I began collection SSD benefits in September of 2008. My last date of work due to disability was Mar 13, 2008. I withdrew my 401(k) money so that I could continue to meet my mortgage, living expenses and to pay medical expenses, including health insurance premiums.
I am trying to find out if this exempt from the 10% penalty. The 401(k) company has told me that it does not qualify because the SSD claim was not approved at the time of the withdrawal, therefore box 7 on the 1099-R is coded correctly with a 1. I spoke to someone at the IRS, and they said that as long as I have a written statement from my physician that I was disabled, it is exempt and the box should be coded as 03. The timing of the withdrawal and the approval of the SSD claim doesn't matter as long as I have a statement from my physician. I quess my question is twofold:
1. Do I need to get a corrected 1099-R? Or
2. Do I need to file form 5329(?) to report the exception?

Or is this transaction truly subject to the early withdrawal tax?

If you are totally and permanently disabled then you meet the requirement for an exception from the 10% early withdrawal penalty. You do not need a corrected 1099-R, but you should complete and attach form 5329 to claim an exemption. I also suggest you include documentation that demonstrates your disability, such as a letter from your doctor.