SECURE 2.0 introduced several new distribution options and tax reporting rules for defined contribution plan sponsors. Below is an overview of the new provisions and their potential implementation dates. (For an overview of SECURE 2.0 for defined contribution plan sponsors, click here.)
Here is a quick summary of the new distribution changes in SECURE 2.0.
|Distribution Change||Effective Date||Mandatory or Optional|
|Terminal Illness Distributions||Immediate||Mandatory (if rollovers allowed)|
|Domestic Abuse Distributions||January 1, 2024||Optional|
|Emergency Savings Accounts||Plan years beginning on or after January 1, 2024||Optional|
|Emergency Expense Distributions||January 1, 2024||Optional|
|Qualified Disaster Recovery Distributions||Immediate (applies to disasters that occurred on or after January 26, 2021)||Optional|
|Qualified Long-Term Care Insurance Distributions||December 30, 2025||Optional|
|Qualified Birth or Adoption Distributions||Available since 2020||Optional|
|Hardship Distribution Self-Certification||Plan year beginning after December 29, 2022 (January 1, 2023 for calendar year plans)||Optional|
Terminal Illness Distributions
SECURE 2.0 eliminates the 10% early withdrawal tax for distributions made to a plan participant with a terminal illness. For this purpose, a participant is considered terminally ill if a physician has certified that the participant has an illness or physical condition that can reasonably be expected to result in death within seven years. This does not create a new distribution option; thus, a terminally ill individual cannot receive a plan distribution solely because they are terminally ill. The individual must otherwise be eligible for a plan distribution (for example, termination of service or age 59½).
Any amount distributed may be repaid to the plan within three years. SECURE 2.0 cross-references the repayment rules for qualified birth or adoption distributions, which require repayment of those distributions only if a plan allows a qualified birth or adoption distribution. In regard to distributions to a terminally ill person, because it is not a separate distribution event, likely any plan that accepts rollovers will be required to accept a repayment of a distribution to a terminally ill individual.
The exception to the 10% early withdrawal tax should be noted on the plan’s Code Section 402(f) notice (the “Special Tax Notice”).
Domestic Abuse Distributions
Plans may allow victims of domestic abuse to receive a distribution of up to $10,000 (or, if less, 50% of the vested account balance) within one year of the domestic abuse event. Under the SECURE 2.0 language, the domestic abuse must have been committed by a spouse or domestic partner. If a plan allows domestic abuse distributions, it must accept repayment of the distribution within three years from the date of the distribution.
Domestic abuse distributions are not subject to the 10% early withdrawal tax, and this should be noted on the Plan’s Special Tax Notice.
Emergency Savings Accounts
Plan sponsors may add a “pension-linked emergency savings account” to a defined contribution plan. If added, the emergency savings account must satisfy the following rules:
- Only available to non highly compensated employees;
- Only employee contributions are allowed;
- Employee contributions are treated as Roth contributions and are qualified Roth distributions whenever distributed (i.e., they are taxed to the employee upon contribution to the plan and not subject to taxation upon distribution);
- No contribution may cause the emergency savings account balance to exceed $2,500, as adjusted for inflation (or a lower amount set by the plan);
- Must allow for a distribution at least once per month;
- Notice of the emergency savings account must be given at least 30 days but not more than 90 days before the first contribution; and
- Amounts contributed to the emergency savings account by the employee must be matched at the same rate as elective deferrals (although the matching contributions are not contributed to the emergency savings account).
Plan sponsors may automatically enroll participants in the emergency savings accounts. Distributions from an emergency savings account are not subject to the 10% early withdrawal tax under Code Section 72(t).
Additional guidance will be provided to ensure emergency savings accounts are not abused by participants who make a contribution each month and then withdraw that contribution in order to receive the corresponding matching contribution. SECURE 2.0 notes that a plan may implement “reasonable procedures to limit the frequency or amount of matching contributions” with respect to employee contributions to an emergency savings account. The IRS has been directed to issue additional guidance within 12 months regarding anti-abuse provisions.
Emergency Expense Distributions
Plans may allow distributions for emergency expenses of up to $1,000 (or, if less, the total vested account balance) once per year. An emergency expense is defined as an unforeseeable or immediate financial need related to necessary personal or family emergency expenses. Employees can self-certify that they need emergency funds. If a plan allows emergency expense distributions, it must accept repayment of the distribution within three years from the date of the distribution. Unless the distribution is repaid, the participant cannot take another emergency expense distribution during the following three calendar years.
Emergency expense distributions are not subject to the 10% early withdrawal tax, and this should be noted on the Plan’s Code Special Tax Notice.
Qualified Disaster Recovery Distributions
Plans may allow a “qualified disaster recovery distribution” of up to $22,000 to a participant who lives in a disaster area and sustains economic loss due to a disaster. Disasters are federally declared disasters under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Distributions must be made between the date the disaster begins and the latest of (i) 180 days after such date, (ii) 180 days after the disaster declaration, or (iii) June 27, 2023. If a plan allows qualified disaster recovery distributions, it must accept repayment of the distribution within three years from the date of the distribution.
Qualified disaster recovery distributions are includable in taxable income over a three-year period and are not subject to the 10% early withdrawal tax.
Qualified Long-Term Care Insurance Distributions
Plans may allow distributions to purchase long-term care insurance in amounts not to exceed $2,500 (or if less, 10% of the vested account balance), adjusted for inflation. Long-term care insurance is defined under Code Section 7702(B)(b)&(c).
Distributions to purchase qualified long-term care insurance are not subject to the 10% early withdrawal tax, and this should be noted on the Plan’s Special Tax Notice. Please note, if the individual covered by the long-term care insurance is the participant’s spouse, the 10% early withdrawal tax exception applies only if the couple files a joint tax return.
Qualified Birth or Adoption Distributions
SECURE 1.0 allowed qualified birth or adoption distributions to be repaid to the plan by the recipient at any time. SECURE 2.0 limits the recontribution period to 3 years from the date of the qualified birth or adoption distribution. (Distributions made before SECURE 2.0 was enacted may be repaid at any time through December 31, 2025.)
Hardship Distribution Self-Certification
SECURE 2.0 allows employees requesting a hardship distribution to self-certify that they have an immediate and heavy financial need that cannot be paid from other available assets. This process is similar to the self-certification that was allowed for Coronavirus-Related Distributions under the CARES Act. The IRS may issue regulations allowing plan administrators to deny a hardship self-certification when the plan administrator has actual knowledge that the employee has sufficient assets to satisfy the immediate heavy and financial need and procedures for addressing misrepresentation.
If you have any questions, please reach out to your Faegre Drinker benefits counsel.
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