That depends. A plan may define disability in a number of ways and use those definitions as triggering events for a distribution. However, for a distribution to be exempt from the 10% penalty, the participant's disability must meet the Social Security Administration's (SSA) definition of disability.

The Social Security definition of disability is the same as the IRS definition found in IRC Section 72(m)(7): “An individual will be considered to be disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued and indefinite duration. An individual shall not be considered to be disabled unless he or she furnishes proof of the existence thereof in such form and manner as the Secretary may prescribe.”

Disability may also be defined in a plan as: ”An illness or injury of a potentially permanent nature, expected to last for a continuous period of not less than 12 months or can be expected to result in death, certified by a physician selected by or satisfactory to the Employer, which prevents the Participant from engaging in any occupation for wage or profit for which the Employee is reasonably fitted by training, education or experience.”   However, the above definition will not exempt the individual from the 10% penalty if the distribution occurs prior to age 59½.

Some plans define disability by adopting the Employer’s Disability Insurance Plan definition. However, exemption from the 10% penalty for a distribution prior to age 59½ will depend on how disability is defined under that plan. Frequently, this definition will not comport with IRC Section 72(m) (7).