Category: Compensation & Employee Benefits; Individuals
Subject: Retirement Distributions
Title: Early Withdrawal from a Qualified Pension Plan
IRC Sections: 402(d), 72(t), 404(k)
Filename: 1315.html
Date Produced: 05/94 Copyright 1998, The Tax Resource Group. All rights reserved. Telephone
800-578-3498. Internet: www.taxresourcegroup.com A taxpayer under 55 years of age withdrew funds representing his entire
account balance from a qualified pension plan as a result of termination
of service with his employer. You have requested confirmation of the following
points. 1) Five year averaging is unavailable. 2) The penalty for early withdrawal applies. Discussion 1
Five year averaging does seem to be available to this taxpayer. Section
402(d)(1) allows five year averaging on lump sum distributions from qualified
retirement plans. §402(d)(4)(A) defines the term "lump sum distribution"
as a distribution within one tax year of the entire balance to the credit
of an employee which becomes payable for a variety of reasons, one of which
is the employee's separation from service from his employer. As I understand
the facts, the taxpayer received his entire balance under the qualified
plan in a single payment as a result of the termination of his employment.
This seems to me to qualify for five year averaging treatment. Discussion 2.
Code §72(t) imposes a 10% penalty on all distributions from qualified
retirement plans unless certain exceptions are met. The exceptions are
clearly set forth in the statue and the taxpayer in this case does not appear
to fall within any of them. In order to avoid the 10% penalty, the distribution
must be a) made on or after the date the employee attains age 59-1/2, b)
paid to the employee's estate, c) paid on account of the employee's disability,
d) paid in connection with separation from service after age 55, e) be
part of a series of periodic distributions, or f) be related to dividends
paid with respect to stock described in §404(k) (ESOP dividends) .
There is also an exclusion from the penalty of an amount equal to the employee's
deductible amount of medical expenses for the year of the distribution.
Based on the facts as I understand them, none of the exceptions above appear
to be met. Accordingly, the 10% penalty should apply. | 
