403b distribution before age 59.5 | Ed Slott and Company, LLC

403b distribution before age 59.5

Scenario: An employee retires from full-time work at age 56 and then returns to work for the same employer as an "on-call" status (hourly pay, less than 20 hours per week, no leave time, no benefits). Can this person take distributions from a 403b account without the early-withdrawal penalty? This comes down to exactly what "separates from service" means. The employer in this case considers the employee to be a retiree in spite of the part-time employment. Is that enough for the IRS to define the employee as "separated from service"?

The plan's definition of separation should govern here, and that should be reflected in the exception coding shown on the 1099R in Box 7. If the plan provisions allow for the part time work schedule to fall under the separation guidelines, then they should code the form accordingly. I believe IRS rulings allow the plan to make this call as long as 50% of the former hours are not exceeded. That's probably one of the reasons for the 20 hour threshold.

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