New Exceptions to the 10% Additional Tax on Retirement Plan Distributions Under SECURE 2.0 Act
The recent changes to the Internal Revenue Code Section 72(t)(1) have brought about new exceptions to the 10% additional tax on early distributions from retirement plans and individual retirement accounts. The SECURE 2.0 Act, effective from Jan. 1, 2024, added two new exceptions: emergency personal expense distributions and domestic abuse victim distributions.
These exceptions aim to provide individuals with increased access to their retirement benefits in times of need, making it more comfortable for employees to contribute to their retirement plans and IRAs.
The IRS has issued Notice 2024-55 to provide guidance on these new provisions.
Emergency Personal Expense Distributions allow for a one-time distribution per calendar year, up to the lesser of $1,000 or the amount by which the vested benefit exceeds $1,000, to meet unforeseeable or immediate financial needs related to necessary personal or family emergency expenses. Factors to consider include medical care expenses, accidents, imminent foreclosure or eviction, burial or funeral expenses, auto repairs, or any other necessary emergency expenses.
Domestic Abuse Victim Distributions provide an exception to the 10% additional tax for victims of domestic abuse by a spouse or domestic partner. This distribution can be made within a 1-year period and is limited to the lesser of $10,000 or 50% of the vested benefit. Domestic abuse includes physical, psychological, sexual, emotional, or economic abuse.
Both types of distributions allow for repayment within three years and are not subject to the 20% withholding applicable to eligible rollover distributions. Plan administrators may rely on an employee’s certification for the purpose of the distribution.
These new exceptions provide much-needed relief for individuals facing financial hardships and should encourage more people to save for retirement with the knowledge that they have access to their funds in times of emergency.