SECURE 2.0 Expands Plan Withdrawal Options

Updated January 23, 2024

SECURE 2.0 created several optional distribution types providing employees with easier access to workplace savings accounts when faced with the unexpected. These distributions are penalty-free, meaning the 10% excise tax on withdrawals taken before age 59 ½ will not apply. Effectively, the new law expanded the list of exceptions to the early withdrawal penalty.

As a practical matter, expanding a plan’s distribution provisions will result in additional administrative requirements and cost. We will need IRS guidance for various implementation purposes, including plan document language, compliance systems configuration, tax reporting, and whether employers will be required to provide the three-year distribution repayment option for distributions that SECURE 2.0 allows to repay to the plan. It will take time for service providers to put systems in place to accept and process these new distribution types, monitor applicable limits, and report disbursements for tax purposes. We anticipate that some of these provisions will effectively be delayed until related regulatory guidance is available.

Effective Immediately

New Withdrawal Option and Expanded Loan Limits for Major Natural Disasters

Historically, when disaster areas were declared, Congress would typically pass special legislation providing employees access to their retirement accounts without a 10% premature withdrawal penalty. SECURE 2.0 made this relief permanent. Notably, this provision applies retroactively to distributions for FEMA-declared disasters occurring on or after January 26, 2021.

Employers now have the option to offer a new distribution type called a qualified disaster recovery distribution (QDRD) for those whose principal residence is within disaster area and who suffered an economic loss because of the incident:

  • Withdrawal amount may not exceed $22,000 per disaster per individual applied to all retirement plan and IRA accounts. Employer’s responsibility in enforcing this amount is limited only to the plans maintained by the employer and its related companies.
  • These distributions are exempt from the 10% early withdrawal tax and not subject to 20% mandatory witholding.
  • The amount may be included in income proportionally over three years.
  • It may be repaid to a retirement account within the three-year period beginning the day after the distribution date.
  • An additional rule allows for amounts distributed before the disaster to purchase a home to be re-contributed if unused because of the disaster.

Disaster-related loan rules have also been updated. The maximum loan amount may be up to the lesser of $100,000 or 100% of the vested account balance. The plan may also extend the repayment period for plan loans up to a year.

Withdrawals for Individuals with a Terminal Illness

  • Terminally ill individuals who otherwise qualify for a distribution from a retirement plan but are under the age of 59 1/2 may receive penalty-free distributions when available under plan terms.
  • Self-certification is not available for this distribution. A physician must certify that the employee has an illness or physical condition reasonably expected to result in death within 84 months.  The certification must meet specific requirements, including, among other things, a narrative of the evidence used to support the statement of illness or physical condition.
  • If a distribution is not processed as a terminally ill individual distribution, an individual may choose to treat it as a terminally ill individual distribution when filing their Form 1040 if the conditions are otherwise satisfied.
  • The amount may be repaid within a three-year period beginning on the day after the date of distribution.

Effective in 2024

Personal Emergency Expense Distributions

  • Most plans (other than traditional defined benefit and cash balance plans) may permit a participant one distribution per year up to the lesser of $1,000 or the vested account balance reduced by $1,000.
  • The amount is taxable but free of the 20% mandatory withholding and 10% early withdrawal penalty.
  • The amount may be repaid to the plan or IRA within a three-year period beginning on the day after the date of distribution.
  • No additional emergency distribution would be allowed during the 3-year repayment period unless that amount is repaid to the plan or IRA or the employee makes salary deferral contributions equal to or greater than the amount of the prior emergency withdrawal.
  • Absent actual knowledge to the contrary, Employers may rely on employee self-certification that the distribution is requested because of unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.

Domestic Abuse Survivor Distributions

  • Most plans (other than traditional defined benefit and cash balance plans) may permit special withdrawals for victims of domestic abuse. This option is limited to plans that do not require spousal consent for withdrawal.
  • The law defines abuse as physical, psychological, sexual, emotional or economic abuse, as well as any efforts aimed at controlling, isolating, humiliating, or intimidating the employee or undermining the employee’s ability to reason independently. It includes abuse of the employee’s child or another family member living in the same household. Participants can self-certify their eligibility.
  • Distribution may not exceed the lesser of $10,000 (adjusted for inflation) or 50% of the vested account balance. It must be taken within one year beginning on any date the individual experiences domestic abuse.
  • Income tax applies, but the amount is free of the 10% early withdrawal penalty and not subject to the 20% mandatory withholding.
  • The disbursement may be repaid wholly or partially back to the plan or IRA over three years

Effective in 2025

Long-term Care Premium Distributions

Beginning on December 30, 2025, most plans will have the option to offer penalty-free distributions to pay premiums for certain long-term care insurance contracts providing ‘high qualify coverage’ subject to the following requirements:

  • The amount must be used to pay long-term care insurance premiums for the employee, spouse, or family member as the regulations allow.
  • The annual withdrawal is capped at $2,500 but may not exceed the lesser of the premium or 10% of the vested balance. The dollar limit is subject to inflation adjustment.
  • This withdrawal is subject to income tax but is free of the 10% premature distribution penalty and not subject to the 20% mandatory withholding.
  • An employee using this option will need to provide to employer a long-term care premium statement with information confirming eligibility. IRS guidance is expected to clarify the timing of this requirement.

These provisions are optional and will require a plan amendment.

Let Pinnacle Plan Design Help

Consultants at Pinnacle Plan Design are actively monitoring new guidance concerning SECURE 2.0. This represents our understanding of the laws at this time. Additional guidance will provide additional clarity. If you have any questions about the withdrawal rules in your retirement plan, don’t hesitate to contact us at (520) 618-1305.

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