I didn’t quite word the OP correctly. Taxpayer is still less than normal retirement age.
Found this in Pub 575 p.5:
If you retired on disability, you generally must include in income
any disability pension you receive under a plan that
is paid for by your employer. You must report your taxable
disability payments as wages on line 7 of Form 1040 or
Form 1040A or on line 8 of Form 1040NR until you reach
minimum retirement age. Minimum retirement age generally
is the age at which you can first receive a pension or
annuity if you aren’t disabled.
You may be entitled to a tax credit if you were permanently
and totally disabled when you retired.
Beginning on the day after you reach minimum retirement
age, payments you receive are taxable as a pension
or annuity. When you receive pension or annuity payments
you are able to recover your cost or investment.
Your cost is generally your net investment in the plan as of
your annuity starting date. It doesn’t include pre-tax contributions.”
The info above talks about treating the payments as wages when less than normal retirement age. Then it talks about treating them as pensions when you are of retirement age. Only at that point does it discuss recovering your cost. That’s why I was wondering……