The Internal Revenue Service (IRS) released a notice providing guidance on distributions for emergency personal expense and domestic abuse victims under the SECURE 2.0 Act of 2022 (SECURE 2.0). Both distributions are optional, allow self‑certification as to eligibility, and may be repaid within three years.
SECURE 2.0 added several new exceptions to the 10% tax on early retirement plan distributions and the distribution restrictions otherwise applicable to elective deferrals. A June 2024 IRS notice provided much-needed additional guidance on two of these new types of distributions: the emergency personal expense distribution and the distribution available to victims of domestic violence. As detailed below, Notice 2024‑55 (Notice) clarifies to whom and for what purposes these distributions may be made.
Penalty-Free Emergency Personal Expense Distribution
Under SECURE 2.0, an “emergency personal expense distribution” is a distribution from an eligible retirement plan (e.g., a 401(k) or 403(b) plan) to “an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” The Notice notes that only one emergency expense withdrawal of up to a maximum of $1,000 (or the excess of the account balance over $1,000, if less) is permissible each year.
Plans offering this optional withdrawal provision must allow a participant to repay the withdrawal in the following three years. During the three-year period, a subsequent emergency personal expense distribution may be made only if (1) the previous emergency personal expense distribution has been fully repaid, or (2) the individual’s contributions to the plan during the period beginning with the prior distribution and ending with the new request equal or exceed the amount of the previous emergency personal expense distribution.
The Notice clarifies that whether an individual has an “unforeseeable or immediate financial need relating to necessary personal or family emergency expenses” is based on individual facts and circumstances. The Notice details that the factors to be considered include, but are not limited to, whether the individual (or a family member of the individual) has expenses relating to
- medical care,
- accident or loss of property due to casualty,
- imminent foreclosure or eviction from a primary residence,
- the need to pay for burial or funeral expenses,
- auto repairs, or
- any other necessary emergency personal expenses.
Emergency Personal Expense Distinguished from Hardship Distribution
Many defined contribution plans already offer hardship distributions, so plan sponsors might question whether an emergency personal expense distribution option is needed. Hardship distributions have an important advantage over emergency personal expense distributions—a hardship distribution is not subject to a fixed dollar cap, and, consequently, may far exceed the $1,000 maximum established for an emergency personal expense distribution permitted.
While emergency personal expense distributions are certainly not a substitute for hardship distributions, they may provide more tax-favorable treatment when participants incur less catastrophic expense emergencies. In this regard, there are several advantages of emergency personal expense distributions:
- Emergency personal expense distributions are not subject to the 10% early distribution penalty, whereas hardship distributions to employees younger than age 59½ are subject to the 10% early distribution penalty.
- There may be personal or family emergency expenses (e.g., auto repairs, utility bills) that might not be eligible for hardship distribution under the plan (depending on the plan’s definition), but that may be eligible for an emergency personal expense distribution.
- Emergency personal expense distributions may be repaid to the plan, whereas hardship distributions may not.
Penalty-Free Distributions to Domestic Abuse Victims
Under SECURE 2.0, qualified plans may permit participants who self-certify that they have experienced domestic abuse within the past year to withdraw a portion of their retirement plan account, up to the lesser of $10,000 as indexed for inflation or 50% of the participant's account. Similar to emergency personal expense distributions, plans that offer penalty-free distributions to domestic abuse victims must give recipients the opportunity to repay the withdrawn amount over a three-year period. In contrast to emergency personal expense distributions, there is no restriction on a domestic abuse victim’s ability to take subsequent domestic abuse victim distributions.
Pursuant to the Notice, an individual that suffers “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” has 12 months to request a special distribution.
The Notice also clarifies that if an individual receives an otherwise permissible distribution from a retirement plan that does not offer the domestic abuse victim option, but the distribution meets the legal requirements of a domestic abuse victim distribution, the individual may treat the distribution as a domestic abuse victim distribution on the individual’s federal income tax return to the extent the distribution meets the limitation on a domestic abuse victim distribution.
Plan Sponsor Considerations
Although SECURE 2.0 authorized Plan sponsors to add these distribution options to plans after December 31, 2023, many have held back, awaiting further guidance from the IRS or recordkeeper. While these distribution options provide additional flexibility to participants for emergency life events, the repayment requirement may be an administrative hurdle to some plan administrators. In addition, the IRS may yet issue further guidance—the Notice seeks comments on whether the IRS should provide exceptions to the rule that a plan administrator may rely on an employee’s certification and procedures to address cases of employee misrepresentation.