Public safety DB 10% penalty

Submitted by Chad Goeden on Sun, 2019-02-17 18:25

I am a state public safety member who is planning on retiring before age 50. I have the following plans:

1) Defined benefit, based wage and time employed. Once in retirement, the retirement checks will be taken in periodic payments over the course of my and my spouse’s lifetime.
2) 457 plan
3) 401(a) plan in lieu of social security

I know that I would have a 10% penalty if I take $ from the 401(a) before 59 1/2, so I won’t be touching that. My state specifically says I will not face a 10% penalty if I take payments from my 457 plan before 59 1/2. My questions are:
1) If I retire before 50, will I have a 10% penalty on payments from my defined benefit retirement plan? I wouldn’t think so because the lifetime periodic payments seem to meet the 72(t) exception (and maybe for other reasons as well).
2) If the 10% penalty does apply, does it go away when I reach age 50, or does it stay in place until 59 1/2?



Submitted by Alan - IRA critic on Sun, 2019-02-17 20:54

  1. Yes, you would incur the 10% penalty because your distribution amount is based on a certain average earnings amount and years of service rather than one of the 3 approved methods for SEPP payments outlined in Notice 2002-62.
  2.  The penalty remains until 59.5 because you will retire prior to the year you will reach 50.

Submitted by Chad Goeden on Tue, 2019-02-19 03:56

Unfortunately, that is the exact opposite info I received on Bogleheads:”No. If your pension is set up to allow qualified payments at the age you retire then your 1099-R box 7 would report them as “2–Early distribution, exception applies (under age 591⁄2).” There would be no penalty.”Not sure which expert to trust.

Submitted by Alan - IRA critic on Tue, 2019-02-19 04:36

  • You can read the IRS explanation in the link below.
  • https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments
  • Note that the above explanation does provide the possibility of exceptions in question 9. If there has been any IRS letter rulings available by DB plans that approve their method of calculating the payments as “substantially equal” they would be able to provide that “2” coding on the 1099R box 7.  Of course, if a 1099R does show the 2 code it does not mean that the code is correct, and if they show the 1 code instead and it is in error, the participant can file a 5329 and claim exception “02”. Do you know any former co workers who retired before 50 and have received 1099R forms? If so, how were they coded?
  • While this is something that the IRS should have clarified a long time ago since the question has been around for decades, you might try to get ahold of your plan and ask them two questions. First, will they report a “2” code, and if so what documentation do they have to indicate that this coding is correct in the eyes of the IRS?
  • If the IRS has authorized the 2 coding, the explanation of why has not been published anywhere that I am aware of. 

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