The IRS has recently released Notice 2024-55, providing additional guidance on provisions of SECURE 2.0 dealing with certain emergency distributions from retirement plans and distributions to victims of domestic abuse. The notice continues the IRS’ practice of issuing piecemeal guidance on specific sections of SECURE 2.0.
Emergency Personal Distributions
Under SECURE 2.0 retirement plan a distribution for an “emergency personal expense” is exempt from the 10% excise tax on early distributions. As clarified by Notice 2024-55:
- Notice 2024-55 clarifies that this provision of SECURE 2.0 really made two changes to the law:
- It added emergency personal expense distributions as a new category of permitted plan distributions. Accordingly, 401(k) or 403(b) plans can now make these emergency personal expense distributions in addition to the current (more narrow) definition of a hardship distribution.
- Emergency personal expense distributions are exempt from the 10% penalty tax on early plan withdrawals (before age 59-1/2).
- This is a discretionary, optional plan provision. However, even if a plan does not include these emergency distribution provisions, an employee can (i) take an otherwise permitted plan distribution, and (ii) treat the distribution as an emergency distribution on their tax return to avoid the 10% penalty tax.
- An emergency personal expense is a distribution made “for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” and the determination of such need is based on “relevant facts and circumstances” for each individual.
Helpfully, Notice 2024-55 provides a list of expenses that are “relevant” to this determination. This list is not an exclusive list, but does contain a useful and broad array of potential needs–such as medical expenses, accident or loss of property due to casualty, imminent foreclosure or eviction from a primary residence, need to pay for burial or funeral expenses, and auto repairs.
Even more helpfully, Notice 2024-55 specifies that a plan administrator can rely on a participant’s written certification that the participant is eligible for an emergency personal expense distribution. - As a general matter, participants are allowed to take one emergency personal expense distribution of up to $1,000 per year (not indexed for inflation). However, participants who utilize this provision may not take another emergency distribution for the immediately following three calendar plan years following the year of distribution unless certain additional requirements are met.
Emergency personal expense distributions can be repaid to the plan and the repayment reduces the three-year waiting period. Plans that make emergency personal expense distributions are, generally, required to accept such repayments.
Notice 2O24-55 also contains guidance on the provisions of SECURE 2.0 providing special distribution rules to the victims of domestic abuse. As with emergency personal expense distributions, Notice 2024-55 clarifies that these domestic abuse victim distributions (i) represent a new category of eligible plan distributions, and (ii) are exempt from the 10% penalty tax on early distributions. Under the rules governing these domestic abuse distributions:
- The maximum amount available for domestic abuse distribution is the lesser of (i) $10,000 (indexed for inflation) or (ii) 50% of the employee’s vested account balance. This amount is available during a one year. Beginning on the date on which the individual is a victim of domestic abuse By a spouse or domestic partner.
- The term domestic abuse is defined as “physical, psychological, sexual, emotional, or emotional abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.”
- Domestic abuse victim distributions are not available from any retirement plan that is subject to the joint and survivor annuity rules of sections 4O1(a)(11) and 417 of the Code. As a general matter, this will exclude plans that utilize annuities as a distribution option. This limitation reflects the challenge posed by the fact that plans utilizing annuity options are required to obtain spousal consent before making plan distributions and, in the case of domestic abuse victims, such spousal consent is not practical.
- Domestic abuse victim distributions can be repaid any at any time during the three-year period beginning with the date the distribution is received.
- This is a discretionary, optional plan provision. However, even if a plan does not include these emergency distribution provisions, an employee can (i) take an otherwise permitted plan distribution, and (ii) treat the distribution as domestic abuse victim distribution on their tax return to avoid the 10% penalty tax.
- As with emergency distributions, participants can self-certify eligibility for a domestic abuse victim distribution. Such self-certification must specify that the employees eligible for a domestic abuse distribution and the distribution is being made during the one year. Beginning on the date on which the individual is a victim of domestic abuse.
Both of these provisions were effective January 1, 2024 and the timing of this guidance represents a two-edged sword. Lawyers and administrators are glad to have the clarity offered by this guidance. On the other hand, employers and administrators (and participants) will need to live with the reality that guidance on many of the other provisions of SECURE 2.0 will just not be available until years after enactment.