Is there a tax penalty for a stock payout after someone leaves a company? We have a 1099-R and Turbo Tax is confusing with an early retirement withdrawal.

[jp_tke]

Trust company sent a 1099-R with Box 7 Distribution code as 1. It is flagging as an early payout for retirement instead of a "no longer employed at this company stock payout." It was not a retirement account but stock options.

[DavidD66]

According to the IRS, Form 1099-R is used to report distributions from the following:

• Profit-sharing or retirement plans.
• Any individual retirement arrangements (IRAs).
• Annuities, pensions, insurance contracts, survivor income benefit plans.
• Permanent and total disability payments under life insurance contracts.
• Charitable gift annuities, etc.

Code 7 in box 7 of a Form 1099 indicates a "Normal Distribution".   Form 1099 does not have an option for "no longer employed at this company stock payout."  TurboTax is not confusing the distribution.  A Form 1099-R with code 7 in box 7 indicates a taxable distribution from a Pension, Annuity, Retirement or Profit-Sharing Plan, IRA, Insurance Contract, etc.

Either the company made an error in how they reported the distribution or you have a misunderstanding of the tax charachteristics of the plan from which you received the payout.  Either way I suggest you contact your former company for clarification.  

[dmertz]

The account apparently contained ESOP shares and is a type of qualified retirement account.  As such, an early distribution of these shares is subject to penalty unless rolled over to another qualified retirement account or you have a penalty exception that applies.  Being no longer employed by the company is not an exception to the penalty.