Expert: Allen - 8/29/2009

Question
I was laid off from a company at age 54 in 2006. I also received severance pay in 2006. In 2007 I was issued my "last" check, which was a Team award bonus (for the year 2006). I also requested a withdrawal in 2007 from my 401K after I was 55 years old.

The dilemma is centered on my actual separation from the company. I understand that the term “separation from service” is not defined by either the Code or regulations. I also understand that a “true separation” is when the employer/employee relationship is completely severed. I feel my actual separation occurred in 2007 with the issuing of my “last” pay check dated 3/15/07, which showed earned wages and income tax withheld for both Federal and State as reported (by Fidelity) on the 2007 W2 form. This was the same year in which I turned 55 years old and received my distribution, thus allowing for the exception per publication 575.

The exception per publication 575 states “From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55.



Am I exempt from the 10% early penalty?


Answer
I am not an attorney and therefore am not qualified to give a legal opinion. Saying that, I can only give you my opinion.

Unfortunately, my opinion is that you are subject to the penalty. I believe your separation occurred in 2006. I do not believe that the receipt of a bonus payment in 2007 is relevant.

One other thing, the language in Pub. 575 is more liberal than the language in the Internal Revenue Code. The Code states "made to an employee after separation from service after attainment of age 55". It appears that the IRS is giving a more liberal interpretation than required which may help you.

The fact that your misundersatnding was due to a complex section of the Code may give you grounds to appeal the penalty to the IRS. One other suggestion is to contact your representative in Congress and see if his/her staff can do anything for you.