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New Distribution Options to Encourage Savings

Jen Swets 12/11/23


SECURE 2.0 (S2) includes a number of provisions designed to encourage workers to save more for retirement.  Although it may seem counter-intuitive, one way Congress attempted to do this is by ensuring that those who do contribute have access to their accounts when they need it.  To that end, S2 creates at least 4 new types of distributions and makes changes to several others.

While S2 includes many other changes that are “bigger ticket” items, distribution items are the ones that generate the most questions from participants.

So, what’s all the hubbub about?  Here’s a quick rundown of some of S2’s distribution provisions:

  • Penalty free distributions of up to $1,000 for emergency expenses
  • Penalty free distributions related to domestic abuse
  • Penalty free distributions for those with terminal illness
  • Distributions for Federally declared disasters
  • In-plan emergency savings accounts
  • Participant self-certification of hardship distribution requests
  • Alignment of 401(k) and 403(b) hardship distribution rules

Too much to cover in a single post?  We agree.  We’re going to work through the first three topics here.  We’ve already covered the hardship changes here, and we will leave the others for a separate discussion.  Can’t have all the fun at one time!

Penalty Free Distributions

Before we get into the details on these new provisions, let’s make sure we’re all working from the same page with regards to early withdrawal penalties.  Generally speaking, a participant is subject to a 10% early withdrawal penalty (on top of regular income taxes) when s/he takes a distribution (not rollovers) from his or her plan account prior to age 59 ½.  There are a few exceptions, but that’s the general rule.  S2 creates several new exceptions starting in 2024.

Emergency Expenses

Participants who have an unforeseen or immediate financial need for “necessary personal or family emergency expenses” may withdraw up to $1,000 from their plan accounts to help meet this need.  Similar to hardship distributions, plan sponsors may rely on a participant’s written certification that they meet the requirements.  These withdrawals are eligible for repayment.

The restrictions on how often a participant can take one of these emergency expense distributions get a bit cumbersome.  Basically, after taking one of these distributions, a participant cannot take another until s/he meets one of these requirements.

  • The end of the 3rd calendar year following the year of the distribution, or
  • The later of the following:
    • The calendar year following the year of the distribution,
    • The date the participant fully repays a previous emergency expense distribution, and
    • The date the combination of new contributions to the participant’s account (employee deferrals and / or employer contributions) are at least as much as the previous distribution.

Participants who are not eligible for emergency expense distributions may still be eligible for hardship distributions if the plan permits.  A hardship, however, will not necessarily offer the 10% penalty waiver and cannot be repaid.

Domestic Abuse

A participant who is the victim of domestic abuse by a spouse or domestic partner is able to withdraw the lesser of $10,000 or 50% of their vested balance under the plan for up to one year following the abuse.  The $10,000 limit will be adjusted for cost-of-living index each year.

Recognizing that this can be a delicate situation to navigate, S2 provides some guidance on what constitutes abuse, defining it as follows:

“…physical, psychological, sexual, emotional, or economic 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.”

To continue a couple of common threads, plan sponsors are able to rely on participant self-certification, and participants who take domestic abuse distributions are able to recontribute them to the plan.

Terminal Illness

A participant who is certified by a physician as having a terminal illness is able to take a penalty-free distribution from his/her account.  S2 defines a terminally-ill individual as someone whose life expectancy is less than 84 months.

Unlike some of the other new distribution provisions, these are not subject to participant self-certification.  Instead, the participant must provide sufficient evidence that s/he qualifies.  Similar to the other new distribution options, however, terminal illness distributions can be recontributed to the plan.

General Comments

Keep in mind that these are primarily individual tax provisions.  Since the 10% early withdrawal penalty is usually factored in when a participant prepares his/her individual tax return for a given year, it will largely be up to them to claim the waiver come tax time.  However, companies that want to offer any of these as specific new plan distribution options will need to amend to do so.  Those amendments are generally due by the end of 2025.

With that said, it is important to coordinate with your plan’s recordkeeper to determine if/when the provider is able to accommodate each of these new withdrawal options.  As you consider how and when you might want to offer these provisions, our team is happy to talk through it with you.

For more information, please visit our SECURE 2.0 Act Resource Page.

Topics: 401(k) Plan, Legislation, Plan Distributions, SECURE 2.0


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.