Exceptions to penalty on early retirement plan distributions outlined

The IRS issued guidance on exceptions to the Sec. 72(t)(1) additional 10% tax on early distributions from retirement plans for emergency personal expense distributions and for domestic abuse victim distributions, which were added by the SECURE 2.0 Act (Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328).

The provisions of the act became effective Jan. 1. However, Notice 2024-55, issued Thursday, notes it is optional for a plan to permit emergency personal expense distributions and domestic abuse victim distributions.

The distributions are includible in gross income but are not subject to the Sec. 72(t)(1) 10% additional tax that is imposed if a distribution does not qualify for one of the exceptions listed in Sec. 72(t)(2).

Emergency personal expense distributions

A taxpayer may receive a distribution from an applicable eligible retirement plan to meet unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The notice:

• Defines emergency personal expense distributions, including what is an unforeseeable or immediate financial need.
• Provides that qualified defined contribution plans (including Sec. 401(k) plans), Sec. 403(a) annuity plans, Sec. 403(b) plans, governmental Sec. 457(b) plans, or IRAs are eligible to permit emergency personal expense distributions.

Distributions to domestic abuse victims

A taxpayer may receive a distribution from an applicable 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. The notice:

• Defines domestic abuse victim distributions, including the definition of domestic abuse.
• Provides that IRAs and certain retirement plans not subject to the spousal consent requirements under Secs. 401(a)(11) and 417 are eligible to permit domestic abuse victim distributions.

For both situations, the guidance describes the dollar limitation (indexed for inflation) on receiving distributions and provides that a taxpayer may repay the distributions to certain plans.

The notice also provides guidance to applicable eligible retirement plans on requirements for the two types of distributions.

The notice said that Treasury and the IRS anticipate issuing regulations on the 10% additional tax (including the exceptions to the 10% additional tax) and request comments on the notice by Oct. 7. Comments are specifically requested on repayments of certain distributions permitted under Sec. 72(t)(2).

Individuals report early distributions that are not subject to the 10% additional tax on line 2 of Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

In tax year 2021, the latest year for which the IRS has statistics, about 608,000 individuals reported that early distributions from qualified plans (including IRAs) were not subject to the 10% additional tax, the IRS said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.