59 1/2 - When exactly?

[Lou S.]

I think I know the answer but in case I'm wrong I thought I'd ask. For the exception to the 10% penalty, when does the distribution have to occur? That is does the distribution have to happen 6 months after the participant turns age 59 or is it anytime in the year in which they turn 59 1/2? This participant will reach 59 1/2 anniversary in October 2023.

Normally I'd just tell them to wait but the participant is going on leave due to medical issue that may be terminal so waiting until October may not be an issue.

If it is after age 59 1/2 is there a hardship exemption to the 10% penalty that would allow the distribution now without penalty?

I realize there is a work around where the client could deem him terminated and thus the withdrawal would be after separation of service after attainment of age 55 and not subject to the 10% penalty but there might be reasons like health insurance that they would want to classify him on leave instead of terminated.

Any thought would be appreciated.

[Bri]

What about the exception for disability?

[Lou S.]

Disability might work too. It could just be problematic if he does return to work.

[Paul I]

Check the  plan definition of disability.  Some allow the Plan Administrator some leeway on the decision whether the participant is considered disabled.

[Peter Gulia]

To return to Lou S.’s query, the statute, the Internal Revenue Code of 1986, reads:

§ 401(k)(2)(B)(i)(III)

A qualified cash or deferred arrangement must meet a set of conditions, which include:

“(B) . . . amounts held by the trust which are attributable to employer contributions made pursuant to the employee’s election—

       (i)    may not be distributable to participants or other beneficiaries earlier than—

               (III) in the case of a profit-sharing or stock bonus plan, the attainment of age 59½[.]”

Accord 26 C.F.R. § 1.401(k)-1(d)(1)(ii)(A) (“[t]he employee’s attainment of age 59½”).

§ 72(t)(2)(A)(i)

“Except as provided in paragraphs (3) and (4), paragraph (1) [the imposition of an extra tax on a too-early distribution] shall not apply to any of the following distributions:

Distributions which are—made on or after the date on which the employee attains age 59½[.]”

[Appleby]

On 6/30/2023 at 3:09 PM, Lou S. said:

I think I know the answer but in case I'm wrong I thought I'd ask. For the exception to the 10% penalty, when does the distribution have to occur? That is does the distribution have to happen 6 months after the participant turns age 59 or is it anytime in the year in which they turn 59 1/2? This participant will reach 59 1/2 anniversary in October 2023.

 

it is Six months after the date the participant reaches age 59 1/2.  You want to be careful and wait a day or two after that, because some systems count it in days and not months.   ( it is not anytime during the year in which they reach age 59 1/2)

[EBP]

I recently evaluated a similar situation for a client who had a terminally ill participant under age 59-1/2 who was on leave. Here is part of my answer:

"As far as the 10% early withdrawal penalty because he’s not 59-1/2 yet, SECURE 2.0 does contain an exception to the penalty on early distributions for individuals with a terminal illness. A physician must certify that the employee has a terminal illness on or before the date the employee takes a distribution. Further guidance is needed on what type of evidence is sufficient for the plan administrator.

 The term “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification. (Code §101(g)(4)(A)) SECURE 2.0 says that 84 months is substituted for 24 months in this case.

It sounds like [recordkeeper] is not yet set up for this provision of SECURE 2.0, which is not surprising. There are so many moving parts to the changes in SECURE 2.0 for recordkeepers in particular that they’re scrambling right now. And, as with this provision, we all await further guidance on many provisions. Because the 10% early withdrawal tax is assessed to the individual and does not affect the distribution amount, there is some time for [recordkeeper] to figure out how to report this. [Recordkeeper] would withhold the normal 20% now when it distributes. When the participant files his taxes, he would pay the 10% tax penalty at that time. I assume that by tax season next year, [recordkeeper] will be able to code his 1099-R with a special code indicating a physician certified his terminal illness and there will be a Schedule to attach or someplace to report it on the Form 1040, but that is unknown at this time.

Here are two other exceptions to the 10% early withdrawal penalty that could work in this participant’s case:

1. The participant is totally and permanently disabled.
2. The employee separates from service during or after the year the employee reaches age 55."

 

In my client's case, they looked into the requirements for life insurance and other benefits to see if they would be adversely affected by terminating the participant. They determined that his benefits would not be adversely affected, so they opted to terminate him and presumably, he used the age 55 exemption to avoid the 10% early withdrawal penalty. That was a cleaner approach than going with the SECURE 2.0 provision for them.

 

 

[BruceM]

When I am infrequently asked this question, I use my TI-BAII Plus and add 181 days to the client's 59th birthday to give the earliest possible date to avoid the 10% early withdrawal penalty. So for example, 59th birthday is March 22, 2023. Go to calculator's 2ND/1  (DATE function). Enter this date as 03.2264 in DT1=. Then arrow down twice to DBD (days between dates) and type 183 and ENTER. Then arrow up once to DT2 and hit CPT (compute). It comes up with TUE = 9-21-2023 

[Belgarath]

I look at a calendar, and go out 183 days...

