1099 R Question

[Crank]

Have a 23 y.o. new client who received a 1099R with a distrbution code of 7 (normal distribution) and I'm debating the 10% penalty.

She was a substitute teacher who had mandatory retirement deducted from her paycheck but because she didnt work the required number of hours last year they refunded the contributions (via the 1099R) claiming she wasnt eligible to be in the plan. The issuer claims they have discussed this at length and concluded that the code 7 is the correct code for all 1099Rs.

Im inclined to force the 5329 and take the 10% penalty.

Am I correct in doing this? Comments are appreciated.

Thanks

John

[Terry D EA]

Boy, in my opinion, somthing smells bad about this. Why did this employer take the funds to begin with if the person didn't qualify for the plan. So, not qualifying for the plan still constitutes being penalized because apparently an error was made. If I was this 23 year old, I would argue the death out of the 1099R. How can you withdraw funds that seem to have never been part of a retirement plan and classify them as an early withdrawl???? Is there a line on the 5329 for an exception due to Dumb A employer mistake? :wall:

[Crank]

Well, they claim that when the employee started they assume that they will work the required number of hour to qualify for the plan. Then at the end of the year they find out the employee didnt qualify. I agree, this doesnt seem correct to do this to an individual.

However, I believe it is an early withdrwal from a qualified plan. But if they didnt qualify for the plan, how can they make qualifying contributions? That is why Im wrestling with this.

Thanks for the comments Terry.