Unraveling the in-service distribution options

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In the dynamic landscape of retirement planning, the SECURE 2.0 Act has introduced new in-service distribution options, offering flexibility and potential advantages for both plan sponsors and participants. As we celebrate the one-year mark of these changes, it's crucial to unravel the details of these optional provisions and understand their implications.

It's essential to emphasize that these in-service distribution options are not mandatory for plan sponsors. They are voluntary choices. Three key commonalities define these options:

Taxable Distributions: Although distributions are taxable, they are exempt from the 10% premature distribution penalty.

No Mandatory Withholding: Unlike many distributions, there is no 20% mandatory withholding on the distribution amount. Participants, however, may request withholding.

Repayment Option: Recipients can repay the distribution amount back into their 401(k) account within three years.

Among the introduced in-service distribution options, let's explore each one individually:

Disaster Distributions:

Plan sponsors can now offer distributions of up to $22,000 for "affected employees" in federally declared disaster areas. These employees, having their principal residence in the disaster area and experiencing economic loss due to the disaster, qualify. Additionally, employees can elect to have the distribution taxed ratably over three years.

Terminal Illness:

Participants facing a terminal illness, certified by a physician with a prognosis of death within seven years, can access penalty-free distributions. It's crucial to note that a distributable event, such as termination of employment, must align with the terminal illness for this option to apply.

Emergency Distributions (Starting January 1, 2024):

A new provision allows one distribution per year of up to $1,000 for emergency purposes. Participants can self-certify their eligibility based on unforeseeable or immediate financial needs related to personal or family emergencies. Conditions for subsequent distributions include full repayment, equivalent contributions, or a three-year waiting period.

Distributions for Domestic Abuse Victims (Beginning in 2024):

Distributions may be available to domestic abuse victims, capped at $10,000 or 50% of the employee's vested account balance. Eligibility spans a one-year period from the date of becoming a victim, and participants can self-certify their eligibility.

Distributions of Emergency Savings (As of January 1, 2024): 

A 401(k) plan may now include emergency savings accounts for non-highly compensated employees. These accounts, funded with Roth after-tax contributions, have a capped balance of $2,500. Participants can take distributions up to this amount, with at least one per month not subject to administrative fees.

Distributions for Long-Term Care Premiums (Beginning December 29, 2025):

A forward-looking provision allows distributions for long-term care insurance premiums, with a maximum annual amount determined by specific factors. Participants must provide a premium statement for eligibility.

In conclusion, these in-service distribution options under SECURE 2.0 Act present valuable opportunities for plan sponsors and participants. While optional, they can enhance the flexibility and appeal of retirement plans, provided that sponsors and participants navigate the conditions and requirements carefully.

Contact your Marsh McLennan Agency retirement plan advisor to learn about SECURE 2.0 Act and how it affects your organization.