Disability and Age 55

L1: Disability and Age 55hi-i am currently on short-term disability and awaiting a long-term disability determination (LTD) next month. If I qualify for LTD, my employer will carry me as an inactive employee until April 2007 at which time I will be terminated. My understanding is that I can not roll over my 401k plan until then. I will be 55 on December 24, 2007, so will I escape the 10% penalty? Also, considering my age and disabiity status, am I limited to the SEPP distribution or do I have more leeway?Many thanks,Paul2006-08-29 10:21, By: safford, IP: [24.146.16.93]
L2: Disability and Age 55Hello Safford:
The age 55 exemption only applies to fundswithin your 401(k) plan. Whenever you process an IRA Rollover, then you come under the IRA rules of age 59 1/2 to avoid the 10% penalty. So for your case, as long as you have your 55th birthday during the year you retire / terminate, and if you can stay in the K-plan with your employer,then your will be exempt from the 10% penalty.One of the problems you may encounter is not being able to take periodic distributions from the K-plan. Some companiesonly allow a one-time distribution to you at the time you process your IRA Rollover. Check with your HR department for the planrules.
As to your LTD determination, don”t be shocked if the first report is to “deny” the claim. Unfortunately this is pretty common practice and it takes appeals to get approved for LTD. Social Security works this way and unfortunately many companies take their lead from SS. Both K-plans and IRA”s have “disability waiver” provisions for the 10% penalty, but a lot depends on your final determination for LTD. Wish I had more concrete information for you but you are operating in one of the “grayest” areas of the rules / law.
Good luck.
Jim2006-08-29 10:57, By: Jim, IP: [70.184.2.72]

L2: Disability and Age 55hi jim-thanks for the quick response. so as I understand what you are saying, even with a LTD determination at age 55, I am limited to the SEPP distributions until age 59 1/2?–Paul2006-08-29 16:17, By: SAFFORD, IP: [24.146.16.93]

L2: Disability and Age 55If you can prove you are disabled, then you meet the disability exemption to the 10% penalty. I think what Jim was saying is that proving that you are disabled may be more difficult than simple.
While the definition of disability may be different that it is for Social Security, it may be sufficient. You may also want to discuss with your employer – you may meet the definition of disability under your 401(k) and you might be better off leaving the funds in the 401(k) and taking distributions from the plan – especially if your employer will give you the proper code on your 1099. 2006-08-29 16:26, By: Gfw, IP: [172.16.1.71]

L2: Disability and Age 55Thanks for the additional question. I see that I did not do a very good job answering that part of your question.
I am going to defer to some of our CPA”s to address documentation to support an early distribution due to disability. Suffice it to say that disability is a reason for early distribution without penalty at any age. If you get the disability exception, then you don”t need a SEPP Plan. But if you have a SEPP Plan in operation, you can”t use the disability reason for distributions and continue the SEPP PLan, unless you get a favorable PLR for your situation.
Now I”m going to stop and let someone with experience acutually processing penalty free distributions and dealing with the tax aspects.
Hope this helps.
Jim2006-08-29 16:32, By: Jim, IP: [70.184.2.72]

L2: Disability and Age 55Hello Jim:
I agreewith everything you said, except “you can”t use the disability reason for distributions and continue the SEPP PLan, unless you get a favorable PLR for your situation.”
Given the strange way in which IRC 72(t) works; it is actually 72(t)(4) that reimposes the 10% surtax when a SEPP plan is modified. However, 72(t)(4) permits modifications to SEPP plans without penalty. Thus, although it is circuitious (or maybe a triple/quadruple negative) a SEPP plan can be terminated without penalty when the reason for that termination/modification is either death or disability.
Now, onto the definition of of “disability”. One needs to turn to IRC 72(m)(7) which says:
“…an individual shall be considered to disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued or indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.”
The key, as you mentioned earlier lies in the documentation; ususally a combination of: being granted total disability by a private insurer; physician”s statements & granting of disability status by the Social Security Administration.
TheBadger
wjstecker@wispertel.net

2006-08-29 18:22, By: TheBadger, IP: [72.42.67.76]

L2: Disability and Age 55There may never be a clear definition in many cases of what physical or mental condition constitutes a qualifying disabilily. There are two recent tax court rulings (2006-74 and 2006-62) that come to opposite conclusions with respect to the “indefinite” nature of a disability and what conditions make a disability of indefinite duration. It appears that many different factors are considered and weighted quite differently from case to case. What this means is that if you take the distribution in a borderline situation, don”t count on the IRS not contesting a claimed penalty waiver.2006-08-29 23:22, By: Alan S., IP: [24.116.68.91]

L2: Disability and Age 55Hi Bill:
Thanks for your comments / clarifications about disability and SEPP. No, I really did not do a very good job with my explanation. If someone is dead … that”s easy to figure out … or disabled … that”s the crap shoot … there is no reason to keep a SEPP in operation. All distributions after the disability determination should be without penalty. I assume the custodian would issue two Form 1099-R for the year someone stops SEPP and shifts to Disability Distributions. I assume you may have seen this in your practice and I would appreciate your comment on this subject.
Jim2006-08-30 15:08, By: Jim, IP: [70.184.2.72]

L2: Disability and Age 55The problem is the various definitions of “total disability”. You are dealing with the definitions in the401-K plan, LTD insurer, Social Security, and IRS, and they all may be different. The previous wording “unable to preform ANY GAINFUL EMPLOYMENT” could be a real problem because that is the IRS” definition. However, if you satisfy this definition for the IRS, then the others do not matter in regards to the 10% penalty exception.
Get a very specific letter from a doctor detailing your condition, that it is permanent, and that you cannot do ANY gainful employment (if possible). If not, you will have to take your chances with the facts in your case as far as what your limitations are, and may have to consider the cost of getting a PLR (Private Letter Ruling) from the IRS before proceeding in either direction (disability waiver vs. SEPP).
Professional advice is probably your best route. Experienced tax attorneys, accountants, and/or enrolled agents who have dealt in this area are highly recommended.2006-09-04 00:59, By: dlztaxes, IP: [4.175.9.243]