Permanent Disability Defined
To qualify for the early withdrawal exception, you must meet the tax code's definition of permanently and totally disabled. To qualify, you must not be able to do any gainful activity, and whatever physical or mental impairment that prevents you from doing so must be be permanent or expected to last indefinitely. You must be able to provide proof, such as a signed statement from your doctor, that you meet this definition.
Requesting 401(k) Distribution
You can request a distribution from your 401(k) plan by submitting a distribution request form and indicating on the form that you are permanently disabled where it asks for the distribution reason. When you request the distribution from your 401(k) plan administrator, you should provide proof of your disability so that the 1099-R form that documents your distribution will indicate the reason for your early withdrawal. That way, when you file your taxes, the 1099-R will show code "3" in box 7, so the IRS will already know the reason for the distribution.
Early Withdrawal Exception Reporting
If for some reason your Form 1099-R does not have code 3 on it to exempt you from the early withdrawal penalty, all is not lost. When you file your taxes, complete and attach Form 5329 to your return. On the form where it asks for the early withdrawal exception code next to line 2 of Part I, enter "03" to indicate to the IRS that you are claiming permanent disability. This code exempts your entire distribution from the early withdrawal penalty.
Special Treatment for Roth 401(k)
If you have a Roth 401(k), your permanent disability might qualify you to take completely tax-free withdrawals, even if you aren't already 59 1/2. If you are permanently disabled and you have had the account open for at least five years, your distributions count as "qualified withdrawals," which are always tax-free. If you haven't had the Roth 401(k) open for at least five years, you prorate your withdrawals between your contributions, which are tax-free, and your earnings, which are taxed (but not penalized).