SECURE 2.0 includes many optional provisions for plan sponsors to consider that will allow participants to make penalty-free withdrawals from their retirement savings. The withdrawals are still taxable to the participant but will enable them to avoid the 10% early withdrawal penalty. Optional provisions apply to different life circumstances that a participant may experience, such as birth or adoption of a child, declared federal disasters, victims of domestic violence, terminal illness, and other emergencies. The amount available differs depending on the provision currently being utilized to allow the withdrawal.
Plan sponsors have asked whether they should add these optional withdrawal provisions to their plans. If you are similar to me, you are not fond of opening retirement savings broadly for withdrawals during life events other than retirement. These withdrawals that are not repaid can have significant long-term impacts on an individual’s retirement nest egg. Additionally, withdrawal need is self-certified by the participant, therefore increasing the potential for abuse. As a result, we recommend that clients carefully consider the need for these options versus the long-term impact on retirement savings and the ability of participants to retire.
The IRS recently released Notice 2024-55 that focuses on these two optional provisions: emergency withdrawals and victims of domestic violence. The Notice follows a Q&A format and provides clarification that may help plan sponsors review their options. It also covers situations where a participant can avoid the 10% early withdrawal penalty even if the plan sponsor has not adopted the provision. Suppose a participant has a distributable event (i.e., terminated employee, in-service withdrawal provision) and makes a withdrawal. In that case, they can report the distribution using one of the penalty-free exceptions when completing their individual tax return. This provides some access to penalty-free withdrawals without having to open the option for all participants. While the notice solely covered the two provisions, I expect similar guidance for the remaining optional provisions. Plan sponsors should be aware of this when working with participants, especially terminated participants.
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