The EPED provision generally allows a participant to take a distribution of up to $1,000 on self-certification of an emergency need. The DAVD provision allows a self-certifying domestic abuse victim to take the lesser of $10,000 (indexed for inflation) or 50 percent of the participant’s nonforfeitable account balance. Both provisions are discretionary.

The IRS requests comments on all matters in the guidance by October 7, 2024.

Emergency distributions

SECURE 2.0 includes two emergency savings provisions. The first allows a 401(k) plan, and certain other DC plans, to create a pension-linked emergency savings account (PLESA) within the plan. Participants may maintain up to a $2,500 balance to be used and distributed, free of income tax and the 10 percent premature distribution additional tax, for emergencies. Both the IRS and the DOL have issued guidance on PLESAs, which we discussed in a January 18, 2024 insight and a February 7, 2024 insight, respectively.

The EPED, which is the provision discussed in the latest IRS notice, Notice 2024-55, is also aimed at providing participants with emergency access to their retirement funds. The EPED has a simpler administrative structure than the PLESA. A participant may self-certify to having an unforeseeable or immediate financial need relating to personal or family emergency expenses and receive a distribution from the account. The distribution would be subject to income tax but free from the additional premature distribution tax.

Whether the participant has such a need is a matter of facts and circumstances. Notice 2024-55 includes examples of relevant needs including an imminent foreclosure, funeral expenses and auto repairs.

As noted above, allowing for EPEDs is discretionary. A plan may operationally implement an EPED at any time. The actual amendment must be made by the delayed date for SECURE 2.0 amendments to be retroactive to a prior year. After the SECURE 2.0 amendment period expires, an amendment adding an EPED is treated like any other discretionary amendment to a plan.

All types of plans, other than a DB plan, may adopt an EPED provision. EPEDs are treated as not violating distribution restrictions.

A participant may take a distribution from an EPED once a year in an amount not to exceed $1,000. There is a lower limit if the participant’s total nonforfeitable account balance is below $2,000. The limit applies on an aggregate basis to all plans of the employer and its controlled group in which the participant participates. If a participant takes an EPED, they may not take another EPED for the following three years unless the EPED is paid back fully (within the three years) or they make aggregate elective and employee contributions in excess of the EPED. A plan must accept repayment of amounts distributed from that plan if such plan would accept rollover contributions.

If the plan chooses not to specifically allow EPEDs, a participant still may treat a distribution as an EPED if it meets all the requirements for the EPED, including being a distribution from a plan that could provide for EPEDs (i.e., it could not come from a DB plan). Also, because the plan chose not to create a special distributable event, the distribution must be taken based on another distribution option.

Domestic abuse victim distributions

The DAVD provision is similar to the EPED provision. The domestic abuse victim self certifies to meeting the standards. Whether a plan includes a DAVD provision is discretionary. and the amendment rules echo the rules for the EPED provision. A permissible DAVD is subject to income tax but exempt from the 10 percent addition tax on early distributions.

The maximum DAVD is the lesser of $10,000 or 50 percent of the nonforfeitable account balance. The $10,000 is adjusted by a cost-of-living index. A participant may not take multiple DAVDs. The three-year repayment rule discussed for EPEDs applies here also as does the ability to treat an otherwise permissible distribution as a DAVD even if the plan does not provide for DAVD distributions per se. 

DAVDs are treated as being permissible distributions despite the in-service distribution restrictions of 401(k), 403(b) and governmental 457(b) plans. If the plan does not allow for a special DAVD, a participant still may treat an otherwise eligible distribution as a DAVD on the participant’s tax return.

DB and other plans for which the spousal consent rules apply (i.e., all money-purchase plans and profit-sharing plans that do not pay the full account balance to the spouse on death) may not allow DAVDs, and otherwise permissible distributions from those plans are not eligible for the 10 percent additional tax exception even if the participant had been abused.

The Notice 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 by means of abuse of the victim’s child or another family member living in the household.

Request for comments

The IRS specifically asks for comments on whether there should be exceptions for self-certification, and how to deal with employee misrepresentation. The IRS also requests comments on repayments, noting that the three-year repayment provision also applies for purposes of birth-and-adoption distributions and terminal-illness distributions. Specifically, it asks whether an administrator should be able to rely on the participant’s self-certification that the repayment is within the three-year limit. Comments are to be submitted on or before October 7, 2024.

Observations

SECURE 2.0 included the PLESA and the EPED as two different ways of addressing the concern that some participants would not make contributions to 401(k) and similar plans because those participants were worried about needing the money for an emergency. From the sponsor’s viewpoint, there was an interest in encouraging lower-income employees to participate both to generate a retirement income and to help the plan pass nondiscrimination testing. Sponsors will have to look at their own participants and contribution history to determine whether they want to include an emergency provision.

The DAVD was included because of concern about domestic abuse victims having money restrictions that prevented them from leaving the abuser. For example, in plans like 401(k) plans, absent separation from service, certain contributions, such as elective deferrals, are not available unless the participant is age 59½. By making such distributions available despite normal distribution restrictions, abuse victims have more flexibility.

Most recordkeepers now have these options available for adoption.