The Internal Revenue Service (IRS) has recently provided new guidance on exceptions from the 10% tax penalty for early retirement plan distributions. These exceptions are related to emergency personal or family expenses and for victims of domestic abuse. The provisions, which were added by the SECURE 2.0 Act of 2022, are effective January 1, 2024.
They allow plan participants to take early permissible distributions for emergency personal expenses and in cases of domestic abuse. According to the IRS notice, taxpayers can receive distributions from an eligible retirement plan to meet unforeseeable or immediate financial needs related to necessary personal or family emergency expenses. While these emergency personal expense distributions are taxable as gross income, they are exempt from the 10% additional tax.
However, only one distribution per calendar year can be treated as an emergency personal expense. The distribution amount cannot exceed the lesser of $1,000 or the individual’s total nonforfeitable accrued benefit under the plan. If an emergency distribution is taken, no subsequent distribution can be treated as an emergency personal expense distribution during the immediately following three calendar years.
This applies unless the previous distribution is repaid or in certain other limited circumstances.
New retirement plan exceptions explained
For victims of domestic abuse, the IRS notice permits distributions of up to $10,000, indexed for inflation, from an eligible retirement plan.
These distributions can be made during the one-year period beginning on the date the individual becomes a victim of domestic abuse by a spouse or domestic partner. These distributions are also included in gross income but are exempt from the 10% tax penalty. The rules for repayment of domestic abuse victim distributions are aligned with those for repayment of qualified birth or adoption distributions.
A distribution can be classified as a domestic abuse victim distribution if the employee or participant certifies it as such. Domestic abuse is broadly defined in the notice to include physical, psychological, sexual, emotional, or economic abuse, among other forms. IRAs and certain retirement plans not subject to spousal consent requirements under Sections 401(a)(11) and 417 are eligible to permit these distributions.
The IRS guidance emphasizes that offering emergency personal expense distributions and domestic abuse victim distributions is optional for retirement plans. This latest guidance helps clarify the SECURE 2.0 Act provisions. It offers much-needed flexibility for individuals facing unforeseen financial emergencies or domestic abuse situations.
