These 8 positions are expressly awarded this treatment: 1) Law Enforcement Officers; 2) Firefighters; 3) Customs and Border Protection Officers; 4) Air Traffic Controllers; 5) Nuclear Materials Couriers; 6) U.S. Capitol Police; 7) Supreme Court Police and 8) DSS Agents of the Department of State. No others qualify. If you are a Special Category Employee (SCE) and NOT employed in one of the above-listed 8 positions, then H.R. 2146 does not apply to you.
The TSP has finished issuing Forms 1099 for the 2016 tax year and many retirees in these 8 positions received a surprise on their TSP Form 1099. Most of the 1099s display a distribution code of “1” in Box 7, which indicates an “early withdrawal with no known exception.”
This code signifies to the IRS that the withdrawal is subject to the 10% penalty. The correct distribution code for these 8 positions is distribution code “2,” which is an “early withdrawal – exception applies.” That code indicates that no 10% penalty is applicable.
The issue arises because the TSP does not possess information in its files regarding whether or not its participants qualify under one of these 8 positions. The TSP is now asking agencies to transmit to them a designator code of “P” when they transmit the employee information to the TSP.
So, it’s up to you to “fix” this issue for the 2016 tax year. Let’s look at two ways you can fix it:
Correct Underlying Records
The first way is to try to correct the underlying TSP records by contacting your agency and asking them to transmit the “P” code to the TSP. Following that code transmission, you then need to request a corrected Form 1099 from the TSP. With the tax deadline quickly approaching, you may not be successful before April 18th (or even at all) in dealing with your agency.
File Form 5329
The second (and best) way to “fix” this issue is to file a Form 5329 with your federal tax return.
Let’s suppose you received a Form 1099 from the TSP for $12,000 with distribution code “1” and you are in one of the 8 positions listed at the start of the article. You would complete Form 5329 by listing $12,000 on line 1 of the form, enter reason code “01” (not “1” but “01”) and $12,000 on line 2 of Form 5329.
That’s it! It’s that simple to file a Form 5329.
The Form 5329 codes do not match up with the Form 1099 codes, so do not get confused and think that distribution code “1” on a Form 1099 is the same as a reason code “01” on Form 5329. Code “01” on Form 5329 tells the IRS that your TSP distribution was a qualified plan distribution after a separation in service in or after the year that you turned 50 years of age and were a qualified public safety officer (PSO).
As a PSO annuitant, your federal tax return should already contain a statement that you are a PSO and the letters “PSO” should already appear on line 16b of Form 1040 if you are paying FEHB premiums through OPM, as there is an exclusion of up to $3,000 for FEHB premiums paid.
If you happen to use TurboTax to prepare your tax return, and you supplied all of the proper information to the software in the interview, TurboTax will prepare a Form 5329 for your return.
My colleague, Dan Jamison, a CPA and retired federal employee, contributed significantly to this article. His FERSGUIDE covers all aspects of law-enforcement retirement and can be found at www.fersguide.com.