thank you,

Jeanne :angry:

10% penalty does not apply if made to an employee after separation from service after attaining age 55. As long as employee attains age 55 by end of the year separation occurs the penalty will not apply.

[QDROphile]

I agree with the responses, but this is a personal tax matter and it would be best for the plan and the em[ployer not to get involved.