[C. B. Zeller]

13 hours ago, BruceM said:

When I am infrequently asked this question, I use my TI-BAII Plus and add 181 days to the client's 59th birthday to give the earliest possible date to avoid the 10% early withdrawal penalty. So for example, 59th birthday is March 22, 2023. Go to calculator's 2ND/1  (DATE function). Enter this date as 03.2264 in DT1=. Then arrow down twice to DBD (days between dates) and type 181 and ENTER. Then arrow up once to DT2 and hit CPT (compute). It comes up with TUE = 9-19-2023 

With alternative tools that others might prefer:

HP 12c:

3.222023 [ENTER] 181 [g][DATE]

 Result is 9.192023, interpreted as September 19, 2023

Excel:

=DATE(2023, 3, 2022) + 181

Result is 9/19/2023

That said, if you are working with a system that works in days instead of months, a half year would be more correctly 365 (or 366) divided by 2, which would be 182.5 (or 183). So I would go with Belgarath's suggestion of 183 days instead of 181 if you are doing it this way.

[Bri]

This will be easier once the calendar goes metric.

[Peter Gulia]

Different minds can reason a few different ways to count a half a year, or to mark a half-birthday.

The Treasury department’s rule to interpret Internal Revenue Code § 401(k)’s condition about when a plan with a cash-or-deferred arrangement may provide a distribution from a § 401(k) subaccount does not specify when 59½ occurs.

26 C.F.R. § 1.401(k)-1(d)(1)(ii)(A) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(d)(1)(ii)(A).

And there is no rule to interpret when 59½ occurs for § 72(t)(2)(A)(i)’s exception that § 72(t)(1)’s extra tax on a too-early distribution does not apply to a distribution “made on or after the date on which the employee attains age 59½[.]”

The Treasury’s current (and proposed) § 401(a)(9) rule sets 70½ as “the date six calendar months after the 70th anniversary of the [participant’s] birth.” The rule (current or proposed) illustrates this with two examples: A 70th birthday on June 30 results in 70½ on December 30; a 70th birthday on July 1 results in 70½ on the next year’s January 1.

26 C.F.R. § 1.401(a)(9)-2/Q&A-3 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-2.

That rule’s examples result in a span of 183 or 184 days. But other anniversary dates can result in a span of 182 or 181 days.

The § 401(a)(9) rule does not illustrate how to count six months for someone born on the last day of March, the last day of May, the three last days of August, the last day of October, or the last day of December.

How one might interpret or apply a half-year concept might differ between § 401(k)(2)(B) and § 401(a)(9)(C). Among several arguable differences: For 70½, that date does not by itself set the required beginning date; rather, it sometimes sets the year that precedes the year that includes the required beginning date. For 59½, that date is the relevant conclusion.

About § 401(k)(2)(B), there is a range of interpretations a plan’s administrator might defend. And about the § 72(t)(2)(A)(i) exception, there is a range of interpretations a distributee might assert.

In deciding whether a participant gets a distribution because she reached age 59½, an individual-account retirement plan’s administrator might want to know what measurement or assumption its recordkeeper’s software would apply absent the administrator’s instruction.

In considering whether a distributee gets an exception from the too-early extra tax because the distributee reached age 59½, a participant might want to know what measurement or assumption the reporter of Form 1099-R would apply. (Although a taxpayer may file a tax return that asserts an income tax treatment different than one suggested by a Form 1099-R report’s coding, some participants consider potential burdens of responding to the IRS’s or another tax agency’s inquiry.)

If a participant seeks to be certain of getting 59½ treatment for both purposes that refer to 59½, one might count to the later of (i) 183 days after the 59th birthday, or (ii) the latest date that would result from any possible interpretation of the “six months” in 26 C.F.R. § 1.401(a)(9)-2/Q&A-3 as an analogy for the 59½ half-year.

If the participant can’t wait for the money, other interpretations might be possible, depending on the facts and circumstances.

Does anyone know how Relius software looks for 59½?

Does anyone know how Empower’s software looks for 59½?

[BruceM]

Corrected to days

[Peter Gulia]

Does anyone know how Relius software looks for 59½?

Is it 183 days after the 59th birthday? Or something else?

[Bri]

Peter -  I just took a quick peek at how Relius sets up distribution definitions, and it's looking for a minimum age of years/months.  I don't have a dummy plan to test it on, but that sounds like they'll simply add the number of months to the birthdate day number.

[Peter Gulia]

Thanks.

Using six-calendar-months-after follows the rule for 70½.

But what does the software do about someone born on the last day of March, the last day of May, the three last days of August, the last day of October, or the last day of December?

(For those, the sixth month after lacks the same numbered days.)

[Bri]

I did just look to see what 8/30 would convert to as 6 months later and it came to 2/28.  Starting with 10/31, though, it came up as 4/29.

(This was straight plan entry-date calculations as opposed to benefit-eligibility calculation.  Maybe Relius does those calculations identically, but I can't say for sure.)

Interesting....

[Peter Gulia]

Thank you for sharing the information with me and our BenefitsLink neighbors.