SECURE 2.0 Provides Participants with a Domestic Abuse Withdrawal Option

SECURE Act of 2022 (SECURE 2.0) included a number of provisions designed to encourage workers to save more for retirement.  Although it may seem illogical, Congress attempted to do this by ensuring that those who do contribute have access to their accounts when they need it.  To that end, one of the SECURE 2.0 provisions created a new type of withdrawal for domestic abuse victims and made changes to several others.

While SECURE 2.0 includes many other changes that are “bigger ticket” items, withdrawal items are the ones that generate the most questions from participants.

Here’s a list of some of distribution provisions made available or changed by SECURE 2.0:

·         Penalty free distributions related to domestic abuse

·         Penalty free distributions of up to $1,000 for emergency expenses

·         Penalty free distributions for those with terminal illness

·         Distributions for Federally declared disasters

·         In-plan emergency savings accounts

·         Participant self-certification of hardship distribution requests

Before we get into the details on penalty free distributions, let’s make sure we’re all working from the same page with regards to early withdrawal penalties.  Generally speaking, a participant is subject to a 10% early withdrawal penalty (on top of regular income taxes) when they take a distribution (not rollovers) from their plan account prior to age 59 ½.  There are a few exceptions, but that’s the general rule.  SECURE 2.0 creates several new exceptions starting in 2024. 

One such exception applies to a Domestic Abuse Distribution.

A participant who is the victim of domestic abuse by a spouse or domestic partner can withdraw the lesser of $10,000 or 50% of their vested balance under the plan for up to one year following the abuse.  The $10,000 limit will be adjusted for cost-of-living indexed each year. Amounts withdrawn may be paid back into the plan within a three-year period, beginning on the day following the distribution. If the amount is repaid within that three-year period, the income tax paid upon distribution may be refunded on the repaid money.

Recognizing that this can be a delicate situation to navigate, SECURE 2.0 provides some guidance on what constitutes abuse, defining it as follows:

“…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.”

To align with some of the other withdrawal provisions available, plan sponsors are able to rely on participant self-certification.

Participants should keep in mind that these withdrawal provisions are primarily individual tax provisions.  Since the 10% early withdrawal penalty is usually factored in when a participant prepares their individual tax return for a given year, it will largely be up to them to claim the waiver come tax time.  However, companies that want to offer any of these as specific new plan distribution options will need to amend their plan documents to do so.  Those amendments are generally due by the end of 2025.  It is important to coordinate the adoption of this and any other new provisions with your plan’s record keeper and/or third-party administrator (TPA).

If you have any questions about SECURE 2.0, please contact a member from Team Enza.

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