New guidance on exceptions to early retirement plan distributions

The IRS recently released Notice 2024-55 to provide FAQ guidance, on the emergency personal expense and domestic abuse victim distribution exceptions from the additional 10% tax on early distributions from tax-favored retirement plans, such as 401(k) plans and IRAs.

Section 72(t) provides numerous exceptions to the 10% additional tax on early distributions, including distributions made on or after an employee attains the age of 59-1/2 or made to a beneficiary or estate on or after the death of an employee. The SECURE 2.0 Act, passed in 2022, amended Section 72(t) to add the emergency personal expense and domestic abuse victim distribution exceptions.

Notice 2024-25 clarifies that an applicable eligible retirement plan is not required to provide the emergency personal expense and domestic abuse victim distribution exceptions and provides plan requirements in the event a plan permits these types of distributions.

The notice defines an “emergency personal expense distribution” as any distribution from an applicable eligible retirement plan, other than a defined benefit plan, to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. This exception must not exceed $1,000 and is limited to one such distribution per calendar year.

The notice also provides a definition of “domestic abuse,” which includes forms of abuse such as physical, psychological, sexual, emotional, or economic abuse, and other efforts to control or intimidate the victim or victim’s child. A domestic abuse victim may receive a distribution from an applicable eligible retirement plan of up to $10,000 (indexed for inflation) if it is made within one year of the date on which the individual is a victim of domestic abuse by a spouse or domestic partner.

The notice explains further that the IRS expects to issue regulations on the 10% additional tax, which will include rules on the exceptions, and invites comments to be submitted in writing on or before Oct. 7, 2024.