Disability termination of SEPP Plan
L1: Disability termination of SEPP Plan
The following linkis toan article by Ed Slott outlining cases where the disability exception to an early distribution penalty is being interpreted to the letter of the law by the IRS. The same section of the tax code that defines disability is used for
both early withdrawal penalties and therefore by extension for when and IF a SEPP plan is automatically terminated due to disability.
Moreover, there apparently is no statute of limitations here because one example goes back 6 years to recover the 10% penalty. Another example shows that a taxpayer who subsequently “recovers” to some extent from their disability can trigger an IRS position
that the taxpayer retroactively did NOT meet the definition in the tax code in the first place.
The point is to be very careful in deviating from your plan based on the extent of your disability because the IRS is vigilant in observing the code definition:
2011-11-04 03:39, By: Alan S., IP: [188.8.131.52]
L2: Disability termination of SEPP Plan
Alan… thanks for posting the link – good article.
The definition of disability under IRC Section 72 is very close (but not identical to) the definition of disability used by Social Security. As a general rule of thumb, if a person isn’t disabled for Social Security purposes, they probably aren’t disabled
for purposes of Section 72. And while being disabled under social Security is no guarantee that an individual is disabled under Section 72, it would be extremely difficult for the IRS to disagree with the Social Security Administration.
The 2 definitions follow…
Definition of Disability for a SEPP: IRC Section 72(m)(7) MEANING OF DISABLED. — For purposes of this section, an individual shall be considered to be 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 and 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.
IRC Section 72 –
http://72t.net/72t/IRC/Section72 – scroll down to 72(m)(7)
Definition of Disability for Social Security: The Social Security Act defines disability (for adults) as “inability 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 which has lasted or expected to last for a continuous period of not less than 12 months” (Section 223 [d]). Amendments to the Act in 1967 further specified that an individual’s physical and mental impairment(s) must
be “. . . of such severity that he is not only unable to do his previous work but cannot, considering his age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy, regardless of whether
such work exists in the immediate area in which he lives, or whether a specific job vacancy exists for him, or whether he would be hired if he applied for work” (Section 223 and 1614 of the Act). SSA disability programs only pay for total disability and not
partial or short term disability.
Social Security Act Section 223 –
http://www.ssa.gov/OP_Home/ssact/title02/0223.htm – scroll down to (d) Definition of Disability
2011-11-04 11:45, By: Gfw, IP: [184.108.40.206]