1099R

[calalily]

New York
I have a question about a 1099R.
The distribution is from a 503 Plan, an employee welfare benefit plan employer fully contributed plan designed for Vacation, Holiday, Unemployment Plan.
The IRS seems to consider it falls under an early withdrawl penalty from a Pension or Annuity.
Also a previous accountant must have struggled with how to classify it, and the IRS kicked back his choice of exclusion as taxable income, and the adjustment ends up being an $1,800.00 tax bill.
Can someone explain this type of annuity distribution, the benefits explanation from the union, their explanation hasn't helped me understand. I feel like it should be a simple additional income, but I appear to be the only one with that thought.
Thank You

 

[Taxing Matters]

Internal Revenue Code (IRC) section 503 has nothing to do with employee retirement or annuity plans; it is a section that has rules for tax exempt organizations. So there are no § 503 plans. However, IRC § 403 covers what are often called tax sheltered annuity plans offered by public schools and certain tax exempt organizations. Is that the kind of plan involved here? If so, it is subject to most of the same rules as a § 401(k) plan, and the distributions are thus taxed the same — the distributions are ordinary income to the employee and are subject to penalties for early withdrawals that do not meet an exception.

 

[calalily]

Yes, the plan is designated a 503 plan but does fall under the 403. I did, in my research attempts, read the code you reference.
I agree that it is taxable as income, as it is holiday and vacation pay. My difficulty is the early withdrawl penalty.
I read where the exemptions are over 59 1/2, if they are from a govt pension, periodic disbursements.
What you are saying is, this type of benefit fund, is unable to fit under any exemption of early withdrawl, and I should stop looking for clarification that it does, correct?
I do appreciate, your lightening quick and clear, response.

 

[LdiJ]

Yes, the plan is designated a 503 plan but does fall under the 403. I did, in my research attempts, read the code you reference.
I agree that it is taxable as income, as it is holiday and vacation pay. My difficulty is the early withdrawl penalty.
I read where the exemptions are over 59 1/2, if they are from a govt pension, periodic disbursements.
What you are saying is, this type of benefit fund, is unable to fit under any exemption of early withdrawl, and I should stop looking for clarification that it does, correct?
I do appreciate, your lightening quick and clear, response.

If it was reported on a 1099-R, the company or person administering the plan believes that it is taxable retirement income subject to the penalty. What distribution code was used on the 1099-R (box 7).

 

[Taxing Matters]

Yes, the plan is designated a 503 plan but does fall under the 403. I did, in my research attempts, read the code you reference.
I agree that it is taxable as income, as it is holiday and vacation pay. My difficulty is the early withdrawl penalty.

Something is off here. There are no compensation plans known in federal tax as 503 plans. Where are you seeing the reference to 503 in the materials you have?

In any event, you do say it is a § 403 plan for vacation/holiday pay. It is a kind of deferred pay arrangement. Instead of getting your vacation/holiday pay paid to you during the year you accrue it, you elect to defer payment of it to a later date, e.g. after you retire, etc. The funds in these accounts grow tax free until you get the distributions paid you to you later. While the pay that goes into it is your vacation pay, these plans are basically retirement plans like § 401(k) plans for regular for profit employers. The idea here is to allow you to use the vacation pay for those benefits to help fund your retirement. Importantly, these plans are subject to the same rules for taxing distributions as § 401(k) plans. This means they are included as ordinary income and that they are subject to the same distribution restrictions and penalties as 401(k) plans. So if you take a distribution prior to age 59½ you are subject to the early withdrawal tax (what most people refer to as the early withdrawal penalty) unless you meet the requirements for one of the exceptions.

IRS publication 571 covers these plans. Since the distribution rules for you are the same as other retirement plans, that publication refers you to Publication 575 for information on that. The discussion of early withdrawal tax and exceptions starts on page 33.

 

[calalily]

Yes ,in box 7 it is designated with code 1.

Yes, the plan distributor (union) annuity plan numbers are 500, 501, 502 , 503 etc, the IRS code 403 referencing pension annuity funds, explains which qualify for the exceptions.

I appreciate both of your clear and concise explanations, with a better understanding, I feel comfortable with the classification and only wish the previous accountant would have been as knowledgeable.

Be Well

 

[Taxing Matters]

Yes ,in box 7 it is designated with code 1.

Yes, the plan distributor (union) annuity plan numbers are 500, 501, 502 , 503 etc,

That then sounds like numbers the union uses to distinguish among the plans it offers. That is, it is union's own numbering system for the plans it has rather than a reference any tax code provision for the plan.