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The SECURE Act 2.0: New And Expanded Distribution Rules And Events

The Setting Every Community Up for Retirement Act 2.0 or the SECURE Act 2.0 brings a variety of new retirement plan requirements and options to plan sponsors. Among the SECURE Act 2.0 provisions are several new minimum distribution rules and distribution options. This article focuses on the new distribution options offered through the SECURE Act 2.0 that plan sponsors should consider offering to plan participants as the different options become available. The new distribution events generally apply to account based defined contribution plans, such as 401(k) plans. However, the new minimum required distribution age and cash-out rules apply to all qualified plans.

Increase Minimum Distribution Age. For participants who turn age 72 on or after January 1, 2023, the required minimum distribution age is increased to age 73. This means the latest required minimum distribution date is April 15 of the year following the year such individual turns age 73. This minimum distribution age for someone who turns age 73 in 2033 or later will have a required minimum distribution age of 75. To help visualize the minimum distribution ages, please see the following chart:

Birth Date

Minimum Distribution Age

Before July 1, 1949

Age 70 1/2

July 1, 1949 through December 31, 1950

Age 72

January 1, 1951 through December 31, 1959

Age 73

On and after January 1, 1960

Age 75

Also, effective January 1, 2024, Roth amounts held in a qualified plan are not subject to the minimum distribution rules. The penalty for failure to take a minimum distribution is reduced from a 50% to a 25% excise tax. The reduction in the excise tax is effective December 29, 2022. Finally, a spouse beneficiary, effective January 1, 2024, may elect to have the required minimum distribution payment treated as if it is being paid to the employee/participant.

Disaster Relief Withdrawals. Effective retroactively to February 25, 2021, up to $22,000 may be withdrawn from a company’s retirement plan for an individual whose principal residence at the time of a federally declared disaster is within the disaster area. Such payments are not subject to the 10% early withdrawal penalty and the taxation on the withdrawal may be spread over three years. Distributions may be repaid to a tax deferred account such as an IRA.

Withdrawals for Terminal Illness. Effective December 29, 2022, the date of enactment of the SECURE Act 2.0, a participant with a terminal illness may withdraw funds and will not be subject to the 10% early withdrawal penalty. The participant may repay the withdrawal within three years of the withdrawal. The participant must provide proof of the participant’s terminal illness.

Emergency Expenses. Effective January 1, 2024, a plan may allow participants to withdraw up to $1,000 per year for unforeseeable emergencies or financial needs. The withdrawal is not subject to the 10% early withdrawal penalty and participants may repay the withdrawal within three years. No new emergency withdrawals may be taken unless the participant repays the withdrawal.

Domestic Abuse. Also, effective January 1, 2024, a plan may allow for distributions up to $10,000 or 50% of the participant’s account balance in the event the participant is a victim of domestic abuse. The distribution must be taken within 12 months of the abuse. In such case, the 10% early withdrawal penalty will not apply. The withdrawal may be repaid by the participant over three years. A participant may self-certify with respect to the victimization of domestic abuse.

Cash Out Limit Increase. Currently, and since 1997, a plan can pay a lump sum cash-out to a participant or beneficiary without the participant or beneficiary’s consent if the participant’s account or benefit is less than $5,000. Effective January 1, 2024, the cash-out limit is increased to $7,000. This means beginning in 2024 terminated participants with account balances of less than $7,000 can be “cashed-out” without their consent.

Emergency Savings Accounts. Plans may provide non-highly compensated employees emergency savings accounts within the qualified plan. Employees can contribute up to $2,500 and no more than 3% of compensation to the emergency account. Contributions are treated as Roth contributions. Up to four withdrawals may be made without the imposition of fees. The emergency account option will be available on and after January 1, 2024.

Long-Term Care. Amounts may be withdrawn from a plan for the payment of long-term care premiums. Such withdrawals will not be subject to the 10% early withdrawal penalty. Withdrawals are limited to annual withdrawals not to exceed the lesser of (i) the amount paid by the employee for long-term care insurance; (ii) 10% of the participant’s vested account; or (iii) $2,500. Supporting documentation must be provided by the participant to the plan. The long-term care distribution provision does not take effect until December 29, 2025.

Other than minimum distribution requirements, the above distribution options are generally available but not required. Also, there are open questions relating to taxation and reporting for many of the distribution options and future guidance is expected. Furthermore, recordkeepers and payroll departments and providers are working to accommodate the new options. In the meantime, plan sponsors should consider their employees’ needs and whether adding some or all of the new options is desirable for their plans.

If you have any questions, please contact McGrath North’s Employee Benefits Group.