Update on Mental Illness as a Disability

I have previously commented on two Tax Court Summary Opinions, Keeley and Mary L. Coleman-Stephens (my comments are here and here) that discuss when psychological depression constitutes a "disability" for purposes of obtaining relief from the 10% penalty on premature withdrawals from qualified plans. The two cases reach different conclusions on facts that are essentially not distinguishable. I had criticized the Service's position because it was bottomed on regulations that I believe exceed the rule-making authority under the statute.

There is now an excellent article on the topic by Sarah B. Lawsky of Cadwalder, Wickersham & Taft, LLP, entitled Redefining Mental Disability in the Treasury Regulations. Lawsky makes several points that I had missed.

First, she notes that the overly restrictive definition of psychological disability at issue in Keeley and Coleman-Stevens is incorporated by reference in many sections throughout the Internal Revenue Code. Thus, the definition's mischief is more significant than I had thought.

More significantly, however, she traces the definition back to a provision that was enacted in 1958. This provision was identical to a definition of mental disease found in the Social Security regulations at that time. However, the definition found in the Social Security regulations has been modified extensively to keep pace with changing concepts of mental illness and new treatment modalities. The Treasury Regulations, by contrast, have been essentially frozen in amber for over 40 years.

Lawsky makes a compelling case that not only can the Service revised the regulations, but that the regulations should be revised in order to better reflect legislative intent in the area.