Life and Death Planning for Retirement Benefits

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Chapter 9: Distributions Before Age 59 ½ 419
We now turn to the other exceptions to the penalty. Although these lack the broadly
applicable planning possibilities of the SOSEPP, each can be useful in particular situations.
9.4.01 Death benefits
A distribution “made to a beneficiary (or to the estate of the employee) on or after the death
of the employee” is exempt from the penalty. This exception applies to
distributions from all types of plans. Thus death benefits may be distributed penalty-free from any
type of plan or IRA, regardless of whether the beneficiary is under age 59½ and regardless of
whether the participant had attained age 59½ at the time of his death.
Despite the unique clarity of this exception, it generates confusion for the following reason:
If a surviving spouse rolls over benefits inherited from the deceased spouse to the surviving
spouse’s own IRA, the rolled-over funds cease to be death benefits; they become part of the
surviving spouse’s own retirement account. Thus, distributions from the rollover IRA will once
again be subject to the penalty rules if the surviving spouse is under age 59½—even if the
deceased spouse was over age 59½. See for planning implications.
9.4.02 Distributions attributable to total disability
A distribution (from any type of plan) that is “attributable to the employee’s being
disabled” is not subject to the penalty.
Disabled is defined in It means “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.” See Reg.
Generally the IRS requires that the individual be eligible to receive Social Security
disability benefits to qualify for this exception.
also states that “An individual shall not be considered to be disabled unless he
furnishes proof of the existence thereof [sic] in such form and manner as the Secretary may
require.” IRS Publication 590 (2009), p. 52, states that “A physician must determine that your
condition can be expected to result in death or to be of long, continued, and indefinite duration.”
This requirement is not waived for those whose religious beliefs prohibit them from consulting
physicians. Fohrmeister, 73 T.C. Memo 2483, 2486 (1997).
Depression and similar psychiatric problems typically will not constitute “disability” for
this purpose, even if they lead to termination of employment or allow the individual to collect
disability payments, because these problems are usually temporary.
It is not clear to what extent the plan distribution must be shown to be “attributable” to the
disability. In PLR 2001-26037 the IRS said any distributions made after the participant was
disabled would be exempt from the penalty
9.4.03 Distributions for deductible medical expenses
Distributions from any type of plan are penalty-free to the extent they “do not exceed the
amount allowable as a deduction under to the employee for amounts paid during the taxable
year for medical care (determined without regard to whether the employee itemizes deductions for
such taxable year).” “During the taxable year” means “during the taxable year in
which the distribution is received.” Evers, T.C. Summ. Op. 2008-140.