Tax Court Rejects Hepatitis Early Withdrawal Penalty Exception

July 13, 2007 (PLANSPONSOR.com) - A participant who tried to claim the disability exception to the required 10% early withdrawal penalty because he suffered from hepatitis C was dealt a recent setback by the U.S. Tax Court.

Special Trial Judge John F. Dean ruled that Steven A. Dykes still had to pay the penalty, despite his illness. Dykes, a former juvenile court detention officer in Washington state, took a plan distribution of $39,087.10 at age 50 when he left his job in 2003.

Because of medication Dykes was taking, the hepatitis did not fit the Tax Code’s disability definition as affecting a person who is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration,” Dean asserted.

Related regulations further provide that an impairment is not a disability if it can reasonably be remedied to the extent that the individual can engage in substantial gainful activity, according to the ruling.

Dykes had taken the issue to Tax Court after the Internal Revenue Service notified him he still owed the government
  $3,909 for the early withdrawal payment.

In rejecting Dykes’ case, the court observed that hepatitis C is permanent but noted that medication had reduced the participant’s problems with “fatigue and attention.”

Dean’s opinion in Dykes v. Comm’r, T.C. Summ. Op. 2007 101 (2007) is here .

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