New Penalty Free Plan Distributions

The SECURE Act 2.0, which was enacted in late 2022, builds upon updates made in the 2019 legislation of the same name. Many of the changes are designed to ensure broader access to plans, facilitate automatic enrollment and escalation, increase catch up contribution limits, and modify required minimum distribution (RMD) timing. There were also several employer targeted provisions designed to make it easier and less costly to offer and maintain an employer sponsored retirement plan. Beyond these changes, there were also updates to the rules governing plan distributions. While the focus is on finding ways to expand retirement savings, there were also updates made that allow for penalty free distributions to be taken under certain circumstances. This includes distributions for terminal illnesses, domestic abuse, and for birth/adoption. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

New Penalty Free Distribution Types

• Domestic Abuse Victims – There is now an optional penalty-free distribution type for defined contribution plans, including 401ks and 403b plans, for victims of domestic abuse. A distribution up to the lesser of $10,000 or one half the IRA or vested retirement plan balance. It is important to note the distribution must be taken within a year of the abuse by a spouse or domestic partner. Participants can repay the distribution within a three-year period commencing the day after the distributions were received. This change goes into effect starting January 1, 2024.
• Terminal Illness – Effective immediately, any participant with a doctor certified terminal illness expected to result in death within 84 months can take penalty free distributions. It is important to note that the participant must be separated from or be over the age of 55 to qualify. Government plans require the earlier of 50 years of age or 25 years of service. There is no limit on the amount which can be taken by eligible individuals.
• Emergency Expenses – Effective immediately, plan participants that self-certify there is an immediate financial need can request one distribution per calendar year of up to $1,000. The funds must be used to meet an immediate or unforeseeable financial need. The participant is not allowed to take another emergency distribution during the following three years unless the original distribution are repaid.
• Disaster Relief – There is a penalty free distribution option available for those impacted by a federally declared disaster occurring on, or after, January 26, 2021. Impacted individuals can withdrawal up to $22,000 per disaster event. Note the withdrawal must be made within 179 days after the date of disaster declaration. An impacted individual is defined as on whose principal residence is in the disaster zone and has sustained loss due to the disaster. The distribution must be repaid at any time during the three-year period after the distribution was issued.
• Long Term Care Distributions – There are also penalty free distributions available to individuals to pay for certain long term care insurance expenses. To qualify, a participant must provide a long-term care premium statement to the plan. The distribution amount can not exceed the least of the amount paid by of assessed to the long-term care insurance for the participant/spouse, 10% of the vested account balance, or $2,500 (adjusted for inflation).

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While the SECURE Act 2.0 makes it easier to participate in and accelerate retirement savings, there are other benefits to those experiencing hard times. The addition of these penalty free distribution types will make it easier to manage financially. If you have questions about the information outlined above or need assistance with your next plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.