According to the Delaware instructions for line 6 "Pension Exclusion" there are restrictions. The first line appears to eliminate most Code 2 reasons (see below for Code 2 reasons). Disability pensions are also excluded per the instructions. For more details click here and see page 6.
If the reason for your Code 2 is not one of the excluded reasons you may have to print/mail your DE return along with 1099R copies.
An early distribution from an IRA or pension fund for emergency reasons or following a separation from employment does not qualify for the pension exclusion. If the distribution code listed in Box 7 of your 1099 R is a 1 (one), or if you were assessed an early withdrawal penalty on Federal 1040, Schedule 2, Line 8 for the distribution, then that distribution DOES NOT qualify for the pension exclusion.
Disability pension income paid by your employer is reported as wages on the federal return, until you reach the minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Therefore, disability pension income would not qualify for the pension exclusion.
Use code 2 only if the employee/taxpayer hasn't reached age 59 & 1/2 and you know the distribution is:
- A Roth IRA conversion (an IRA converted to a Roth IRA).
- A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331.
- A section 457(b) plan distribution that is not subject to the additional 10% tax. But see Section 457(b) plan distributions on page 12 for information on distributions that may be subject to the 10% additional tax.
- A distribution from a qualified retirement plan after separation from service in or after the year the taxpayer has reached age 55.
- A distribution from a governmental defined benefit plan to a public safety employee after separation from service in or after the year the employee has reached age 50.
- A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v).
- A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA).
- Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using code 1, 3, or 4.
[edited: 2/1/2023 7:55am PST]
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