Distributions in excess of 72T amount

Submitted by Davide Cervome on Wed, 2017-01-11 00:53

if you take out funds to pay unreimbursed medical expenses in excess of the computed 72t amount do they still qualify for the penalty exemption?

Permalink Submitted by Alan - IRA critic on Wed, 2017-01-11 02:40

Yes, the medical expenses qualify for the exception, but only for the amount in excess of either 7.5% or 10% of AGI depending on the year. Therefore, much of the medical expenses do NOT qualify since they are under the threshold.
The much larger question is whether the 72t plan has been busted. Conventional opinion is that ANY additional distributions would bust the plan, however this was upended by the tax court in the 2009 case of “Benz v. IRS”. In the Benz case, the tax court ruled that since the additional distributions were subject to a specific penalty waiver (higher education expenses in the Benz case), the 72t plan had not been busted by that distribution. Further, this particular exception did not apply for all the penalty waivers available, just 3 of them. The 3 were medical expenses, higher education expenses, and the first home purchase exception.
Accordingly, I would recommend that the taxpayer file Form 5329 to claim both penalty waivers. Because there is more than one exception enter code 12 on the 5329, line 2. Then attach an explanatory statement showing the 72t distribution amount is subject to exception code 02 and the medical expense distribution is subject to exception code 05 to the extent the medical distributions exceed 7.5% or 10% of AGI.
Then wait and hope you do not hear from the IRS. If you do, then you can present your case based on the Benz vs. IRS case. Note that your case fails if more than the eligible medical expense amount was distributed.

Permalink Submitted by Davide Cervome on Wed, 2017-01-11 16:53

Thank you for your promt reply this was very helpful.