As part of our ongoing exploration of the change to retirement plans under SECURE 2.0, this advisory takes a closer look at the new distribution options. Beyond required distributions, plan sponsors have had several choices for when to allow distributions from defined contribution retirement plans. Common distribution options include at separation from service, death, disability, once the participant reaches age 59 1/2 or normal retirement age (often 65), as well as hardship distributions and loans. SECURE 2.0 creates several more distribution options, most of which are optional. As there are several changes and many are optional, it is important that plan sponsors take time now to decide which will be added to a retirement plan. Even though plan amendments are not immediately required, coordination with administrators, legal counsel and other service providers will help minimize the compliance risks.
The following chart provides some of the most important information about each distribution option, including whether adding the distribution option is voluntary and when it goes into effect.
|Distribution Option||Summary||Amount||Is Repayment Permitted?||Is the Provision Optional?||Effective Date|
|Federally Declared Disasters||For presidentially declared disasters, there is no longer a need to wait for IRS to issue guidance. Instead, once the disaster is declared, a distribution is permitted.||Up to the lesser of (a) $22,000; (b) the amount needed because of the disaster; and (c) account balance.||Yes, over three years following distribution date.||No||1/26/20|
|Emergency Personal Expenses||The distribution must be for a necessary personal or family emergency expense. Participants must wait three years between distributions.||Up to the lesser of (a) $1,000 and (b) account balance greater than $1,000.||Yes, over three years following distribution date.||Yes||1/1/24|
|Domestic Abuse and Violence||Participants who self-certify to having experienced domestic abuse or violence.||Up to the lesser of (a) $10,000 and (b) 50% of account balance.||Yes, over three years following distribution date.||Yes||1/1/24|
|Terminal Illness||Those diagnosed with a condition expected to result in death within 84 months may take a distribution. The plan is permitted to rely on certification from a physician.||No additional restrictions beyond the plan’s existing restrictions on distributions.||Sometimes||Yes||1/1/24|
|Long Term Care Insurance Policy||For participants who obtain long term care insurance, some or all of the premium can be paid with their retirement plan account balance.||Up to the lesser of (a) the amount of the long-term care; (b) $2,500 (adjusted annually); and (c) 10% of vested account balance.||No||Yes||12/29/25|
SECURE 2.0 also creates the option for emergency accounts, beginning January 1, 2024. These emergency accounts are effectively non-retirement savings accounts within defined contribution plans that allow for pre-tax savings that are more readily available in an emergency. Participants in the retirement plan must be eligible to make contributions to the plan and cannot be a highly compensated employee. Contributions are treated as Roth contributions and subject to matching contributions from the employer. The amount a participant can contribute each year will depend on the amount already in the emergency account. Generally, contributions can be in an amount equal to 3% or less of compensation each year. However, the account balance cannot exceed $2,500, unless the plan sponsor sets a lower maximum. Plan sponsors who allow emergency accounts can also choose to automatically enroll eligible participants in an emergency account. Once contributions are made, the investment of the emergency fund is more limited than other assets of the plan. Each year participants can take up to four distributions without fees and additional distributions can be subject to reasonable fees.
With many of these options first available in the coming plan year, now is a prudent time to start the decision-making process on whether to incorporate the optional provisions. These new options are technical, and this summary covers only the most prominent aspects of the distribution provisions. A discussion with your recordkeepers, administrators and legal counsel now can help you make an informed decision that enables compliant administration of the new options.