IRS Issues Guidance on Exceptions to 10% Early Withdrawal Penalty under SECURE 2.0

On June 20, the IRS issued Notice 2024-55 (the Notice) providing guidance on the application of exceptions to the 10% additional tax on early distributions under Internal Revenue Code (IRC) Section 72(t)(1) as it relates to emergency personal expense distributions and domestic abuse victim distributions that were added under SECURE 2.0.  

What is the 10% Additional Tax?  

The 10% additional tax on a distribution from qualified retirement plans generally applies unless the distribution qualifies for one of the exceptions listed in IRC Section 72(t)(2) and applies only to the portion of the distribution includible in gross income.   

For purposes of IRC Section 72(t), the term “qualified retirement plan” means 401(k) profit-sharing plans, 403(b) plans (including 403(b) annuity contracts), individual retirement accounts, and individual retirement annuities.  

Exceptions to the 10% Additional Tax  

IRC Section 72(t)(2) provides several exceptions to the 10% additional tax for early distributions as follows: 

• A distribution made on or after the date on which the individual attains age 59½;  
• A distribution made to a beneficiary or estate of an individual on or after an individual’s death;  
• A distribution which is attributable to an individual being disabled;
• A distribution that is part of a series of substantially equal periodic payments made for the life/life expectancy of the individual or the joint lives/joint life expectancies of an individual and the individual’s designated beneficiary; and 
• A distribution made to an individual after a separation from service after reaching age 55. 

The SECURE 2.0 Act amended IRC Section 72(t) by adding exceptions to the 10% additional tax for emergency personal expense distributions and domestic abuse victim distributions. 

New Exceptions Under SECURE 2.0

Emergency Personal Expense Distributions 

The Notice provides a new exception to the 10% additional tax for a distribution from an eligible retirement plan to an individual for emergency personal expenses. Emergency personal expense distributions are subject to three limitations:

• An individual may not treat more than one distribution per calendar year as an emergency personal expense distribution; 
• The maximum amount an individual may treat as an emergency personal expense in any calendar year is $1,000, and 

• Limits on subsequent emergency personal expense distributions (see discussion below). 

Individual Written Certifications  

The Notice provides that an administrator of an eligible retirement plan may rely on an individual’s written certification that they are eligible for an emergency personal expense distribution to determine whether an employee is eligible for such a distribution. 

Subsequent Emergency Distributions  

The Notice states that if an individual treats a distribution as an emergency personal expense distribution in any calendar year, none of any subsequent distribution can be treated as an emergency personal expense distribution during the next three calendar years unless: (1) the previous emergency personal expense distribution is fully repaid to the eligible retirement plan, or (2) the total amount of the individual’s contributions to the eligible retirement plan after the previous emergency personal expense distribution is at least equal to the amount of the previous emergency personal expense distribution that has not been repaid. 

Repayments  

Under the Notice, an eligible retirement plan must accept the repayment of an emergency personal expense distribution from an individual if: 

• The plan permits emergency personal expense distributions;  
• The individual received an emergency personal expense distribution from that plan, and  

• The individual is eligible to make a rollover contribution to that plan when the individual wishes to repay the emergency personal expense distribution to the plan. 

Domestic Abuse Victim Distributions  

The Notice provides a new exception to the 10% additional tax for a distribution from an eligible retirement plan to an individual who is a domestic abuse victim.  

A domestic abuse victim distribution is included in gross income but is not subject to the 10% additional tax. An individual may receive a distribution from an eligible retirement plan of up to $10,000 (indexed for inflation) without the 10% additional tax being applied if the distribution qualifies as a “domestic abuse victim distribution,” which is defined as any distribution from an eligible retirement plan to a domestic abuse victim if made during the one-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner.  

Additionally, the Notice clarifies that the total amount that an individual may treat as a domestic abuse victim distribution cannot exceed the lesser of (1) $10,000 as indexed for inflation or (2) 50% of the vested benefit of the individual under the plan. 

Repayments  

The Notice provides that an individual may repay any portion or all of the distribution they received during the 3-year period beginning the day after the distribution was received to an eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.  

Individual Written Certification 

The Notice states that any distribution that an individual certifies as a domestic abuse victim distribution will be treated as meeting the distribution restriction requirements. To meet those requirements, the individual could check the box on the distribution request form to certify that

1. They are eligible for a domestic abuse victim distribution and  
2. The distribution is made within the one-year period commencing on the date on which the individual is a victim of domestic abuse.  

The certification must be provided in writing, and the individual may use the electronic delivery rules to provide the certification. 

Discretionary Adoption of SECURE 2.0 Provisions  

The Notice provides that eligible retirement plans are not required to permit emergency personal expense distributions or domestic abuse victim distributions. Accordingly, the plan amendments adopted to permit emergency personal expense distributions and/or domestic abuse victim distributions are considered discretionary amendments by the IRS.  

Alternative for Individuals to Avoid the Additional Tax 

For both emergency personal expense distributions and domestic abuse victim distributions, if an eligible retirement plan in which the individual participates or is the beneficiary does not permit such distributions and an individual receives an otherwise permissible distribution that meets the requirements for those distributions, they may treat the distribution for reporting purposes on their federal income tax return for the year of the distribution as an emergency personal expense distribution or domestic abuse victim distribution to the extent it meets the limitations on such distributions and not pay the ten percent additional tax. 

Key Takeaways for Plan Sponsors  

Plan sponsors will want to consider: 

1. The limited tax savings of the emergency personal expense distribution likely makes it of limited utility to individuals and  
2. The domestic abuse victim distribution raises the question of how many individuals would be willing to volunteer such information to receive a distribution.  

Additionally, there is no meaningful need to adopt plan amendments and procedures for either emergency personal expense distributions or abuse victim distributions because otherwise eligible individuals are permitted to self-claim a tax deduction for amounts they are otherwise able to withdraw from the plan.   

Suppose a plan sponsor is concerned that individual plan participants will not otherwise access funds from the plan. In that case, they should consider adopting the plan amendments to implement one or both provisions. 

Contact our specialized team today to discuss how these changes benefit your employees and improve your plan's overall effectiveness.