First featured in the July 25, 2024, edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC.
The Secure 2.0 Act provided for new exceptions to the 10% additional tax imposed upon early distributions from retirement plans for emergency personal expense distributions and domestic abuse victim distributions. The Department of Treasury and Internal Revenue Service recently issued guidance on how to administer the distributions in order to qualify for the exception in advance of issuing regulations in Notice 2024-55. Although the department and IRS are seeking comments to the guidance, plans may generally rely upon the guidance in administering emergency personal expense distributions and domestic abuse victim distributions.
Emergency Personal Expense Distributions
An 401(k), 403(b), a governmental 457(b), IRA, or 401(a) defined contribution plan may, but is not required to, allow in-service distributions for emergency personal expenses. Plans may allow the distributions to be made from employee deferrals and at the plan’s option, employer contributions, including qualified nonelective, qualified matching or safe harbor contributions.
Emergency personal expenses distributions are distributions made to a participant for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. Emergency personal expenses would include expenses related to medical care, an accident or loss of property due to casualty, imminent foreclosure or eviction from a primary residence, the need to pay for funeral or burial expenses, auto repairs, or any other necessary emergency personal expense. Plan administrators may rely upon a participant’s written certification that the participant is eligible for the distribution.
Emergency personal expense distributions are capped at $1,000. A participant may only receive the lesser of $1,000 and the participant’s vested account balance minus $1,000 (at least $1,000 must remain in the account after distribution). For example, if the participant’s vested account balance is $1,000 or less, the participant may not receive an emergency personal expense distribution because $1,000 minus $1,000 is zero (the lesser of $1,000 and zero is zero). If the participant’s account balance is $1,750, the participant may receive an emergency personal expense distribution equal to $750 (the lesser of $1,000 and $750 ($1,750 minus $1,000)). If the participant’s account balance is $3,000, the participant may receive an emergency personal expense distribution equal to $1,000 (the lesser of $1,000 and $2,000 ($3,000 minus $1,000)).
A participant may only request one emergency personal expense distribution per year. In addition, once a participant receives an emergency personal expense distribution, then the participant may not receive another emergency personal expense distribution during the immediately following three calendar years, unless the participant either repays the previous emergency personal expense distribution or the aggregate of the individual’s elective deferral and the employer contributions after the emergency personal expense distribution is at least equal to the amount of the previous emergency personal expense distribution that has not been repaid. For example, a participant received a $500 emergency personal expense distribution in July 2024 and repays $300. Between August 2024 and December 2024, the participant defers $400 of its wages to the plan. Because the participant deferred more than the amount of the emergency personal expenses distribution which has not been repaid ($200) after receiving the distribution, the participant would be allowed to take another emergency personal expense distribution of up to $1,000 in 2025.
If the plan allows emergency personal expense distributions and allows rollovers to be made to the plan, it must allow the participant to repay all or part of the distribution at any time during the three-year period beginning on the day after the date on which the distribution was received.
The distributions are included in the participant’s gross income but are exempt from the 10% additional tax imposed under Code Section 72(t). In addition, the distributions are not subject to the 20% mandatory withholding to which eligible rollovers are subject.
Domestic Abuse Victim Distributions
Most defined contribution plans may, but are not required, to allow distributions to victims of domestic abuse. Defined benefit plans and defined contribution plans which are subject to Code Section 401(a)(11) and 417 (because spousal consent requirements apply) are not eligible to provide domestic abuse victim distributions. Other defined contributions plan may allow the distributions.
Domestic abuse victim distributions are distributions made to a participant who is a victim of domestic abuse by a spouse or domestic partner and which are made within one year of the domestic abuse incident. Domestic abuse means physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate or intimidate the victim or undermine the victim’s ability to reason independently. Domestic abuse would include abuse of the victim’s child or other family member living in the same household. Plan administrators may rely upon a participant’s certification that it qualifies for the distribution. The certification must be in writing and must indicate that the participant is eligible for a domestic abuse victim distribution and that the distribution is being made during the one-year period beginning on any date on which the individual is a victim of domestic abuse.
Domestic abuse victim distributions are capped at $10,000 adjusted annually. A participant may only receive the lesser of $10,000 and 50% of the participant’s vested account balance. For example, if the participant’s vested account balance is $12,000, then the participant could receive a distribution of $6,000 (the lesser of $10,000 and $6,000 (50% of $12,000)). If the participant’s account balance is $100,000, the participant may receive a domestic abuse victim distribution equal to $10,000 (the lesser of $10,000 and $50,000 (50% of $100,000)).
If the plan allows domestic abuse victim distributions and allows rollovers to be made to the plan, it must allow the participant to repay all or part of the distribution at any time during the three-year period beginning on the day after the date on which the distribution was received. The distributions are included in the participant’s gross income but are exempt from the 10% additional tax imposed under Code Section 72(t). In addition, the distributions are not subject to the 20% mandatory withholding to which eligible rollovers are subject.
If an employer wishes to implement emergency personal expense distributions or domestic abuse victim distributions, they should contact their administrators. Plans may begin allowing the distributions immediately even though the plans documents are not required to be amended until the last day of the first plan year after Jan. 1, 2025.
Renée Lieux is chair of McNees’ employee benefits & executive compensation group and serves clients from Harrisburg. Clients seek her assistance with the establishment, compliance and administration of pension plans, welfare benefit plans and fringe benefit plans, including defined contribution plans, and she has extensive experience counseling clients on ERISA and the complex tax laws which impact benefit plans. She can be reached at [email protected] or 717-237-5484.