IRS Provides Guidance on Plan Distributions for Emergency Personal Expenses and Domestic Abuse Victims Under SECURE 2.0 Act

Subject to limited exceptions, distributions from a qualified plan for participants who have not attained age 59.5 are subject to an additional 10% tax under 72(t)(1) of the Internal Revenue Code (the “Code”). The SECURE 2.0 Act of 2022 ("SECURE 2.0") added distributions for emergency personal expenses and for victims of domestic abuse as new exceptions to the additional 10% tax. The Internal Revenue Service (IRS) recently issued Notice 2024-55, which provides guidance on administering the new exceptions. The following briefly summarizes that guidance.

Emergency Personal Expense Distributions

Under Section 115 of the SECURE 2.0 Act, a distribution from an applicable eligible retirement plan (including 401(k) plans, 403(a) annuity plans, 403(b) plans, governmental 457(b) plans, and IRAs) for emergency personal expenses is not subject to the additional 10% tax, provided it meets the following requirements:

1. A participant may receive only one Emergency Personal Expense distribution per calendar year.
2. The distribution may not exceed the lesser of:
   1. $1,000 or
   2. the excess of the participant’s vested account balance over $1,000.
3. Participants taking an Emergency Personal Expense distribution cannot take another such distribution for the next three calendar years unless the previous distribution is fully repaid or their subsequent contributions to the plan equal or exceed the unpaid amount.

For these purposes, “Emergency Personal Expenses” are amounts needed to meet unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. This includes but is not limited to circumstances related to medical care, accident or loss of property due to casualty, imminent foreclosure or eviction from the primary residence, the need to pay for burial or funeral expenses, and auto repairs.

Domestic Abuse Victim Distributions

Under Section 314 of the SECURE 2.0 Act, a distribution for assistance to domestic abuse victims is no longer subject to the additional 10% tax, provided:

1. The distribution is equal to the lesser of:
   1. $10,000 (as indexed for inflation) or
   2. 50% of their vested plan balance.
2. The participant may repay during the three-year period from the day after the date the distribution was received.

For these purposes, “domestic abuse” means physical, psychological, sexual, emotional, or economic abuse, and includes actions that aim to control, isolate, humiliate, or intimidate the victim, as well as efforts to undermine the victim’s ability to reason independently. The abused victim for these purposes may include the victim’s child or another family member living in the household with the participant.

Take-Aways for Plan Sponsors

Plan sponsors should also note the following considerations regarding the new distribution exceptions to the additional 10% tax. Both new exceptions:

• are optional; they are not required plan provisions,
• may be documented by written certifications from the participants,
• may be drawn from any combination of elective deferrals, matching contributions, or other employer contributions in the participant’s account balance,
• are not considered “eligible rollover distributions” or subject to the mandatory 20% income tax withholding requirement, and
• are effective January 1, 2024.

If either of the new distribution provisions are added to the plan, the plan will have to administer the right of participants to repay the distributions. Also, if a new distribution provision is added, it is unclear whether the employer will have the flexibility to remove it at a later date, at least with respect to any benefits which have accrued as of that time.

If you have any questions regarding IRS Notice 2024-55, or if you have questions regarding SECURE 2.0, please contact any member of Calfee's Employee Benefits and Executive Compensation practice group.