Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
Feel free to make those reservations at the fancy restaurant at any time! In fairness to you, this is a tricky issue, as the premature distribution penalty for retirement plan distributions under IRS Code Section 72(t) is often misunderstood. The 10% penalty is waived for distributions taken on or after the attainment of age 59 1/2. But if an individual terminates employment on or after age 55, and takes a distribution from the employer’s plan, the 10% penalty is waived as well.
Then why did you lose the bet, since the employee in question was only 54 years of age? A somewhat obscure IRS notice from 20+ years ago (Notice 87-13) clarified that it is possible for 54-year olds to take advantage of the exemption from the 10% penalty tax as well. Here’s how it works; if the termination of employment occurred during the CALENDAR YEAR that the employee turned age 55, then the 10% premature distribution penalty would be waived for distribution under that circumstance as well. Thus, it is possible to be 54 years old today, terminate employment, turn 55 prior to 12/31/2011, and receive a distribution anytime following termination of employment that is exempt from the penalty tax. Thus, you lose the wager.
Thanks for the question, and be certain not to wager any more meals before checking with the Experts!
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.