Among the many changes in the SECURE 2.0 legislation are a number of provisions allowing participants to access their retirement funds without incurring a penalty excise tax. These provisions are discussed below.
Withdrawals for Terminal Illness or Domestic Abuse. Effective on the date of enactment (December 29, 2022), SECURE 2.0 authorizes a plan to permit a participant diagnosed with a terminal illness to withdraw money from his or her retirement account regardless of age. The distribution will not cause the Participant to incur the 10% excise tax for withdrawals prior to age 59 1/2. However, it is still income.
Likewise, beginning in 2024, a plan can permit a domestic abuse survivor to withdraw the lesser of $10,000 or 50% of the participant’s account. While taxable income, the distribution is not subject to the 10% early withdrawal penalty. The Participant can self-certify that he or she has experienced domestic abuse. The general idea is that the participant may need the money to escape an unsafe situation. However, no reason for needing the money needs to be stated.
Additionally, the participant can repay the withdrawn amounts over a 3-year period. The repayments may be made to a different plan or an IRA and are treated as roll over contributions which allows for a refund of the income taxes paid on the withdrawn amount once they are repaid.
Qualified Disaster Recovery Distributions. Similarly, effective for disasters occurring on or after January 26, 2021, plans can allow withdrawals of up to $22,000 for participants living in a federally declared disaster area that have sustained an economic loss due to the disaster. This is a permanent rule for any federally declared disaster as opposed to prior rules on a case by case basis. Unlike the terminal illness or domestic abuse withdrawals, these can be taken into income over a three-year period. They too escape the early withdrawal excise tax and can be repaid as rollovers to a plan or IRA over a three-year period. The distributions must be made within 179 days after the later of (i) the first day of the disaster incident period or (ii) the date of the disaster declaration. For federal disasters occurring on or after Jan. 26, 2021, and before enactment of SECURE 2.0 (Dec. 29, 2022), eligible individuals can take a qualified disaster recovery distribution until June 27, 2023, if that date is later.
Additionally, during the applicable period for taking a disaster distribution, plans can allow participant loans to affected employees of the lesser of $100,000 or the present value of the benefit. This is twice the amount of a normal participant loan.
Also, loan payments that fall due during the applicable period for a disaster distribution may be suspended for a year and remaining payments adjusted. Finally, a participant who took a hardship distribution from the plan to purchase or construct a home within 180 days of the disaster, that will not be so used due to the disaster, may recontribute that distribution back to the plan.
$1,000 Emergency Withdrawals. Also beginning in 2024, a plan can permit a penalty-free withdrawal of up to $1,000 by a Participant for certain emergency expenses. Only one such emergency withdrawal can be made each year. The emergency expenses must be unforeseeable or an immediate financial need relating to personal or family emergencies.
The Participant can repay the distribution within 3 years.
Emergency Savings Accounts. Effective on the date of enactment (December 29, 2022) employers maintaining individual account plans may provide for a separate emergency savings account under the plan for nonhighly compensated employees. Contributions to such accounts must be on an after-tax Roth basis and cannot exceed $2,500 annually. Once the annual limit is reached, the contributions must stop or be re-directed to the Participants other Roth account under the plan. The employer can auto-enroll its nonhighly compensated employees at no more than 3% of salary.
Such emergency account contributions are considered elective deferrals subject to matching if the plan provides for matching contributions. At separation from service the account balance may be rolled over to any Roth account in a defined contribution plan or Roth-IRA.
Conclusion. SECURE 2.0 authorizes many ways a plan can allow participants access to their retirement savings for other reasons. The repayment features are meant to avoid retirement savings leakage that could otherwise occur if the amounts could not be repaid to the plan. It remains to be seen if amounts that can be repaid are repaid in practice. Of course, these provisions are all optional, making the decision whether to include them in the discretion of the sponsoring employer as a matter of plan design.