Internal Revenue Code Section 72(t)(1) imposes a 10% additional tax on most distributions from retirement plans and individual retirement accounts before age 59 1/2. However, there are various exceptions to this additional tax. The SECURE 2.0 Act added two exceptions effective beginning Jan.1, 2024: emergency personal expense distributions and domestic abuse victim distributions.
These exceptions should make employees more comfortable contributing to retirement plans and IRAs because they’ll have increased access to their benefits if necessary.
The IRS recently issued Notice 2024-55 to provide guidance regarding these provisions.
Emergency Personal Expense Distributions
Section 115 of SECURE 2.0 added a new IRC Section 72(t)(2)(I), which provides an exception to the 10% additional tax for emergency personal expense distributions. An emergency personal expense distribution is a distribution to meet unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. This provision is only available (1) for one distribution per calendar year and (2) in any calendar year up to the lesser of $1,000 or the amount by which the vested benefit exceeds $1,000.
Whether a distribution qualifies as an emergency personal expense distribution depends on the facts and circumstances. Factors to consider include whether the individual has expenses relating to medical care, accident or loss of property due to casualty, imminent foreclosure or eviction from a primary residence, the need to pay for burial or funeral expenses, auto repairs or any other necessary emergency or personal expenses.
A plan administrator may rely on an employee’s certification as to the purpose of the distribution.
If an employer plan doesn’t permit emergency personal expense distributions, the employee may treat an otherwise permissible distribution as an emergency personal expense distribution.
The same rules for repayment of qualified birth or adoption distributions apply to the repayment of an emergency personal distribution. An employee or IRA owner may repay the distribution within three years. The employee can’t take additional emergency personal expense distributions during the next three calendar years unless the emergency personal distribution has been repaid or the employee has subsequently made contributions at least equal to the portion of the emergency personal distribution not repaid.
An emergency personal expense distribution isn’t an eligible rollover distribution. Thus, it’s not subject to the 20% withholding applicable to an eligible rollover distribution.
Domestic Abuse Victim Distributions
Section 314 of SECURE 2.0 added a new IRC Section 72(t)(2)(K), which provides an exception to the 10% additional tax for domestic abuse victim distributions.
A domestic abuse victim distribution is a distribution to a domestic abuse victim made within the 1-year period beginning on any date when the individual is a victim of domestic abuse by a spouse or domestic partner.
For this purpose, domestic abuse is 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.
This provision is only available for distributions up to the lesser of $10,000 (indexed) or 50% of the vested benefit.
An employee or IRA owner may repay the distribution within three years.
A plan administrator may rely on an employee’s certification as to the purpose of the distribution.
If an employer plan doesn’t permit domestic abuse victim distributions, the employee may treat an otherwise permissible distribution as a domestic abuse victim distribution.
A domestic abuse victim distribution isn’t an eligible rollover distribution. Thus, it’s not subject to the 20% withholding applicable to an eligible rollover distribution.
