Additional follow up to age 55 from qualified plan

L1: Additional follow up to age 55 from qualified planFurthermore, look at the instructions for Form 1099R coding:2Early distribution, exception applies.
A distribution from a qualified retirement plan after separation from service where the taxpayer has reached age 55.

A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), or (v).Yet another distinction!I”m really wondering about this. Last year, when I was 57, I had to take a distribution from a plan after termination, and was issued a 1099R coded “1” – no exception.And talking around to several people in the industry, this question has been met with a universal “you kidding, aren”t you”?No, I”m not.2006-04-18 13:50, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planThe Plan Administrator is not obligated to give you a code of ”2” – they are only obligated to send a 1099 to the IRS.
It is up to you to fileIRS Form 5329 with your 1040 to claim the exemption. I”m surprised your accountant missed it when your taxes were completed.2006-04-18 13:57, By: Gfw, IP: [172.16.1.74]

L2: Additional follow up to age 55 from qualified plan”>By:
Gfw

Date:
4/18/2006

Subject:
Additional follow up to age 55 from qualified plan

The Plan Administrator is not obligated to give you a code of ”2” – they are only obligated to send a 1099 to the IRS.
It is up to you to fileIRS Form 5329 with your 1040 to claim the
exemption. I”m surprised your accountant missed it when your taxes were
completed. “First of all, it the PAYOR who is obligated to issue the form. That may or may not be the Plan Administrator. If Big Fat Bank is trustee of the plan and issues the check, Big Fat Bank is the payor.Where you get the idea that there is no obligation on the part of the payor to indicate a distribution code in Box 7 completely escapes me. But by all means you go right ahead and do that – you”ll be hearing from the IRS right quick, along with a penalty notice for failing to complete the Form 1099R properly.”My accountant” is me and TurboTax. And although you are right in thinking that a tax preparer should have caught that, an informal survey of some people I know who are accountants or enrolled agents found that most of them did not recall that qualified plan distributions after 55 due to termination are not subject to penalty. It appears to me that everyone has memorized the IRA distribution rules, which has no such exception, and conflated the IRA distribution rules with the qualified plan distribution rules. In fact, I did that myself, and I”ve been in the “pension business” since Methusela was a toddler, and have an MBA in Taxation to boot! I highly suspect this error is extremely common, even among those of us who really should know the difference.2006-04-20 21:47, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planWhen you say …
“Last year, when I was 57, I had to take a distribution from a plan after termination,”
the only thought I have is what was the total value of the account? If the account value is $5,000 or less, then forced distribution is allowed. But in each case I have dealt with this, my daughter being the most recent, there was a period (60-days in my daughter”s case) to either roll to an IRA or a new qualified plan before the auto distribution kicked in. So in your case unless the value was $5,000 or less, I have no idea why you had this distribution.
Jim2006-04-21 08:44, By: Jim, IP: [70.184.1.35]

L2: Additional follow up to age 55 from qualified planWhat happened Jim, is I was laid off with an outstanding loan balance that (given that I was now unemployed) I wasn”t able to pay it off and so had to recognize as income the unpaid balance. Unfortunate, but happens. The issue here, of course, is that being 55 or older at the time, although I had to recognize the income, I should not have had to pay a premature distribution penalty in addition.Something important occurred to me last night – the institution in question is of course not doing their plan recordkeeping with quill pens and ledgers, they use the Omni recordkeeping system, which does contain date of birth information.So, I”m now wondering whether or not I may have stumbled across a flaw in the system. Although I did receive incorrect information from a person in the service center, it seems to me that the fundamental problem may be in the Omni system. Since I believe Omni is used extensively throughout the country, this may be a problem for literally thousands of plan administration service providers.I have checked to see if somehow because of the fact that this was an unpaid loan situation that the rules may be somehow different, but I have found nothing to indicate that.Oh, my balance is way over $5000, so that isn”t an issue. I”ll keep the forum posted as I learn more.Thanks for you comment.Evan2006-04-21 10:59, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planMay I suggest that you obtain from your last employer”s HR Dept and review the Plan Document that sets up the K-plan rules and procedures. Since this is the controlling document, look for the part explaining what happens when there is a loan against the account. I”ve never known about a plan going into forced distribution just because there was a loan against the account.
I am aware that any loan must be satisfied before a K-plan is rolled over to an IRA. Satisfaction in this case is either 1) the participant writes a check from other funds to pay off the loan or 2)sufficient funds are taken from the account to pay off the loan. If # 2 is used, taxes will apply and early withdrawal penalties may apply.But in your case,since youwere over age 55, I fail to see why there would be any penalty. But then theremay besome obscure statute that was attached to some lawmaker”s pet project bill that”s creating the problem, or you may be right about a system-wide accounting glitch. I have no clue about the Omni system so it”s good that a knowledgeable person (you) can chase this problem.
Jim2006-04-21 11:24, By: Jim, IP: [70.184.1.35]

