1099R box 7 code 1 - medical hardship exemption

[parvitstax]

Client took the withdrawal for a medical emergency. Wouldn't they qualify for an exemption from the 10% penalty? 

Their employer is saying the Tax Pro needs to apply for the exemption but I thought the employer is supposed to select the correct code to reflect it was a hardship withdrawal. 

[dkh · Accepted solution]

Tax Pro  indicates exemption on F5329 

[parvitstax]

I see. I expected the exemption option to be listed on the 1099R entry page. If there is a link on the 1099R page, do you know where it is located so I don't miss that in the future?

[Norman2001]

I don't see a link on the IRA worksheet. but you can chase it down if you recognize the 10% is an additional tax shown on Sch 2. There it shows Form 5329 as required to be attached. 

Also, you can exclude the amount over 7.5% of your client's AGI that is an unreimbursed medical expense. 

From Pub 590-B

"Exceptions
There are several exceptions to the age 591/2 rule. Even if
you receive a distribution before you are age 591/2, you
may not have to pay the 10% additional tax if you are in
one of the following situations.
• You have unreimbursed medical expenses that are
more than 7.5% of your AGI."

[qbteachmt]

"Their employer is saying the Tax Pro needs to apply for the exemption but I thought the employer is supposed to select the correct code to reflect it was a hardship withdrawal."

Hardship withdrawal has nothing to do with the tax rules. It has to do with the Employer plan provision. It might allow hardship withdrawal, or not. They don't control if it is taxable and/or subject to penalty. This simply is a permitted or not, consideration.

The issuer of the 1099-R usually has no idea what happened to the funds, or if they were even used as intended. The 1099-R is for money Out.

The Tax Pro does due diligence to fill in the tax form filings that reflect what happened.

You didn't mention the specific plan or account type. The IRS has a useful table, here:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...

That is specific to the penalty.