I handle a bunch of these returns. The 1099 can be issued incorrectly. It depends on the rules of the state where you live. Most of my firefighters are in Colorado. The disability is from FPPA. This is completely tax free, if they were hurt on the job. However, since there is an offset of their monthly disability for the money in their 401(k), that makes the 401(k) tax free as well. FPPA has a PLR from the IRS stating as such. So, if one of my clients gets a 1099-R that shows the amount dispersed as taxable, then I write a letter of explanation showing that the taxpayer was deemed disable on the job. I include a copy of the PLR. I then correct the taxable amount to zero on the return. I attach the proof as a pdf when I e-file. It takes some time, but they always get their money returned if it was withheld. This does not apply to the 457(b) plan as there was no offset. In Colorado, it doesn't apply to off-duty injuries that lead to a disability.