L2: Additional follow up to age 55 from qualified planWithout getting overly technical, if you have an outstanding plan loan balance at termination, you must either repay it to your account in full, or the outstanding loan balance become a deemed distribution and your account balance is reduced accordingly. See IRC Sec. 72(p) – especially recommended as a cure for insomnia. If you are unable to repay it, and it becomes a deemed distribution, the usual rules apply – in general, if it”s before age 59 1/2, you have to pay a 10% on the deemed distribution (as well as ordinary income tax).However, if at the time of termination you were 55 or older, the penalty should not apply. Or at least so it appears to me, and I have not found anything to indicate that a deemed distribution because of a loan default is treated any differently than any other distribution.Remember, this is a qualified plan exemption – it doesn”t apply to IRA withdrawals, the usual age 59 1/2 or stream of periodic payments exceptions do, but not the terminated after age 55 exception.I”m afraid I”ve been out of straight plan administration long enough to not be at all familiar with what rules might apply to SEPPs and such-like, but for a straight-forward 401(k) plan, the exception most certainly applies.My current employer uses Omni as well, so I”m checking with them to determine if this is a system flaw or I”ve just missed some obscure Revenue Ruling or notice that does make a distinction between deemed loan distributions and ordinary cash distributions, but at this point at least, I don”t believe there is.2006-04-21 11:57, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planThanks for clarifying the status of Q-plan loans upon termination. I knew about having to satisfy them when doing the rollover, but I was unaware of the repayment requirement at termination or retirement.
Jim2006-04-21 12:07, By: Jim, IP: [70.184.1.35]

L2: Additional follow up to age 55 from qualified planJim, it could be it”s OK to add the deemed distribution amount to the amount you deposit in the IRA rollover and avoid the taxes and penalties. Don”t quote me on that, tho, I”m pretty rusty on rollover rules.Evan2006-04-21 12:44, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planIf the loan is treated as a deemed distribution, the amount appearing on the 1099R is NOT an eligible rollover distribution. This is indicated in Pub 590, p 24, and also in the 1099R instructions. In fact, those instructions call for a Code L to appear in Box 7 of the 1099R, and the table on p R-11 does not show Code “2” as an additional available code to use with the “L”. It only shows “1”, which may explain the reason for the Code 2 not showing up on the form. The administrator may just be following the table.
HOWEVER, I suspect that the instructions are incomplete, as they have been in various cases over the years. If the deemed distribution was after the age 55 separation occurred, I see no reason that code 2 should not apply. Nor does it appear that if the loan were actually made prior to age 55, that this would pre empt the deemed distribution date post the age 55 separation date. I would be inclined to simply attach Form 5329, and claim the separation from service exception to waive the penalty since you cannot replace the funds to complete a rollover in this case.
2006-04-21 20:24, By: Alan S., IP: [24.116.165.157]

L2: Additional follow up to age 55 from qualified plan
>If the loan is treated as a deemed distribution, the amount
appearing on the 1099R is NOT an eligible rollover distribution. This
is indicated in Pub 590, p 24, and also in the 1099R instructions. In
fact, those instructions call for a Code L to appear in Box 7 of the
1099R, and the table on p R-11 does not show Code “2” as an additional
available code to use with the “L”. It only shows “1”, which may
explain the reason for the Code 2 not showing up on the form. The
administrator may just be following the table. HOWEVER, I suspect that the instructions are incomplete, as they have been in various cases over the years.Thank you, Alan, that was VERY helpful. Off to study Pub 590 in more detail. It may well be the instructions are incomplete or just wrong about not being able to use “L” and “2”. Or maybe not. There”s certainly nothing in the Code itself that would indicate that, but there may well may some obscure Rev. Rul. or Notice that covers it.By the way, anyone have a pointer to somewhere I can find the Regulations? All I can find is raw code on the Web. 2006-04-21 20:49, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planAs is not unusual, IRS Publications and Instructions turn out to be more ambiguous than is desireable.Following up on Jim”s post above, I found on Page R-5 of the 2005 1099R instructions, under “Loans Treated As Distributions”, the following:On Form 1099-R, complete the appropriate boxes including boxes 1 and 2a,and enter Code L in box 7, and enter Code 1, if applicable.Note the “if applicable”! Since my deemed distribution occured after I had attained age 55, in my opinion, Code 1 is NOT applicable, Code 2 is. Despite their handy-dandy chart that Jim refered to above which implies a Code 2 should not be used in conjunction with Code L.So There!2006-04-22 13:09, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planOops, that should be Alan, not Jim.2006-04-22 13:16, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planEvan,
This is to confirm that I agree with your position that the age 55 exception should apply to a deemed distribution, if the date of distribution meets the age 55 criteria. As I posted earlier, all you have to do is attach Form 5329 and claim the exception for the age 55 separation. That form essentially informs the IRS that you disagree with the “1” code and are claiming a “2” code, which will waive the penalty.
2006-04-23 22:01, By: A, IP: [24.116.165.157]

L2: Additional follow up to age 55 from qualified planThanks, A, that”s what I”ll do.Evan2006-04-24 13:50, By: ehodgens, IP: [24.5.98.241]

L2: Additional follow up to age 55 from qualified planGot a call from my former employer”s benefits manager today. She said I”m quite correct, they”ll issue a corrected 1099R, and will be following up with whoever it is who owns the Omni recordkeeping system, since it should have not coded it that way.2006-04-26 15:45, By: ehodgens, IP: [24.5.98.241]