1099-R coding question

[Art]

Payer coded box 7 exception 1 even though the terminated employee was over 55 when the distribution from the company profit-sharing plan was made. They had to know that the 10% penalty did not apply. Is the company taking the easy way out and just coding anyone under 59 1/2 with exception 1 or an I missing something here? Do we have a potential issue with the IRS down the road if we file the return with code 2?

Art

[ATSMAN]

Payer coded box 7 exception 1 even though the terminated employee was over 55 when the distribution from the company profit-sharing plan was made. They had to know that the 10% penalty did not apply. Is the company taking the easy way out and just coding anyone under 59 1/2 with exception 1 or an I missing something here? Do we have a potential issue with the IRS down the road if we file the return with code 2?

Art

You can't change the Box 7 to 2. It must be corrected by the payer if it indeed is incorrect.

1 – Early distribution no known exception
2 – Early distribution exception applies

If you change it and e-file just be prepared for a CP2000 and taxpayer will have to deal with this issue later. I would rather wait to file and get it corrected if possible.

[kathyc2]

Do we have a potential issue with the IRS down the road if we file the return with code 2?

Yes. The correct way to handle it is with a 5329 form using exception code 01.

[taxea]

Perhaps the documents issued to the TP from the issuer may have a clue.

[dtlee]

You did not indicate the age at which this individual separated from service. The age 55 exception must be met by both the separation from service and the distribution.

[Art]

My bad. Taxpayer was over 55 at the time of separation from service and the time of request for distribution. Code 1 on the 1099-R is correct. Need to use code 1 on the 5329 to remove the distribution from 10% penalty.

Art

[Burke]

If I remember correctly without looking it up, the TP must also have been a plan participant for at least 5 years in order to qualify for this? Be sure to check.