IRS Announces Change to Form 1099-R Instructions

December 2, 2004 ( - The Internal Revenue Service (IRS) has announced a revision to the instruction for the 2004 Form 1099-R, which retirement plans file to report distributions.

>The changes affect distributions codes 1 and 2 for Box 7 of the form; a plan uses these codes to report distributions to participants under age 59-1/2. In general, code 1 indicates that the distribution may be subject to a 10% early distribution penalty under Code 72(t). Code 2 indicates that the distribution is exempt from the penalty.

>The instructions for 2004 limit the circumstances in which a plan or IRA could use code 2, and therefore the IRS has corrected this in an errata published on its Web site.

>Under the correction, a plan uses code 2 in any of the following circumstances:

  • A Roth IRA conversion or a reconversion.
  • A distribution made from a qualified plan or IRA because of an IRS levy under section 6331.
  • A section 457(b) plan distribution that is not subject to the additional 10% tax.
  • A distribution from a qualified retirement plan after separation from service where the taxpayer has reached age 55.
  • A distribution that is a part of a series of substantially equal periodic payments as described in section 72(q), (t) and (v).
  • Any other distribution subject to an exception under section 72(q), (t), and (v) that is not required to be reported using Code 1, 3 (disability), or 4 (death).

>The problem that the IRS is attempting to remedy is that under the corrected instructions, a plan would use code 2 for a corrective distribution, while under the printed instructions, the plan would use code 1, potentially inviting the IRS to contact the participant to explain why the participant is not subject to the penalty tax.

>The corrected instructions, which are posted on the Web site, state, “Use Code 1 only if the employee/taxpayer has not reached age 59½ and you do not know if any of the exceptions under Distribution Code 2, 3, or 4 apply. Use Code 1 even if the distribution is made for medical expenses, health insurance premiums, qualified higher education expenses, or as a first-time homebuyer, under section 72(t)(2)(B), (E), or (F).”

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