On June 20, 2024, the IRS issued Notice 2024-55 (“Notice”), providing guidance on emergency personal expense distributions and domestic abuse victim distributions, two types of optional early distributions that certain defined contribution plans may offer under the Setting Every Community Up for Retirement Enhancement Act (SECURE) 2.0 Act (“Act”). The Notice provides guidance for plans that wish to offer them.
As background, Section 72(t) of the Internal Revenue Code (“Code”) generally provides for a 10% additional tax on distributions from a qualified retirement plan taken before certain events, such as the attainment of age 59 ½, disability or death. The Act added two new exemptions from this 10% additional tax—one for emergency personal expense distributions and the other for domestic abuse victim distributions. If the plan does not offer these distributions, the participant is permitted to treat an otherwise permissible distribution under the plan as exempted to avoid the 10% additional tax.
Emergency Personal Expense Distributions
The Act allows eligible defined contribution plans to offer an early, penalty-free distribution to participants to meet an unforeseeable or immediate financial need relating to personal or family emergency expenses, up to a maximum amount of $1,000 per calendar year. The Notice specifies the factors to be considered by plans when determining whether an expense is an unforeseeable or immediate financial need, such as expenses related to medical care, accident or loss of property due to casualty, burial or funeral expenses, auto repairs, or any other necessary emergency personal expenses. The Notice further clarifies that the amount of the distribution is limited to the lesser of $1,000 or the excess of the individual’s account balance over $1,000. Once a distribution is taken, an individual cannot take another emergency personal expense distribution within the following three calendar years, unless either the previous emergency personal expense distribution is fully repaid or additional elective deferrals or employee contributions are made to the participant’s account equal to the amount of the outstanding distribution. Participants are permitted to self-certify their eligibility for an emergency personal expense distribution. Finally, if a plan chooses not to offer emergency personal expense distributions, the participant is permitted to treat an otherwise permissible distribution under the plan (for example, a hardship distribution or distribution upon severance from employment) as an emergency personal expense distribution to avoid the 10% additional tax.
Plans eligible to offer personal emergency expense distributions include qualified defined contribution plans, such as a 401(k) plan, 403(a) and 403(b) annuity plans, governmental plans under section 457(b), and individual retirement accounts.
Domestic Abuse Victim Distributions
The Act also allows eligible defined contribution plans to offer a penalty-free early distribution up to $10,000 during the one-year period following any date on which the participant is a victim of domestic abuse by a spouse or domestic partner. Domestic abuse is defined in the Code as “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 abusing the participant’s child or another family member living in the household. The Notice clarifies that the amount of a domestic abuse distribution is limited to the lesser of $10,000 (indexed annually for inflation) or 50% of the current account balance. An individual may repay any portion or the full amount of the distribution during the three-year period following the date the distribution is made, and plans are required to accept the repayment and treat it as a rollover contribution. Participants are permitted to self-certify their eligibility for a domestic abuse distribution without providing supporting evidence. Additionally, as with emergency personal expense distributions, if the plan does not offer domestic abuse distributions, the participant is permitted to treat an otherwise permissible distribution under the plan as a domestic abuse distribution to avoid the 10% additional tax.
Plans that may offer domestic abuse distributions generally include 401(k) plans and most other defined contribution plans, provided the plan is not subject to joint and survivor and spousal consent requirements.
Please contact Slevin & Hart for more information about how the Notice affects your plan.
This publication is intended to provide general information only, and is not intended to provide legal advice. The distribution of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship. Permission is granted to make and redistribute, without charge, copies of this entire document provided that such copies are complete and unaltered and identify Slevin & Hart, P.C. as the author. All other rights reserved.