401K Exception Early Distibution >55 Sep from Service

[arikashay]

I have a situation where and individual was laid off from a local company in October 2007. He withdrew his entire 401K and is over 55 but less than 59 1/2. The company sent him another check in 2008 to settle up the vacation/personal time bank he had coming to him for prior service. He never WORKED for the company after Oct 07 and we have a letter from the company saying he was dismissed from service in Oct 07. He used the exception of >55 dismissed from service to avoid the 10% early withdrawal penalty. The IRS is denying the exception because of the bookkeeping adjustment that was done on the company books in 2008 and caused him to get another w-2. We have submitted the letter from the company but the IRS is still denying the exception. ANY IDEAS????

[New York Enrolled Agent]

I assume (perhaps incorrectly) this was a correspondence audit??? If so, let the IRS issue an examination report and a 30-day letter and then file an appeal. Unlike the examiners in the correspondence audit unit who are low grade IRS employees, an Appeals Officer will understand §72(t) and should find for your taxpayer.

[joanmcq]

I used the same exception in an audit once; it went to appeals, and I had to send the appeals officer the code to prove the over 55 exception to the penalty for a 401(k). she had never heard of it(!).

[Burke]

I have a situation where and individual was laid off from a local company in October 2007. He withdrew his entire 401K and is over 55 but less than 59 1/2. The company sent him another check in 2008 to settle up the vacation/personal time bank he had coming to him for prior service. He never WORKED for the company after Oct 07 and we have a letter from the company saying he was dismissed from service in Oct 07. He used the exception of >55 dismissed from service to avoid the 10% early withdrawal penalty. The IRS is denying the exception because of the bookkeeping adjustment that was done on the company books in 2008 and caused him to get another w-2. We have submitted the letter from the company but the IRS is still denying the exception. ANY IDEAS????

Keep on arguing. Refer to IRC code sections. Send them copies. Ask for reconsideration by a supervisor. Sometimes it takes 6 mos, but you should prevail.

[arikashay]

Sep from Service Issue

I am afraid the issue is going to come down to the definition of "separated from service". Any ideas on where I can find support for this issue. He received a W-2 but it was for prior year service. It was actually for commission and sick time they realized they owed him in 2008 for services in 2007. We have submitted a letter from the employer stating his last day of service was October 2007.