Benefits Insights

SECURE 2.0 provided employees better access to liquid assets during a major life crisis. We have previously discussed the domestic abuse victim distribution exemption and the emergency personal expense distribution exemption in this space. We are revisiting these topics because the IRS, through issuance of Notice 2024-55, has provided further guidance on these distributions. In addition, and perhaps more importantly, we have heard from several large recordkeepers that they are ready (or soon will be ready) to administer these optional plan provisions.

More details can be found in the links to our prior posts above, but to summarize, the SECURE 2.0 provisions had two major impacts:

1. Participants that receive distributions that qualify under the new exemptions would not be subject to the 10% penalty that is assessed for any retirement plan distribution before the participant’s attainment of age 59.5; and
2. Plan sponsors have the option to add the newly added qualified distributions to their Plans, giving participants access to funds where a distributable event might not otherwise exist.

For example, Tim is a 40-year old employee and participates in his company’s 401(k) Plan. Tim’s employer has elected to amend its Plan to create a new distributable event that would permit participants to take a distribution due to an emergency in the amount of the lesser of (a) $1,000 or (b) the participant’s account balance minus $1,000. Tim’s car requires $800 worth of repairs that will enable him to get to work. Although no distributable event would have been permissible before the Plan’s amendment, Tim can now receive a distribution from the Plan, and because the distribution is going to be used to meet unforeseeable financial needs related to a personal emergency expense, the distribution will not be subject to the 10% additional tax for early withdrawal.

The IRS Notice provided several updates on emergency personal expense and domestic abuse victim distributions:

• More than one emergency distribution is permitted, but subsequent emergency distributions are not permitted until the 4^th calendar year following the calendar year of the original distribution, unless the participant has repaid the distribution and/or made elective deferrals to the plan that are at least equal to the amount of the original emergency personal expense distribution.
• Emergency distributions can be repaid at any time during a 3-year period (beginning on the day after the date on which the distribution was received), but qualified plans are only obligated to accept such repayments if: (1) the plan permits emergency personal expense distributions, (2) the repaying participant received an emergency personal expense distribution from that plan, and (3) such participant is eligible to make a rollover contribution to that plan.
• Plans can rely on participant self-certification that the participant meets the requirements to request either an emergency personal expense distribution or domestic abuse victim distribution.
• The list of factors to be considered in determining emergency expense distributions mostly aligns with the list of factors used to determine if a participant is eligible for a hardship distribution, but also includes expenses related to auto repairs and any other necessary emergency personal expenses. The expanded list and self-certification means distributions are more readily accessible than hardship withdrawals.
• Domestic Abuse Victim Distributions are not permitted from a plan with spousal consent requirements for distributions. The spousal consent requirements are more common in defined benefit plans, but also apply to some defined contribution plans, including those with transferred assets from a money purchase pension plan.

Plan Sponsors should know that these distributions are not required and may be optionally added, but if you are interested, you should first contact your recordkeeper to determine when they can implement these provisions. In addition to the guidance presented by the Notice, the IRS also announced that it expects to issue regulations and is requesting comments with respect to all aspects of section 72(t), so stay tuned for future updates.