The Internal Revenue Service (IRS) recently issued Notice 2024-55, which concerns exceptions to the 10% additional tax under section 72(t) of the Internal Revenue Code (the Code). These exceptions include emergency personal expenses and domestic abuse victim distributions from qualified retirement plans.
Section 72(t)(1) imposes an additional 10% tax on a distribution from qualified retirement plans unless the distribution qualifies for an exception under section 72(t)(2). Qualified retirement plans include tax-exempt trusts under section 501(a), annuity plans under section 403(a), annuity contracts under section 403(b), individual retirement accounts (IRAs) under section 408(a) or individual retirement annuities under section 408(b).
Section 72(t)(2) excludes the extra 10% tax. Some exceptions include distributions made after the employee is 59 ½ years old or older or made to a beneficiary after the employee's death. On December 29, 2022, the SECURE 2.0 Act of 2022 was enacted. Sections 115 and 314 of the SECURE 2.0 Act amended section 72(t)(2) to add other exceptions to the 10% additional tax rule.
SECURE 2.0 Act, Section 115 – Emergency Personal Expense Distributions
Section 115 of the SECURE 2.0 Act added Code section 72(t)(2)(l), which is a new exception to the 10% additional tax for emergency personal expense distributions. This section defines "emergency personal expense distribution" as "any distribution made from an applicable eligible retirement plan to an individual to meet unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses." Emergency personal expense distributions are subject to three limitations, as follows:
- Employees are entitled to only one emergency personal expense distribution for this section during each calendar year.
- The maximum emergency personal expense distribution per calendar year is $1,000, which is not indexed for inflation.
- Additional rules limit employees who take subsequent emergency personal expense distributions.
The administrator of an eligible plan may rely on a written certification that the employee satisfies the conditions for an emergency personal expense distribution, which is includible in the employee's gross income but not subject to the 10% additional tax.
The rules for emergency personal expense distributions mirror the special rules for qualified birth and adoption distributions in some respects. For instance, employees may repay emergency personal expense distributions at any point during the three-year period that begins the day after receiving the distributions to an eligible retirement plan. Additionally, emergency personal expense distributions are not eligible for rollover distributions for certain Code sections and meet the specific distribution requirements of other Code sections.
SECURE 2.0 Act, Section 314 – Domestic Abuse Victim Distributions
Section 314 of the SECURE 2.0 Act added section 72(t)(2)(K), which is another new exception to the 10% additional tax for eligible distributions to domestic abuse victims. A "domestic abuse victim distribution" is any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the one year beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner." This Code section further 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 using abuse of the victim's child or another family member living in the household." The employee must certify in writing that the requested distribution meets these definitions to qualify as a domestic abuse victim distribution.
Under section 72(t)(2)(K)(ii), employees can take a domestic abuse victim distribution from an applicable eligible retirement plan of up to the lesser of $10,000 or 50 percent of the present value of the nonforfeitable accrued benefit (vested accrued benefit) of the employee under the plan, indexed for inflation. The distribution is included in the employee's gross income but is exempt from 10% additional tax.
Again, the rules regarding domestic abuse victim distributions concerning repayment, eligible rollover distribution requirements, and other distribution requirements of certain Code sections are identical to the special rules for qualified birth and adoption distributions and emergency personal expense distributions.
The Treasury Department and the IRS will be taking comments on the content of Notice 2024-55 until on or before October 7, 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.