The IRS has issued new guidance on June 20, 2024, regarding exceptions to the 10% additional tax for certain emergency distributions and distributions to domestic abuse victims, as outlined in Notice 2024-55.
Background
Under IRC Section 72(t)(1), distributions from qualified retirement plans are typically subject to a 10% additional tax unless they meet certain exceptions. These plans include:
- 401(a) plans with tax-exempt trusts
- 403(a) annuity plans
- 403(b) annuity contracts
- IRAs
- 408(b) individual retirement annuities
Common exceptions to the 10% additional tax include distributions made after age 59½, upon death, disability, or separation from service after age 55, and more. The SECURE 2.0 Act has expanded these exceptions with new provisions for emergency personal expense distributions and domestic abuse victim distributions.
Emergency Personal Expense Distributions
The SECURE 2.0 Act added IRC Section 72(t)(2)(I), introducing a new exception for emergency personal expense distributions. Key points include:
Limitations:
- One distribution per calendar year
- Maximum distribution of $1,000 per year
- Restrictions on subsequent distributions
Certification:
Plan administrators may rely on an employee’s written certification of eligibility for emergency personal expenses.
Additional Distributions:
No further emergency distributions are allowed for three years unless the previous distribution is repaid or matched by new contributions.
Repayments:
Plans must accept repayments if they permit such distributions, the individual received an emergency distribution, and they are eligible to make rollover contributions.
Domestic Abuse Victim Distributions
Section 314 of the SECURE 2.0 Act introduced IRC Section 72(t)(2)(K), which provides an exception for domestic abuse victim distributions:
Definition:
Distributions made within one year of being a victim of domestic abuse.
Limitations:
Maximum distribution of $10,000 (indexed for inflation) or 50% of the vested accrued benefit.
Repayments:
Individuals may repay all or part of the distribution within three years to a plan eligible for rollovers.
Certification:
Employees can certify their eligibility for domestic abuse victim distributions on the distribution request form.
Employer Implementation and Impact
The guidance clarifies that plans are not required to permit these new types of distributions; the decision to do so is discretionary. However, if a plan does not permit these distributions, individuals can still claim the tax exemptions on their federal tax returns if the distributions meet the necessary criteria.
For employers, this guidance provides clarity on implementing these provisions. Employers and third-party administrators should ensure their procedures and communications align with the IRS guidance. Employees benefit from these changes by being able to claim tax exemptions on qualifying distributions regardless of their employer’s adoption of the provisions.
Upcoming Regulations
The Treasury Department and the IRS plan to issue further regulations under IRC Section 72(t) to provide additional details and guidance.
Conclusion
The IRS’s new guidance on the 10% additional tax exceptions under the SECURE 2.0 Act offers significant clarifications for both employers and employees. By understanding these changes, employers can better manage plan amendments, and employees can take advantage of new tax benefits in emergency situations or as victims of domestic abuse.
