I had a pension from an old employer that was no longer getting contributions. I decided to rollover the balance to an IRA so it could grow and have contributions made to it. The balance exceeded the maximum $6,000 per year, so they sent me the remainder as a Mandatory Cashout. Can I and if so how would I avoid the 10% penalty on that amount on my taxes?

It seems to me that I shouldn't be penalized for a mandatory cashout. Any help is appreciated.

Maybe I am not following, but the $6,000 limit (actually $6,500 or $7,000 depending on what year, and assuming under 50 years of age) applies to contributions, not a limit on a rollover amount. To answer your question, it would seem the taxation of what you got paid, and the 10% penalty, could be avoided by rolling it into the IRA provided you are still within the 60 day window.

Have no idea what they are talking about with a mandatory cash out you mention, at least how it applies to you being above some limit. Plans can adopt language that account balances below some threshold can be paid out without the participant requesting it to be paid out.

Might be a good idea to have a sit down session with someone aware of all the rules.

So I guess my Fidelity person didn't understand what I was doing, because they told me the max I could contribute a year was $6,000 and the rest I would have to take as a disbursement.

I told them I wanted to rollover m qualified pension plan into a new IRA and that is when they told me that and then they sent me the rest with tax taken out but not the penalty.

maybe OP had a 401K plan? would be helpful to know the character of said employer plan

Wow.

I would be crawling up Fidelity's @ss on this one. Of course you can rollover a pension into an IRA. It may have a few names, but lump sum rollover and defined benefit to defined contribution rollover, come to mind, but it sounds like you got hosed by bad advice. I guess I'd need to hear the timing of the transaction, and what the amount of lump sum was to say how bad this is, but off the top of my head:

20% mandatory withholding that you'll have to wait til tax filing to get back
10% Penalty tax (if under 59.5) and
Possibly limiting your contributions to an IRA (if, as poster above stated, you were already making those contributions).

Last question... Presumably Fidelity asked what your income is for the year, but did the extra funds getting paid out push you into the 'non-deductible" IRA category? If so, this will complicate your tax returns in retirement for many years.

Also stated above, you have a very limited amount of time to try to get this rectified. Once you pass 60 days, it is difficult to go back.

Edit to add: If this was done by phone, the call was almost certainly recorded. Someone at Fidelity should be able to listen to the archived call and determine whether you received bad advice or just didn't understand what you were agreeing to.