The IRS has released Notice 2024-55, which provides guidance on new exceptions for emergency personal expenses and for victims of domestic abuse from the 10% penalty for an early distribution. As background, the SECURE 2.0 Act added an exception for “emergency personal expense distributions”, defined as a distribution from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. In addition, the SECURE 2.0 Act added an exception for “domestic abuse victim distributions,” defined as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the one-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. Both exceptions are effective January 1, 2024.
Key points in the guidance that are of interest to 401(k) plan sponsors and administrators include—
- The new distributions are optional, and plan amendments allowing them are treated as discretionary amendments.
- 401(k) plan administrators may rely on participants’ written certifications that they are eligible for the new distributions.
- These distributions are deemed to meet the 401(k) plan distribution restriction. 401(k) plan sponsors can allow amounts attributable to elective, qualified nonelective, qualified matching, or safe harbor contributions to be included in both types of distributions.
- Because these distributions are not treated as eligible rollover distributions, direct rollovers need not be offered, Code § 402(f) notices need not be provided, and no 20% mandatory income tax withholding is required from these distributions.
- Participants can only request one emergency personal expense distribution per calendar year, with a limit equal to the lesser of (1) $1,000 or (2) the excess of their vested account balance over $1,000. Participants taking an emergency personal expense distribution cannot take another such distribution from the same plan for the next three calendar years unless the previous distribution is fully repaid or their subsequent contributions to the plan equal or exceed the unpaid amount.
- The term “domestic abuse” encompasses physical, psychological, sexual, emotional, or economic abuse, and includes actions that aim to control, isolate, humiliate, or intimidate the victim, as well as efforts to undermine the victim’s ability to reason independently. It includes abuse of the victim’s child or another family member living in the household. Domestic abuse victims can withdraw up to the lesser of (1) $10,000 (as indexed for inflation) or (2) 50% of their vested plan balance.
- All or a portion of either type of distribution can be repaid to a 401(k) plan within three years from receipt. 401(k) plans must accept repayment from participants who are eligible to make a rollover contribution to the plan at the time of repayment.
The guidance is provided in a question-and-answer format such as:
Personal Expense Distributions
Q.A-1: What is an emergency personal expense distribution?
A-1: An emergency personal expense distribution is a distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. An emergency personal expense distribution is includible in gross income, but it is not subject to the 10 percent additional tax under section 72(t)(1).
Q.A-2: How does an individual determine whether an expense is an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses?
A-2: Whether an individual has an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses is determined by the 5 relevant facts and circumstances for each individual. Factors to be considered include, but are not limited to, whether the individual (or a family member of the individual) has expenses relating to --
- medical care (including the cost of medicine or treatment that would be deductible under section 213(d), determined without regard to the limitations in section 213(a)),
- 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 personal expenses.
For purposes of determining whether an individual has an unforeseeable or immediate financial need, the administrator may rely on an employee’s written certification that the employee is eligible for an emergency personal expense distribution. See Q&A A-9 of this notice.
See IRS Notice 2024-55 for the complete guidance.
