1099R Public Safety Officer HELP please 10% early?

[sandigi]

I keep thinking I understand, but the more I read makes me question myself. Can you please help me? I'm sorry my post is so long but I wanted to share my research.

I'm having trouble with the 10% early distribution penalty rules and exceptions

Public Safety officer - Joe was a city firefighter.
He retired early when he was 46 on an early buyout program (however those work, they look like magic to me!)

Joe is 57 in the year 2020

He has 2 forms 1099-R with the SAME account number.
1 form = $5000 with distribution code 2 - early distribution, exception applies (under age 59 1/2)
1 form = $7500 with distribution code 1 - early distribution, no known exception (in most cases, under age 59 1/2)

I ask about the retirement plan and he tells me it is a 457B plan. After researching this, I learn something new. These 457 plans are mostly governmental plans, and there is more magic involved. These 457b plans have tax advantages in that they are NOT subject to early withdrawal penalties so long as you have left the job that provided you with the 457b plan.

That explains the $5000 early distribution exception code 2

Now I'm wondering about the code 1 on the 2nd form.
He tells me that doesn't make any sense they issue me 2 form 1099R - it is the same account. I’m thinking the same thing as the forms have the exact same account number.
I do further research and ask him "Was any of this money from a rollover from another type of plan into your 457b? He says "Well, yes, some was a rollover from my wife's 401K when we got divorced." I thought that explained it and that the 10% penalty would apply. He says he withdrew money in the past and didn't have to pay the 10% early penalty. (I can't verify this because it happened before I began doing his taxes)

I suggested he call Nationwide Retirement Solutions who issues the form 1099. He says they tell him there is a code his tax preparer can put in to say there is no 10% penalty. The closest code I can find:
01 Qualified retirement plan distributions
(doesn’t apply to IRAs) you receive
after separation from service when
the separation from service occurs in
or after the year you reach age 55
(age 50 for qualified public safety
employees
That doesn’t apply since he was 46 when he separated from service.

I read in publication 575:
“The tax doesn’t apply to distributions that are:
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees) (see Separation from service , later
Separation from service.
In order to meet the requirements for the first exception in the list above, you must have separated from service in or after the year in which you reach age 55 (or age 50 for qualified public safety employees). You can’t separate from service before that year, wait until you are age 55 (or age 50 for qualified public safety employees), and take a distribution.”

Nationwide tells him they will send him a form and now that they know he was a fireman (public safety officer), he is not subject to the 10% early penalty.

I know you some of you experts on here have handled this or at least understand the rules. Please help me.

.

[RWG1950]

Sandigi :
Do you have 3-way calling available to you on your phone ? If you do, you may want to get your client
and the 1099-R provider together with you on a conference call to sort out what has happened.
There is likely to be a phone # on the 1099-R This way you can ask the 1099-R issuer questions yourself
(with the customer's permission) instead of just hearing what the customer thinks.
With our privacy laws, the customer will have to be on the conference call to give such permission.
Over the years, 3-way calls have helped me a great deal in these situations. Good luck to you.

[sandigi]

Sandigi :
Do you have 3-way calling available to you on your phone ? If you do, you may want to get your client
and the 1099-R provider together with you on a conference call to sort out what has happened.
There is likely to be a phone # on the 1099-R This way you can ask the 1099-R issuer questions yourself
(with the customer's permission) instead of just hearing what the customer thinks.
With our privacy laws, the customer will have to be on the conference call to give such permission.
Over the years, 3-way calls have helped me a great deal in these situations. Good luck to you.

Thank you RWG for your reply. I appreciate and admire anyone on here who takes time out of their busy schedule to reply to these posts
I don't have 3-way calling and it sounds like they are giving him wrong information. I was hoping somebody could help me with the rules. I'm 99% sure from my research that he is subject to the 10% penalty on the rollover amount that went from his wife at divorce into his 457B. He is currently under 59 1/2 and separated from service before he was 50.
Maybe somebody can confirm that for me.

[New York Enrolled Agent]

Thank you RWG for your reply. I appreciate and admire anyone on here who takes time out of their busy schedule to reply to these posts
I don't have 3-way calling and it sounds like they are giving him wrong information. I was hoping somebody could help me with the rules. I'm 99% sure from my research that he is subject to the 10% penalty on the rollover amount that went from his wife at divorce into his 457B. He is currently under 59 1/2 and separated from service before he was 50.
Maybe somebody can confirm that for me.

I think you're correct on both issues. As a general rule there is no 10% addition to tax on §457 distributions. However, in §72(t) where the 10% addition to tax is found there are 2 paragraphs which confirm your thinking. I'm pasting the 2 paragraphs and added some emphasis. Paragraph 9 stops a rollover from a plan to the 457 and then no more penalty - won't work. Paragraph 10 includes firefighters.

(9) Special rule for rollovers to section 457 plans

For purposes of this subsection, a distribution from an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A) shall be treated as a distribution from a qualified retirement plan described in 4974(c)(1)[ 401K plans are included in the Code section] to the extent that such distribution is attributable to an amount transferred to an eligible deferred compensation plan from a qualified retirement plan (as defined in section 4974(c)).

(10) Distributions to qualified public safety employees in governmental plans

(A) In general. In the case of a distribution to a qualified public safety employee from a governmental plan (within the meaning of section 414(d)), paragraph (2)(A)(v) shall be applied by substituting "age 50" for "age 55".

[sandigi]

Thank you, New York Enrolled Agent. I looked up those IRC sections but I have the hardest time interpreting the code. There is just something about all of those ( ) and numbers and letters both BIG and little that confuses my brain so much, I want to shout! I guess that is why it called a code.

[TAXNJ]

Thank you, New York Enrolled Agent. I looked up those IRC sections but I have the hardest time interpreting the code. There is just something about all of those ( ) and numbers and letters both BIG and little that confuses my brain so much, I want to shout! I guess that is why it called a code.

Also, try to use The TaxBook and or TaxBook Web Library that takes BIG letters and numbers and breaks it into understandable language most of the time.