IRA Alert

Ed Slott

Law expands 10% penalty exception for public safety workers

More public safety officials may take early distributions without penalty from more of their government-sponsored retirement plans

Sep 18, 2015 @ 1:49 pm

By Ed Slott

The Trade Priorities and Accountability Act of 2015, signed into law on June 29, included a provision that will allow more public safety officials to take early distributions without penalty from more of their government-sponsored retirement plans.

Early distributions from retirement plans are generally subject to an IRS 10% early distribution penalty. Currently, the law provides an exception for withdrawals from company retirement plans for individuals who separate from service at age 55 or older.

Another less publicized exception exempts certain public safety officials — such as state and local policemen, firemen and EMS workers — who separate from service at age 50 or older from the 10% penalty. The exception applies only to distributions from such workers' government-sponsored defined benefit plans. The exception is not available for distributions from IRAs or other plans. As such, a public safety employee who has an IRA and a government pension may qualify to take a penalty-free distribution from their defined benefit plan at age 50, but any distribution from the IRA would be subject to the penalty (unless another exception applied).


The new law expands the definition of “public safety official.” Under prior law, which will remain in effect through the end of 2015, public safety officials only included state or local public safety employees. Federal public safety workers, even those who had essentially the same jobs as their state and local counterparts, were not eligible. The Trade Priorities and Accountability Act of 2015 resolved this obvious discrepancy, expanding the term public safety worker to include federal law enforcement officers and firefighters. Other federal workers, such as certain customs officials, border protection officers and air traffic controllers will also qualify to use the exception.


The new law also would also extend the availability of the age 50 exception to include distributions from governmental defined contribution plans. Previously, the exception applied only to distributions taken from governmental defined benefit plans. This will allow not only federal public safety employees, but state and local public safety workers to access a wider range of retirement plans without penalty after retiring at age 50.

Only distributions taken after Dec. 31 will qualify for the new expanded age 50 exception provisions. Distributions taken this year are not eligible. Thankfully, however, in order to qualify for this exception, only a client's distribution will have to occur in 2016 or later, not their separation from service. However, in order to qualify for the exception, their separation must have occurred in the year they turned 50 or older.

Example: Phil is a federal law enforcement officer who retires at age 51 in 2015. In October 2016, when he is 52, he takes a distribution from his governmental defined contribution plan. The distribution will qualify for the age 50 exception under the expanded rules and will, therefore, be penalty free but taxable. Note that if Phil were to have taken a distribution in 2015, the distribution would be taxable and subject to the 10% early distribution penalty because the exception for federal public safety officers taking distributions from governmental defined contribution is not available until 2016.

Distributions taken from an IRA or a company plan in a series of substantially equal periodic payments, commonly known as 72(t) payments, are not subject to the IRS 10% early distribution penalty. The payments must continue for five years or until the individual reaches age 59, whichever is longer. During the payment period, the payments may not be modified.

For many years, it was understood that any non-72(t) distribution from a retirement account from which 72(t) distributions were being taken would be considered a modification, triggering retroactive 10% penalties and interest. Then, in 2009 the Tax Court ruled in the Benz case that a taxpayer could take distributions from her 72(t) schedule subjected IRA for educational expenses — another exception to the 10% penalty for IRAs — without creating a modification. This is the only such case, however, in which such a combination was formally allowed. As such, practitioners have been hesitant to recommend combining 72(t) distributions with distributions that meet another exception in the tax code.

This ambiguity won't be an issue for the newly expanded age 50 exception though. The new law specifies that any distributions that qualify for the exception for public safety workers will not be considered a modification of 72(t) payments. Many federal public safety workers retire at age 50. To access funds in their retirement plans without penalty, many of these workers set up 72(t) payment plans. Now these workers can take additional distributions using the new exception without modifying the 72(t) payments.

Beginning in 2016, clients who are public safety workers will have new options to tap their government retirement plans in their fifties without penalty. All employer retirement plans are now included in this exceptions, but not IRAs.

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group. He can be reached at


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