Exception to 10% Penalty on Early Distributions from Retirement Plan

[tonia2021]

I have a client who had to take out all of the money from his retirement plan since he was unable to work while recovering from surgery. The company coded the 2005 distribution a 1 (No exception). At the beginning of 2006 he was told by his doctor that he couldn't return to work and was able to collect disabilty from Social Security. We filed his 2005 return showing the distribution and the 10% penalty since that is how the 1099 was coded. Can this client go back and amend his 2005 tax return and get the 10% penaly back? The insurance agent says the company is very slow and probably won't issue a different 1099 showing his disabilty.

The taxpayer had both hips replaced and was expecting to return to work in 3-6 months, during which time he took the money out. After that time, his doctor told him that he couldn't return to work due to severe arthritis in his shoulders and arms. Does the type of disability determine if the taxpayer qualifies for the exception?

Thanks

[RLymanC]

1099-r

Form 5329 Code 3 requires total and permanent disabilty. Sounds as though this is tha case.

I would generate a 1040X, leave Code 1 on the 1099-R box 7, force form 5329 and enter the exception code 3 and the full amount of the distribution. You could site
IRC 72(t)(2)(iii). This should eliminate the 10% penalty on the 1040X.

Attach the doctors statement indicated the total and permanent disabilty along with a statement that the issueing company will not submit a corrected 1099-R.