Exception to early w/d penalty

[Disco Stu]

I'm wondering about one of the exceptions to the early distribution penalty. In particular the one for separation from service after age 55.

72(t) makes the exception for distributions "made to an employee after separation from service after attainment of age 55."

IRS Notice 87-13 says that "A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred

during or after the calendar year in which the employee attained age 55."

87-13 seems to allow the exception if the participant separates from service before age 55, as long as they turn 55 at some point during that calendar year.

If the more lenient rule in 87-13 is being utilzed, why is this not in the IRC? I'm wondering if there is any more info out there on this subject and which rule is being utilized by practitioners and if this is the same one that the IRS is enforcing.

Thanks for any input.

[Guest LMalone]

Each year when an updated Code is published, I check to see if it has changed, and each year I pencil in the cite to Notice 87-13. We utilize the more lenient timing in the Notice. This Notice has probably been long forgotten by the Code scribes, but I keep it handy for my own use.

[Guest George Catt]

The question still stands: Can I retire at 54 and withdraw from my 401k without penalty?

Has the IRS challenged the lenient interpretation of the rule?

Are people utilizing the lenient interpretation without challenge?

(still working for Lucent but who knows how long)

[david rigby]

I'll hazard a guess.

Perhaps this is in the reg. because the IRS only cares about your status and age on December 31. After all, this is an issue of taxation, not plan provisions.

[Guest George Catt]

Pax, thanks for responding but a guess won't do. Your's is the interpretation I would like to take, too. But the penalty for doing it wrong is to pay the 10% plus interest for any withdrawals. If the IRS doesn't challenge until several years later, it could be very expensive. I've had several people tell me that the "calendar year" interpretaion is correct, but can't find anything in writing that supports it except IRS notice 87-13. I need to know if that will stand up to a challenge.

Thanks again,

Anybody else?

[david rigby]

Here is a link to the 2000 IRS publication 575, Pension and Annuity Income (requires Adobe Acrobat).

http://ftp.fedworld.gov/pub/irs-pdf/p575.pdf

Beginning on page 28 is the section entitled "Tax on Early Distributions". See comment on page 29:

"Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are:

• From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55,..."

[Guest]

If the IRS had challenged the old notice 87-13 then surely we would have heard it by now. (I know, no one wants to be first) or if the IRS had issued a later notice removong this we would have heard of it by now. instead, every thing I have ever read still points to 87-13 and says no penalty if you quit in the year you turned 55.

[dmb]

What if a 57 year old participant in a DB plan separates from service, begins recieving a monthly benefit and then is re-employed?? How does that effect the early distribution tax issue??

[Ellie Lowder]

It is a facts & circumstances issue - the IRS says that if you had planned the return to work, then you have not separated from service - in other words, if you and your employer knew you were returning, it does't qualify as a separation from service.  So, the age 55 rule doesn't kick in unless you later actually later separate before age 59 1/2.