IRS Notice Defines Retirement Plan Tax Distribution Exceptions

The IRS in June issued guidance on exceptions to the additional tax plan participants are subject to when taking early permissible distributions for emergency personal expenses and when they are victims of domestic abuse.

The provisions covered by the IRS guidance were added by the SECURE 2.0 Act of 2022 and were effective January 1, 2024, according to an IRS press release.

The notice states that taxpayers are permitted to receive distributions from an eligible retirement plan to meet unforeseeable or immediate financial needs related to necessary personal or family emergency expenses. The emergency personal expense distribution is taxable as gross income but is not subject to the 10% additional tax.

The notice states that a plan participant can treat only one distribution per calendar year as an emergency personal expense distribution and that the distribution cannot exceed the lesser of $1,000 or the individual’s total nonforfeitable accrued benefit under the plan. The notice also states that when an emergency distribution is taken, “no amount of any subsequent distribution can be treated as an emergency personal expense distribution during the immediately following 3 calendar years with respect to that plan unless the previous emergency distribution is repaid to the plan or in certain other limited circumstances.”

The notice also sets out the parameters for retirement plans opting to offer emergency personal expense distributions.

The notice provides that taxpayers are permitted to receive distribution from an eligible retirement plan if made during the one-year period beginning on the date on which the individual is a victim of domestic abuse by a spouse or domestic partner, which are also included in gross income, but not subject to the 10% tax penalty.

The rule permits a victim of domestic abuse to receive a distribution of up to $10,000 indexed for inflation and requires that that the rules relating to repayment of domestic abuse victim distributions should follow the rules the rules for repayment of qualified birth or adoption distributions. It also established that “any distribution that the employee or participant certifies as a domestic abuse victim distribution shall be treated as meeting the distribution requirements.”

The notice defines domestic abuse victim distributions 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 and defines domestic abuse as “physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.” It also provides that IRAs and certain retirement plans that are not subject to the spousal consent requirements under Sections 401(a)(11) and 417 are eligible to permit domestic abuse victim distributions.

The notice also provides guidance to eligible retirement plans on the plan requirements relating to emergency personal expense distributions and domestic abuse victim distributions, including that it is optional for a plan to permit these types of distributions.