How to recover penalty charged in error
L1: How to recover penalty charged in errorI separated/retired from my company in June of this year and then turned 55 on 12/24/08. I requested a partial distribution from my 403(b) plan (The Principal) in September.The plan withheld 30% at the time of the distribution, 20% which I expected fortaxes as required but also the 10% early withdrawal penalty. I can’t seem to get my plan to understandthe rules associated with 72t as related to the provision often clarified here as being exempt from the penalty if one separates from service in the “year one turns 55”. Please calrify that my understanding is still correct on this matter and what can I do to get my plan to redeposit the 10% penalty withheld in error.2008-12-30 19:30, By: freeatlast, IP: [184.108.40.206]
L2: How to recover penalty charged in errorOne technique that usually works is to ask your plan administrator to show you the part of the IRS tax regulations that requires them to withhold the 10% penalty. You can also download IRS Pub. 590 and go through that to find the part of the IRS regulations that show that they do not have to withhold the 10% penalty and that separating from service in the year in which one turns 55 allows employer retirement plans to offer partial withdrawals. Note that they are not required to offer partial withdrawals. Many do but others do not. When faced with a plan that does not allow partial post age 55 and separated from service withdrawals, you can roll your plan into an IRA, set up a substantially equal payment plan, and withdraw the calculated annual amount.It is likely that you will have to file a form 5329 to claim an exemption from the 10% early withdrawal tax.2008-12-30 22:39, By: Ed_B, IP: [220.127.116.11]
L3: How to recover penalty charged in errorI agree with Ed…ask them to show you where it says they should withhold the penalty.
Maybe they misunderstand the rules. The penalty is separate and apart from withholding federal and State taxes. Ask them how they plan to report the penalty to the IRS- as there is no provision for them to do so. The 1099-R- which is used to report distributions and tax withholding- does not provide for the reporting of the penalty amount. As far as the penalty is concerned, their responsibility is limited to reporting whether the distribution is subject to the penalty by inputting the applicable Code in Box -7.
The following is a link to Sec. 1.403(b)-2 http://whatistaxed.com/regs/CFR-MainFolder/26CFR-2004/a257.g.akamaitech.net/7/257/2422/12feb20041500/edocket.access.gpo.gov/cfr_2004/aprqtr/26cfr1.403(b)-2.htm . This explains the withholding rules that apply for purpose of federal taxes. You can also refer to IRS publication 575 which discusses distributions and withholding tax . Withholding requirements are explained on page 26. the age 55 exception on page 30. http://www.irs.gov/pub/irs-pdf/p575.pdf2008-12-30 23:59, By: Denise Appleby, IP: [18.104.22.168]
L4: How to recover penalty charged in errorYou are correct that the employer/admininstrator goofed. However, you will still get credit for the TOTAL FEDERAL WITHHOLDINGS when you prepare and submit your tax return in the next few weeks or few months. You must try to get them to understand their error, and get them to refund your extra 10% withholding BEFORE THEY REMIT IT TO THE IRS. Once they submit it, there is almost no way that they can get it back.HOWEVER, you can insist that if they cannot give you YOUR MONEY, then they should at least give you an INTEREST-FREE LOAN until 6/15/2009, which is the date by which you will receive your refund from the IRS for the overpayment of your taxes. Then you would repay their loan.If you will be filing estimated taxes in 2009, then you could have your overpayment applied to your 1stor more estimated payments next year. In that case, insist that your employer/administrator pay you interest for your not having the funds available to you. Charge them a herfty interest rate, at least 6%/year, or better yet the credit card rates of 18%/year.Last, but not least, report them to the IRS and the applicable agency overseeing pension plans. And, if all else fails, speak to an attorney to see if you can have them arrested for theft, since they took your money without authorization or authority. That will definitely get their attention.2008-12-31 00:45, By: dlzallestaxes, IP: [22.214.171.124]