Secure Act 2.0 Creates Several New Distribution Options

Retirement accounts are established with the intent of income replacement while in retirement. Generally, a distribution from a retirement account, prior to attaining age 59½, is subject to income tax plus a 10% early distribution penalty. However, through the years, Congress created several exceptions to the 10% early distribution penalty tax in various pieces of legislation.

Why? Legislators have recognized that certain expenses (e.g., first-time home purchase, higher education) and/or events (disability, death) arise that necessitate early access to retirement assets. In Secure Act 2.0, enacted into law in late 2022, Congress expanded the list of exceptions for pre-age 59½ investors to access their retirement funds without being assessed the 10% penalty tax. New options to access retirement savings include distributions for emergency expenses, terminally ill individuals, and survivors of domestic abuse.

Emergency Expense Distributions
Secure Act 2.0 provides an exception for distributions used for emergency expenses, defined as “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” This feature applies to distributions from employer-sponsored retirement plans (i.e., 401k, 403b and 457(b) (governmental)). Notably, Emergency Expense Distributions (EEDs), unlike pension-linked emergency savings accounts, can be provided to highly compensated employees.1 Here are some key facts about EEDs: .

EEDs are effective for distributions made after December 31, 2023.
An EED is not subject to the 10% early distribution penalty tax.
Emergency withdrawals are an optional plan provision.
Only one EED is permissible per year up to $1,000.
A plan may rely on an employee’s self-certification that they satisfy the conditions for an EED.
A plan that allows for an EED must accept repayment (of the distribution) within three years from the date of the distribution.
A plan is prohibited from allowing a participant to take a subsequent EED until the earlier of: (1) prior emergency distributions have been completely repaid during the three-year period; (2) employee elective deferrals (made to the plan) since the emergency distribution total at least as much as the amount of the distribution; or (3) three years have passed since the previous emergency distribution.
A participant that is not eligible for an EED may still be eligible for a hardship distribution assuming the plan permits. A hardship distribution, however, will generally be subject to the 10% penalty and cannot be repaid.
An EED is not eligible for an IRA rollover.

Terminally Ill Individual Distributions
Another new exception to the 10% early penalty for distributions from both IRAs and employer-sponsored retirement plans (i.e., 401(k), 403(b)) is for those participants who are terminally ill. This new feature is effective for distributions made after December 29, 2022. On December 20, 2023, the IRS issued Notice 2024-02, providing much needed guidance on several provisions included in Secure Act 2.0, including distributions made on behalf of terminally ill individuals, referred to as “terminally ill individual distributions” (TIIDs).

A TIID is effective for distributions made on or after December 29, 2022.
TIIDs are exempt from the 10% early distribution penalty if taken before attaining age 59½.
A TIID can be taken from a from a qualified retirement plan, including 401(k), 403(b), defined benefit plans, and IRAs. A 457(b) plan is not eligible to offer a TIID.
TIIDs are an optional plan provision.
The law does not create a new distribution option for a participant to receive a TIID solely because they are terminally ill. Instead, the participant must otherwise be eligible to receive an in-service distribution (e.g., age 59½, disability, or hardship withdrawal).
A “terminally ill individual” is defined as an individual “who has been certified by a physician as having an illness or physical condition reasonably expected to result in death within 84 months (seven years) of the date of certification of terminal illness.”
A participant will not be considered terminally ill unless he/she provides sufficient evidence to the plan administrator or IRA custodian. A plan cannot rely on an employee’s self-certification of eligibility. An employee should retain such documentation for their records.
To qualify as a terminal Illness distribution, it must be made on, or after, the date of physician’s certification.
Generally, there is no limit on the amount a participant may receive by reason of a TIID. However, many qualified retirement plans impose a minimum or maximum distribution amount for in-service distributions (e.g., age 59½ or hardship distributions) and/or limit the number of permissible in-service distributions. Should a plan institute a limit of some sort, it would also apply to a Terminally Ill Distribution.
An employee generally may repay (recontribute) amounts distributed (by reason of the TIID) to the plan within the three-year period beginning on the day after the distribution was received. However, a special rule applies for distributions from a plan that does not specifically provide for such distributions. In that case, funds may be repaid to an IRA.

Example: Veronica participates in her employer’s 401(k). Veronica, at age 52, becomes terminally ill but continues working. Veronica, (even though she qualifies), cannot take an in-service distribution because she is terminally ill. Instead, she will need to qualify for an otherwise permissible in-service distribution option (assuming her plan allows), such as hardship. Importantly, taking a TIID allows Veronica to avoid the 10% early distribution penalty.

Domestic Abuse Distributions

Another new exception to the 10% early penalty under Secure Act 2.0 is for distributions from employer-sponsored retirement plans (i.e., 401k, 403b, 457(b) (governmental)), and IRAs to those employees who are survivors of domestic abuse. This new provision (it’s optional—a plan is not required to allow for distribution by reason of domestic abuse) is effective for distributions made on or after January 1, 2023.

For the purpose of this exception, domestic abuse is defined broadly in the legislation 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 means of abuse of the victim’s child or another family member living in the household.” Abuse must have been committed by a spouse or domestic partner.

Here are some important features of this exception:

Effective for distributions made in 2024 or later.
Distribution applies to in-service distributions from qualified retirement plans, including 401(k), 403(b), and governmental 457(b) plans.
Domestic violence distribution is an optional plan provision.
Survivors of domestic abuse may withdraw up to the lesser of: $10,000 (indexed for inflation starting in 2025) or 50% of their vested account balance without being assessed the 10% early distribution penalty.
An employee can repay withdrawn funds (all or a portion) to the plan over a three-year period (beginning the day after the distribution was received) and will be refunded for income taxes on money that is repaid. If a plan allows domestic abuse distributions, it must accept repayment of distribution within three-year period.
Plan administrators and IRA custodians may rely on the employee’s self-certification to receive a distribution.
Distribution must be made within a one-year period after an individual has become a victim.

Questions? Please contact your Lord Abbett representative at 888-522-2388.

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About the Author

Brian Dobbis, QKA, QPA, QPFC, TGPC

Retirement Solutions Lead

Important Information

¹The IRS defines a highly compensated employee as an individual who (1) owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received; or (2) for the preceding year, received compensation from the business of more than $150,000 (if the preceding year is 2023) and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

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A 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. The underlying plan can be a profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan. Generally, deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reported as taxable income on the employee’s individual income tax return.

A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain Code Section 501(c)(3) tax-exempt organizations, and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan. The employer may also contribute to the plan for employees.

Plans of deferred compensation described in IRC section 457 are available for certain state and local governments and non-governmental entities tax-exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years.

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