This article is the fifth in the series addressing the 81 pages of guidance on the legislation known as SECURE 2.0 (the Act) enacted on December 29, 2022, issued by the IRS on December 20, 2023 as Notice 2024-02 (Notice). The first article addressed the extension of the deadline for written amendments and de minimis financial incentives to enroll in a 401(k) or 403(b) plan. See Notice 2024-02 Extends Deadline For SECURE 2.0 Amendments And Provides Other Guidance. The second article discussed Roth employer nonelective and matching contributions. See Guidance on Roth Nonelective or Matching Contributions in IRS Notice 2024-02. The third article addressed guidance on the Act’s requirement that new 401(k) and 403(b) plans after December 31, 2024 must provide for automatic enrollment. See New Plan Automatic Enrollment Guidance Under IRS Notice 2024-02. The last article addressed guidance under the Notice for the Act’s safe harbor for self-correcting reasonable administrative errors in administering automatic enrollment and automatic escalation features in 401(k), 403(b) and other plans with such features. See When Automatic Isn’t Automatic: Notice 2024-02 Guidance on Self-Correcting Auto-Enrollment And Auto-Escalation Failures. This article discusses guidance on the Act’s allowing penalty-free distributions to terminally ill participants.

Distributions to the Terminally Ill.

The Act provides that after the date of enactment (December 29, 2022), a qualified retirement plan may provide that an employee under the age of 59 1/2 that has been certified by a physician as being terminally ill can receive a distribution (Terminally Ill Distribution) from the plan and such distribution is not subject to the 10% additional penalty tax for early withdrawals. The distribution is still taxable income. The Notice clarifies that the types of plans that can provide for Terminally Ill Distributions are both defined contribution and defined benefit qualified plans under Code section 401(a), annuity plans under both 403(a) and 403(b), and IRAs. It also points out that eligible deferred compensation plans under Code section 457(b) sponsored by state or local governments are not eligible to provide Terminally Ill Distributions because they are not considered qualified retirement plans. While not stated in the Notice, 457(b) plans sponsored by tax exempt organizations are not considered qualified retirement plans either.

Physician Certification Required. To be eligible for a Terminally Ill Distribution, an individual must be certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of certification. The physician generally must be a doctor of medicine or osteopathy legally authorized to practice medicine and surgery by the State in which the doctor performs such function. This definition is in keeping with the definition under the Social Security Act. The certification must contain the following information:

  1. A statement that the illness or condition can reasonably be expected to result in death in 84 months or less from the date of certification;
  2. A narrative description of the evidence used to support the above statement;
  3. The name and contact information of the certifying physician;
  4. The date the physician examined the individual or reviewed the evidence provided by the individual; and
  5. A signed and dated attestation from the physician that by signing the statement, the physician confirms that the physician composed the narrative description based on an examination of the individual or review of the evidence provided by the individual.

The employee must provide the certification to the Plan Administrator before receiving the Terminally Ill Distribution. However, the employee need not provide the Plan Administrator with the underlying documentation on which the certification is based. The Notice points out that a Plan Administrator may not rely on a self-certification that the employee is terminally ill even if the employee is a physician.

Terminally Ill Distribution Is Optional But In-Service Distribution Required. The Notice makes clear that whether to permit Terminally Ill Distributions is voluntary in the discretion of the employer. However, the Terminally Ill Distribution provision of the Act is an exception to the 10 percent additional tax, not the distribution restriction requirements of 401(k) or 403(b) plans. For such a plan to allow Terminally Ill Distributions, it must first permit in-service distributions or hardship distributions. If a plan does not permit Terminally Ill Distributions and an employee otherwise receives a permissible in-service distribution, the employee may treat the distribution as a Terminally Ill Distribution on their federal income tax return using Form 5329. In this case, the employee must still obtain the physician’s certification prior to the distribution and retain it with their tax files in case the IRS requests it later. The Notice provides an example where the employee receives a hardship distribution after obtaining the physician certification and avoids the 10% penalty tax by filing Form 5329.

Ability to Pay Back. Similar to qualified birth or adoption distributions, any or all of the Terminally Ill Distribution amount may be re-contributed by the employee. It can be re-contributed to the same plan or another qualified retirement plan in which the employee is a beneficiary and to which rollovers may be made, including an IRA. In the case of a situation where the distributing plan did not permit Terminally Ill Distributions, but the employee treated an allowed distribution as such, the employee can recontribute to an IRA. This means Terminally Ill Distributions may be recontributed at any time during the 3-year period beginning on the date of the distribution the same as qualified birth or adoption distributions.


It remains to be seen whether employer’s will adopt provisions allowing Terminally Ill Distributions. They have until the deadline for amendments required by SECURE 2.0 to adopt written amendments. See Notice 2024-02 Extends Deadline For SECURE 2.0 Amendments And Provides Other Guidance. However, given that terminally ill employees participating in 401(k) and 403(b) plans that already permit in-service or financial hardship distributions can treat such a distribution as a Terminally Ill Distribution on their income tax return, employers may not want to amend such plans and have the increased burden of administering requests for such distributions.