Can anyone help me?? I was a non-spouse beneficiary for someone's 401k. He died in 2002 at age 75. The 401K stayed in the same place it was, but it got registered in my name as a non spouse beneficiary. I took minimum distributions from this account for 7 years, every distribution I requested in January from 2003 until 2009. I was always told I needed to take EITHER nothing, the minimum (which they calculated) or the entire amount. I always chose the minimum. When I filed my taxes every year, I only owed tax on the amount that did not represent his contribution. The 1099 was coded as a Type 1 distribution, and I owed just tax. This year, the 401K plan decided that account should NOT be in the company plan anymore and WITHOUT WARNING they sent me a check for the entire balance (minus 20% withholding). However, when I filed my taxes, I was shocked to see that the entire distribution was subject to 10% PENALTY. I don't mind paying the tax, but WHY the penalty? The 1099 for the minimum distribution taken in January was coded as 1, but the 1099 for the unexpected June payout was coded as a 4 (death). Is this right?

Why do you believe that you owe the 10% early withdrawal penalty? Distribution code 4 means that the distribution is due to death, and the 10% penalty should not apply.

As for why they sent you a lump sum in June - since you were a non-spousal beneficiary the plan was required by the IRS to distribute the balance of the account within 5 years, without any option to roll it to your own IRA. The rules on this changed in 2007, so that now non-spouse heirs have the option of rolling the 401(k) to their own inherited IRA account, but since his date of death was 2002 the changes don't help you. Here are a couple of articles that describe implications of inheriting a 401(k):
What Is The IRS Thinking? - Forbes.com (http://www.forbes.com/2007/02/06/beltway-irs-ira-bus-wash-cz_ae_0207beltway.html)
401khelpcenter.com - What You Need to Know When You Inherit a 401k (http://www.401khelpcenter.com/mpower/feature_2beneficiary.html)