Retirees will receive two statements for the year in which they turn age 59 ½. The IRS considers age 59 ½ to be the normal retirement age, and ordinarily imposes a penalty for any retirement distributions paid to people younger than that age. Because the SDCERS plan allows members to retire and receive pension benefits before age 59 ½, retirees under age 59 ½ receive a 1099-R with Box 7 listing Distribution Code 2, “Early Distribution with Exception.”
For those older than 59 ½, Box 7 lists Distribution Code 7, “Normal Distribution.” However, retirees who turned age 59 ½ during 2022 will receive two 1099 statements, one for each Distribution Code.
You will also receive two statements if you exit DROP, rollover all or a portion of your DROP account, and then continued receiving monthly pension benefit payments during the same calendar year. This is because the 1099 for the DROP rollover has a different Distribution Code than the 1099 for the regular monthly pension benefit payments.
You may also receive an additional 1099 if you are the beneficiary of an SDCERS death benefit during the same year you receive monthly pension benefits and/or DROP account funds.
When members retired before 2003, SDCERS provided a manually prepared Retirement Certificate. This certificate explained the total pre-tax and post-tax contributions SDCERS received from the member. This certificate should be provided to the member’s tax accountant to determine the taxable portion of the benefit using applicable IRS amortization tax tables. If you are receiving payments because you are a continuance or have a domestic relations order, you will use the member’s Retirement Certificate. SDCERS cannot provide tax advice. Click here for a more detailed explanation of this issue.
Box 15 represents SDCERS’ state of residence, not the 1099-R recipient’s state of residence. Box 15 will say California whether or not the payee lives in California because it is SDCERS’ state/tax number.
If you received a 1099-R and a W-2 from SDCERS, that means you are participating in what is known as the Preservation of Benefits (“POB”) Plan. Internal Revenue Code section 415(b) sets a cap on the amount of your pension benefit that can come from the SDCERS trust fund in any given tax year. If your annual pension benefit exceeds section 415(b) limits, then the remainder of your pension benefit will be distributed from the POB Plan, which is simply a separate fund administered by SDCERS. Please note that this does not mean your pension benefit will be reduced – you will still receive the monthly benefit you are entitled to via a single direct deposit, only a portion of those funds will be distributed from a different source. If you are affected by section 415(b), you will receive a W-2 every year for the funds you received from the POB Plan, and a 1099-R for the funds you received from the SDCERS trust fund.