SECURE 2.0 Can Assist with Long-Term Care Insurance
By Mike Rahn, CISP
The number of life events that permit special distributions from retirement plans, and give an exemption from the 10 percent early distribution penalty tax, has grown significantly in recent years. Most recent are multiple new events added by, and defined in, the SECURE 2.0 Act of 2022.
One of these events is the payment of long-term care insurance premiums. Long-term care insurance is purchased by individuals who anticipate future expenses for long-term care, either home-based, or provided in a licensed nursing facility. As the U.S. population ages, the probability that such care may be needed is increasing, as is its cost.
Insurance, including insurance of this type, is generally less expensive when purchased at younger ages. Lawmakers in Congress recognized that some may lack the financial resources outside of their retirement plans to cover such insurance premium expenses. Because statutory and regulatory restrictions can limit access to retirement plan assets at younger ages, this SECURE 2.0 provision appears to be intended to ease that access problem.
To What Plans Does This Option Apply?
Congress has made this option available for distributions made after December 29, 2025. It appears to be limited to salary deferrals and employer contributions in defined contribution plans, including those governed by Internal Revenue Code Section 401(a)—e.g., profit sharing/401(k), money purchase, target benefit, ESOP—as well as 403(a), 403(b), and governmental 457(b) plans. There is some industry sentiment that this SECURE 2.0 provision may apply to IRAs, providing an exemption for those who would otherwise be subject to the 10 percent early distribution penalty tax. Additional IRS guidance may clarify this.
What Benefit Must be Provided?
An insurance contract that is intended to be used for a qualified long-term care distribution must be a “qualified long-term care insurance contract” (as defined in IRC Sec. 7702B(b)) covering qualified long-term care services (as defined in IRC Sec. 7702B(c)). In simpler terms, such long-term care contracts must provide “meaningful financial assistance in the event the insured needs home-based or nursing home care.”
Furthermore, such financial assistance will not be considered “meaningful” unless the promised financial benefit is adjusted for inflation, and consumer protections are provided, including protection in the event such coverage is terminated.
Who can be Covered?
A qualified long-term care insurance contract may cover the participant who has requested the retirement plan distribution, as well as the participant’s spouse—if filing a joint tax return—and other family members as permitted under Treasury regulations (regulations for this provision of SECURE 2.0 have not yet been proposed).
How Much Is Available?
The amount eligible to be distributed in any taxable year from an eligible retirement plan for long-term care insurance premiums—defined as a “qualified long-term care distribution”—may not exceed the lesser of
10 percent of the participant’s vested balance,
the amount paid by or assessed to the participant under such an insurance benefit program of the employer, or
$2,500 (indexed in $100 increments).
A qualified long-term care distribution is not treated as an eligible rollover distribution (ERD), and therefore is not subject to 20 percent mandatory withholding.
Can Such Distributions be Repaid?
Unlike certain special-purpose distributions from employer plans—such as during the COVID-19 pandemic, under the CARES Act—a qualified long-term care distribution is not eligible to be recontributed to any retirement plan.
Is This Mandatory for Retirement Plans?
SECURE 2.0 statutory language states that “A trust forming part of a defined contribution plan shall not be treated as failing to constitute a qualified trust under this section solely by reason of allowing qualified long-term care distributions.” This phrasing implies that an employer plan is not required to offer this as a distribution option.
Is the Penalty Exception Available Independently?
The SECURE 2.0 statutory language does not address whether a participant in a retirement plan that does not offer this option—but who is, nevertheless, eligible for a distribution—can avail himself of the statute’s exemption from the 10 percent early distribution penalty tax if he is subject to it. The fact that there is a required filing by an insurer of a “long term care premium statement” with any retirement plan offering the option—as well as the Treasury Department—suggests that such an independent exemption either may not be available, or perhaps was not considered by Congress. Perhaps more guidance will clarify this.
Is Special Documentation Required?
If this option is offered by an eligible retirement plan and a participant wishes to implement it, the insuring entity—the “issuer”—is required to file with the employer plan a “long term care premium statement.” This statement must include the following:
(I) the name and taxpayer identification number of such issuer,
(II) a statement that the coverage is certified long-term care insurance,
(III) identification of the employee as the owner of such coverage,
(IV) identification of the individual covered and such individual's relationship to the employee,
(V) the premiums owed for the coverage for the calendar year, and
(VI) such other information as the Secretary may require.
Filing with the Secretary of the Treasury
In addition to providing the above information to the employer plan, an entity providing such long-term care insurance must file with the Secretary of the Treasury a disclosure for the specific coverage product to which the above-described statement relates. It must identify the issuer, the type of insurance coverage, and any other information included in the insurer’s state regulatory filing for that product that the Secretary may require.
Will This be Popular?
It remains to be seen whether this provision of the SECURE 2.0 Act will be used to a significant degree by plans and retirement plan participants. Implementing it will clearly add another element of plan administration responsibility.
Good Faith Compliance, for Now
As for amending, it appears that this SECURE 2.0 provision can be implemented now and administered in a good faith manner, with formal amending for the provision taking place when the overall SECURE 2.0 amendment is due, by December 31, 2026.
