IRS Clarifies Exceptions to Penalties for Early Withdrawal from Retirement Plans

July 02, 2024

On June 20, 2024, the IRS issued Notice 2024-55, which provides guidance on two exceptions to the 10% tax under Code section 72(t)(2) on early retirement plan distributions that were included in the SECURE 2.0 Act. The two exceptions are for emergency personal expense distributions and domestic abuse victim distributions. 

The Code defines an emergency personal expense distribution as any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. 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 one-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. 

Notice 2024-55 provides additional guidance on the application of these two exceptions to the 10% tax, including: 

• The administrator may rely on an employee’s written certification that the employee is eligible for these distributions.
• The distribution for an emergency personal expense is limited to the lesser of $1000 or the individual’s total nonforfeitable accrued benefit over $1000 per calendar year, and the aggregate distribution for a domestic abuse victim is limited to the lesser of $10,000 (indexed for inflation) or 50% of the vested balance.
• An individual may, at any time during the three-year period beginning on the day after the date on which the distribution was received, repay all or any portion of an emergency personal expense or domestic abuse victim distribution.
• It is optional for an applicable eligible retirement plan to permit emergency personal expense distributions and domestic abuse victim distributions. 

The IRS indicates that they intend to issue regulations under the tax exception section of the Code and invite comments in the meantime, so these will likely not be the final say on these exceptions. If a plan sponsor wants to include these exceptions to the 10% tax on early distributions in its plan, it should discuss the process with its plan service providers and amend the plan accordingly. 

Notice 2024-55: Certain Exceptions to the 10% Additional Tax Under Code Section 72(t)