Continuing our series on this year’s retirement plan regulatory updates, we now shift our focus to the Internal Revenue Service. If you missed our initial blog covering the Department of Labor, you can read it here.
Key Takeaway for Retirement Plan Sponsors
Recent IRS guidance clarified how SECURE 2.0's qualified long-term care distributions must be administered beginning in 2026. To qualify for penalty-free withdrawals used to pay long-term care insurance premiums, plans must obtain a participant-specific premium statement from the insurance provider, although sponsors may rely on the statement under an IRS safe harbor. The guidance also confirms these distributions are not treated as rollovers, eliminating rollover notice requirements and mandatory 20% withholding. However, the additional documentation requirements may make this provision less attractive than other SECURE 2.0 withdrawal options that allow participant self-certification. Separately, plan sponsors should prepare for important document compliance deadlines, including adoption of SECURE 2.0 amendments by December 31, 2026, and completion of Cycle 2 restatements for pre-approved 403(b) plans by the same date.
Full Internal Revenue Services Update
IRS Guidance for Qualified Long-term Care Distributions
One of the optional provisions in SECURE 2.0 provided for penalty-free distributions to pay for long-term care insurance premiums. First available in 2026, the provision would allow participants under age 59 ½ to make penalty-free withdrawals of the lesser of $2600, 10% of their vested benefit, or the cost of the premiums. While the 10% early withdrawal penalty is avoided, the distribution is still treated as taxable income.
This May, the IRS issued guidance clarifying the reporting requirements for plans offering the provision. For a distribution to be treated as qualified, the insurance provider must provide the plan with a premium statement specific to the covered employee. The statement should include the owner of the coverage, the issuer, and a description of the coverage being provided. The guidance includes a safe harbor, allowing the plan sponsor to rely on the statement’s accuracy. The guidance also clarifies that these distributions are not treated as rollovers, meaning they are not required to provide rollover notices and can avoid mandatory 20% withholding. The deadline for amendments for the provision has also been extended until Dec. 31, 2027.
Many of the other optional withdrawal provisions of SECURE 2.0 allow for participant self-certification. The added complexity and administration required to offer qualified long-term care distributions may be more than many plan sponsors will want to accept.
Plan Document Compliance
SECURE 2.0 Amendments
Amendments for SECURE 2.0 provisions must be adopted by most plans by Dec. 31, 2026. While many of the mandatory and optional provisions have been in effect, written amendments were not required until this year. Key provisions of the amendment include an increase in the required minimum distribution age, mandatory Roth provisions for individuals earning over $150,000, and eligibility for long-term/part-time employees. The amendment should also include any voluntary SECURE 2.0 provisions that the plan sponsor has adopted. While most plan sponsors must complete the amendment this year, governmental plans were granted an extended deadline to Dec. 31, 2029.
403(b) Cycle 2 Restatements
Employers using a pre-approved 403(b) plan document must comply with the Cycle 2 plan restatement requirement by Dec. 31, 2026. The IRS requires pre-approved 403(b) plan documents to be completely updated with a new document every few years. The purpose is to consolidate old rules, including interim changes, and add current IRS-approved language in one document. This is required even if your plan has not undergone any substantive plan design changes. Pre-approved plan documents are typically provided by the employer’s recordkeeper or third-party administrator, who will provide the IRS-approved document to meet this requirement.
