IRS Notice 2024-55 (June 20, 2024)
Available at https://www.irs.gov/pub/irs-drop/n-24-55.pdf
The IRS has released Notice 2024-55, which provides guidance on new exceptions for emergency personal expenses and for victims of domestic abuse to the additional 10% tax on early permissible retirement plan distributions. As background, the SECURE 2.0 Act (see our article) added an exception for “emergency personal expense distributions” (see our Question of the Week), 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. For example, a participant can use a distribution request form to certify eligibility for a domestic abuse victim distribution, and that the distribution is being made during the one-year period beginning on any date on which the individual is a domestic abuse victim.
- 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.
EBIA Comment: Although the Notice provides welcome guidance to 401(k) plan sponsors that want to offer the new distributions to participants, the rules are far from being finalized. The IRS continues to invite comments on all issues covered in the Notice, specifically including whether to create exceptions to the rule allowing plan administrators to rely on employee certifications and procedures for cases of employee misrepresentation. The guidance also indicates that more changes may be reflected in upcoming regulations under Code § 72(t) and invites general comments on distribution repayments. For more information, see EBIA’s 401(k) Plans manual at Sections XII.G (“Other Permissible Distribution Events”), XIV.C (“Direct Rollover Distributions”), and XIV.K (“10% Additional Tax on Early Distributions”).
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