The Internal Revenue Service issued guidance in Notice 2024-55 on applying exceptions to the 10% excise tax under Internal Revenue Code (IRC) Section 72(t) for emergency personal expense distributions and domestic abuse victim distributions.
Internal Revenue Code (IRC) Section 72(t)(1) usually imposes an additional 10% early-withdrawal tax on a distribution from a qualified retirement plan, unless the distribution qualifies for one of the exceptions listed in IRC Section 72(t)(2).
IRC Section 72(t)(2) provides several exceptions to the 10% additional tax, including exceptions for distributions such as attainment of age 59 ½, disability, and early retirement or death.
SECURE 2.0 Act amended IRC Section 72(t) by adding exceptions to the 10% additional tax.
IRC Section 72(t)(2)(I) provides a new exception to the 10% additional tax for a distribution from a qualified plan to an individual for emergency personal expenses.
Emergency personal expense distributions are subject to three limitations:
1. not more than one distribution per calendar year may be treated as an emergency personal expense distribution by any individual;
2. an individual may treat a distribution as an emergency personal expense distribution in any calendar year up to a maximum of $1,000; and
3. rules that limit taking subsequent emergency personal expense distributions.
The amendment to IRC Section 72(t)(2) applies to emergency personal expense distributions made after Dec. 31, 2023. In determining whether a participant is eligible for an emergency personal expense distribution, an administrator of an applicable retirement plan may rely on a participant’s written certification that he or she is eligible for such a distribution, just like they can do with a hardship. If a participant treats the distribution as an emergency personal expense distribution in any calendar year, no amount of any subsequent distribution can be treated as an emergency personal expense distribution during the next three calendar years unless (1) the previous emergency personal expense distribution is fully repaid, or (2) the aggregate of the individual’s elective deferrals and employee contributions to the plan after the previous emergency personal expense distribution is at least equal to the amount of the previous emergency personal expense distribution that has not been repaid.
Under Notice 2024-55, an applicable eligible retirement plan must accept the repayment of an emergency personal expense distribution from an individual if the plan permits emergency personal expense distributions.
IRC Section 72(t)(2)(K) provides a new exception to the 10% additional tax for an eligible distribution to a domestic abuse victim. A domestic abuse victim distribution is includible in gross income but is not subject to the 10% additional tax. Under IRC Section 72(t)(2)(K)(ii), an individual may receive a distribution from an applicable eligible retirement plan of up to $10,000 (indexed for inflation) without the 10% additional tax being applied if the distribution qualifies as a domestic abuse victim distribution.
A “domestic abuse victim distribution” is defined as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1 year beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. The IRS states that an individual may, at any time during the 3 years beginning on the day after the date on which the distribution was received, repay any portion of a domestic abuse victim distribution (up to the entire amount of the domestic abuse victim distribution) to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.
Any distribution that an employee or participant certifies as a domestic abuse victim distribution will be treated as meeting the distribution restriction requirements.
