Age 55 Separation From Service Exception Timing

Submitted by Josh Harmon on Fri, 2017-08-04 17:18

I have a client who just elected to diversify his ESOP and have the company send the check directly to him. He is over 55, and plans on retiring in the next few weeks. If he were to receive the check prior to separating from employment, my assumption is that he would be subject to the 10% penalty. Can he hold the check or have the company hold the check until he severs employment? And if so, does this qualify for the exception? In other words, when does he need to be not employed; when the company cuts the check, when he receives the check, or when he deposits the check? We’re not exactly sure when the check will arrive. He is planning on forfeiting any accrued vacation or PTO.

Thanks in advance for your help,

Josh



Submitted by Alan - IRA critic on Fri, 2017-08-04 18:40

  • If the check is mailed before his separation date, it will be coded as an early distribution and will not be eligible for the age 55 separation exception. To qualify for the exception he would need to delay the distribution or accelerate his separation date such that it comes prior to the date of distribution.  This also applies if he plans an LSD for NUA purposes with ESOP or other company shares. The LSD must be due to separation from service, so any shares distributed that would otherwise qualify for NUA would not qualify if distributed before the separation date. Therefore, if there is enough appreciation to consider NUA and an LSD can be done, perhaps he should wait a couple more months to diversify. That said, diversification should always trump tax benefits.
  • Why would he forfeit paid vacation or unused sick leave? Those benefits should not extend the separation date which is typically the last day worked.

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