Retirement Readiness vs. Immediate Financial Needs
Life is a balancing act. Regulators strive to fight leakage by imposing penalties on early distributions, but they also don’t want to add to legitimate unforeseen and extreme emergency situations by imposing penalties when participants are in trouble. At the same time, regulators don’t want to impose administrative burdens that would be a deterrent from offering a plan, so most of the new distribution options are optional.
Terminal Illness Distributions
Effective immediately, any participant with a doctor-certified terminal illness reasonably expected to cause the participant’s death within seven years can obtain a penalty-free distribution if the participant has separated from service or is over age 55. For government plans, the age limit is reduced to the earlier of 50 or 25 years of service. This mandatory provision does not create a new distributable event, but other optional provisions do, as follows:
Unforeseeable Needs
Effective immediately, participants who self-certify that they have an immediate financial need can request a penalty-free distribution for the lesser of their vested benefit or $1,000. The opportunity is not available again for three years unless the participant repays the distribution amount to the plan.
Domestic Abuse
Effective January 1, 2024, victims of domestic abuse by a spouse or domestic partner have one year from the day of the abusive incident to self-certify a need for a distribution for the lesser of 50% of their account balance or $10,000. Only plan sponsors of defined contribution plans that does not require spousal consent for distributions have the option of offering this distribution. Self-certification is available on account of physical, emotional, or verbal abuse of the participant or a member of the family or household.
Qualified Long-Term Care Insurance Distributions
Effective in 2026, plans may allow penalty-free distributions up to the lesser of 10% of the vested account balance or $2,500 to purchase long-term care insurance, adjusted for inflation. Long-term care insurance is defined under Code Section 7702(B)(b)&(c).
The participant’s spouse can be the one covered by the insurance but then the exemption from the 10% early withdrawal penalty applies only if the couple files a joint tax return.
Balancing the short and long term impact of our choices will always be a challenge: donut vs. eggs for breakfast; working out vs. hanging out; retirement readiness vs. an immediate financial need. The new rules eliminate an additional penalty on difficult choices. The soft side of the distribution rules is a step in the right direction towards a perfect balance.
Read more about the SECURE Act 2.0 in Maria Hurd’s Blog Series
- The SECURE 2.0 Act of 2022: Increased Retirement Savings; Enhanced Self-Correction of Operational Failures; Decreased Costs to Implement a Plan
- SECURE Act 2.0 Brings New and Improved Self-Correction Opportunities
- SECURE 2.0: Mandatory Automatic Enrollment Coupled with Corrective Contribution Relief for Automatic Enrollment Failures
- SECURE 2.0: New Distribution Options
- COMING SOON – SECURE 2.0: Required Minimum Distributions
