IRS Notice 2026-33 provides guidance on penalty-free distributions from retirement plans to pay for certified long-term care insurance under the SECURE 2.0 Act.
Overview
IRS Notice 2026-33 clarifies the rules for qualified long-term care distributions from defined contribution (DC) plans, including 401(a) and 403(b) plans. These distributions allow plan participants to pay for certified long-term care insurance premiums without incurring the standard 10% early withdrawal penalty, though the distributions used to pay the premiums are still subject to regular federal income tax.
Key Provisions
Eligibility and Limits: Participants may withdraw funds up to the lesser of:
- the actual premiums paid,
- 10% of their vested account balance, or
- a statutory cap ($2,600 for 2026, indexed for inflation)
Optional Plan Feature: Adoption of this distribution option is voluntary for plan sponsors.
Effective Date: The provisions apply to distributions made after December 29, 2025.
Plan Amendment Deadlines:
- Non-governmental DC plans, 403(b) plans maintained by public schools, and applicable collectively bargained plans: December 31, 2027
- Collectively bargained plans: December 31, 2028
- Governmental plans: December 31, 2029
Reporting and Compliance
Issuer Disclosure: Insurance providers must submit an Issuer Disclosure to the IRS, including the employee’s information, coverage description, and confirmation that the coverage is certified long-term care insurance
Form 1099-R and Form 1099-LPS Reporting: Plan administrators must report distributions on Form 1099-R, while insurance companies file premium details on Form 1099-LPS by February 1 of the following year.
No 20% Withholding: Plan administrators are not required to withhold 20%, as generally required under section 3405(c)(1).
Practical Implications
Participants can use retirement funds to cover long-term care insurance premiums without the early withdrawal penalty, providing flexibility for retirement planning and long-term care funding.
Employers and plan sponsors have extended time to amend plans to include this optional feature, ensuring compliance with IRS rules and reporting requirements.
Proper documentation and filings are essential to ensure distributions qualify under the notice and avoid penalties.
IRS Notice 2026-33 represents a significant update for retirement plan administration, enabling participants to use retirement assets for long-term care needs while maintaining tax compliance and avoiding plan operational failures.
