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Plan's NRA is 55 and Participant is leaving on medical disability at age 56


Pammie57

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I want to make sure I advise this client correctly. The plan document has NRA as age 55.  A participant is age 56 and is quitting/retiring in 2024.  He has 1.4 million in his account - a good portion of which will go to pay heavy medical bills.  Am I correct in what I interpret code 72T to allow - HE will NOT be subject to any premature withdrawal penalties even though he is not 59 1/2?  Thanks in advance for any comments/sites/ etc to support my position or dispute it.  

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Just in case:

  • the 10% penalty under IRC 72(t) is a tax, not withholding. 
  • "Medical disability" can be a vague phrase.  The cross-reference for its definition is IRC 72(m)(7);
  • it's not up to the employer to decide if the person meets the IRC definition of "disabled".

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Yes if she's leaving for disability the code would be different and you follow the plan terms to determine total and permanent disability. But the OP says the participant is leaving/retiring in 2024 at the age of 56, so if the only issue if the 10% penalty then no need to even worry about disability definitions since they are separating after age 55 and qualify for the waiver if the payment is from the plan to them and not through a conduit IRA.

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Some retirement plans provide no claim for which finding the presence or absence of a participant’s or other claimant’s disability is relevant.

And even for a plan under which disability sometimes might be relevant, a distribution might be provided for some other reason.

Some payers interpret the Form 1099-R Instructions to suggest one need not report that a distributee is disabled if the plan’s administrator made no such finding.

(Even when a plan’s administrator decided nothing about disability to approve the claim for a distribution, some administrators instruct a payer that a distributee is disabled, considering this a courtesy to support the distributee’s tax return.)

Disability is one of several situations in which a fact or finding that need not, or even cannot, be shown in a Form 1099-R report can be relevant to a distributee’s Federal income tax treatment.

A distributee decides how to state her tax returns.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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