What is the SECURE 2.0 Long-Term Care Provision?
By Mike Rahn, CISP
The trend in recent retirement plan legislation has been toward robust, many-faceted packages, rather than incremental change. This was true of both 2019 and 2022 versions of legislation entitled Setting Every Community Up for Retirement Enhancement, better known by the acronym SECURE.
The 2022 version, dubbed SECURE 2.0, contains a provision intended to encourage and enhance the ability of individuals to purchase long-term care (LTC) insurance. Rising costs for both in-home and residential personal care for older Americans have made this a growing priority for savers.
Most defined contribution retirement plans may choose to adopt this provision. If adopted, a distribution that would otherwise be subject to the 10 percent early distribution penalty tax will be exempt if used to pay premiums for qualifying LTC insurance.
NOTE: This penalty tax exception does not apply to IRA distributions.
Of additional significance to plan sponsors that adopt this feature, such distributions are permissible even when a participant might not otherwise qualify for a distribution.
As originally proposed, LTC distributions were intended to also be tax-free. However, in the process of negotiations to make the SECURE 2.0 legislation revenue-neutral, this tax-free feature was stricken from the bill. In July of this year the IRS issued Notice 2026-33, guidance intended to provide greater clarity on the administration of this SECURE 2.0 provision.
What is Qualifying LTC Insurance?
The definition of qualifying LTC insurance is general and broad. It includes insurance that provides meaningful financial assistance if the insured—participant or spouse—needs long-term home-based or nursing home care. Qualifying insurance arrangements include traditional long-term care insurance, and certain life insurance or annuity contract riders that provide LTC benefits.
Which Retirement Plans Can Offer Qualified LTC Distributions?
Qualified LTC distributions are limited to defined contribution plans governed under Internal Revenue Code Sections 401(a)—including 401(k) plans—403(b), 403(a) annuity plans, and governmental 457(b) plans. Traditional and Roth IRAs, SEP plans, SIMPLE IRA plans, and defined benefit pension plans cannot offer qualified LTC distributions.
How Much Can be Distributed?
There is a limit to the amount that can be distributed each year from an eligible retirement plan and treated as a qualified LTC distribution. This amount is the lesser of
premiums paid by, or assessed against, the employee for certified long-term care insurance that covers the employee and/or employee’s spouse, for the year of the distribution;
10 percent of the present value of the participant’s vested accrued benefit; or
$2,600 (for 2026; indexed).
Because such amounts are not eligible rollover distributions, the mandatory withholding rules do not apply.
What are the Tax and Other Related Considerations?
As noted above, distributions of pretax amounts from eligible retirement plans are not tax-free, but they are exempt from the pre-59½ 10 percent early distribution penalty tax.
However, this SECURE 2.0 provision differs from several other early distribution penalty tax exceptions in an important way. Unless an eligible plan specifically adopts the provision, a distribution that is taken under another plan distribution provision and used to pay for long-term care premiums does not qualify for the penalty exception.
For example, an available pre-59½ in-service distribution of employer matching or profit sharing contributions would not qualify for this exception unless the employer formally adopts the provision, receives the required insurer premium statement, and the annual IRS reporting and required insurer statements to covered individuals are properly executed.
In contrast, several other early distribution penalty tax exceptions can be claimed by a taxpayer who is eligible to receive a plan distribution under another plan provision, even if the employer sponsoring the plan does not formally amend to permit the specified distribution. Examples include qualified birth or adoption distributions and qualified domestic abuse distributions.
Also differing from certain other special-purpose retirement plan distributable events, qualified LTC distributions may not be recontributed to a retirement plan.
There are no restrictions on the available plan sources for qualified LTC distributions. Employee salary deferrals, qualified nonelective, qualified matching, safe harbor, and other employee or employer contributions may be received as qualified LTC distributions, as long as the assets are fully vested.
What are the Insurance Provider’s Responsibilities?
For a distribution to be considered a qualified LTC distribution, the contract issuer (i.e., insurance company) must issue a formal Issuer Disclosure, containing the following information.
Contract issuer’s contact information
General description of the LTC insurance provided
Confirmation that the coverage complies with IRC Sec. 401(a)(39)(C)
A statement that the coverage has been filed with, and approved by, the proper state regulatory authority, and that regulatory authority’s identity
A penalty-of-perjury declaration signed by the issuer’s representative
The IRS will provide an acknowledgement letter to the issuer once the above process has been satisfactorily completed. Only when this IRS acknowledgment has been received can the issuer—at the employee’s request—provide to a retirement plan sponsor an LTC Premium Statement for the employee to initiate a distribution.
The issuer must include the following information in the LTC Premium Statement.
The issuer’s name and taxpayer identification number
A statement that the coverage is certified LTC insurance
Identification of the employee as the coverage owner
Identification of the covered individual and that individual’s relationship to the employee
Premiums owed for the calendar year
A statement that the issuer has met the IRS disclosure requirements
How Are Qualified Long-Term Care Distributions Reported?
Both insurance contract issuers and retirement plan sponsors have reporting responsibilities for qualified LTC distributions.
Plan sponsors must report distributions on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. IRS Notice 2026-33, does not provide a code that identifies a qualified LTC distribution as exempt from the 10 percent early distribution penalty tax, despite that being the sole tax benefit of this SECURE 2.0 provision.
The detailed Instructions for Forms 1099-R and 5498 specify reporting such distributions with code 1, Early distribution, no known exception. Given these facts, it appears the IRS intends that the penalty tax exemption be claimed and verified by taxpayers when they file IRS Form 1040, U.S. Individual Income Tax Return, which would generally also require filing IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Advantaged Plans, to claim the exemption.
There is also a new Form 1099-R distribution code (code W, Charges or payments for purchasing qualified long-term care insurance contracts under combined arrangements), which is used to report retirement plan distributions when qualified LTC insurance coverage is paid for by a reduction in life insurance policy surrender value, or in annuity cash value.
The contract issuer must provide IRS Form 1099-LPS, Long-Term Care Premiums Paid Statement, which is still in the drafting phase, to both the IRS and the plan participant/taxpayer in order to report the premiums paid for a calendar year. It is due to the participant by January 31 and to the IRS by February 1 of the year following the calendar year for which it reports the amount of insurance premiums paid. If the qualified LTC distribution is for insurance covering a person other than the participant (i.e., the participant’s spouse) the premium attributable to each must be reported on a separate Form 1099-LPS.
A participant may also request Form 1099-LPS before the close of the calendar year for which the premiums were paid. In lieu of providing this specific form at a time other than its statutory deadline, the contract issuer can provide the information contained within the form by using an acceptable alternative means, such as providing an account statement, or bill.
Are There Amendment Requirements?
Plan sponsors may use a discretionary amendment to adopt this SECURE 2.0 provision. Nongovernmental and noncollectively-bargained plans who have adopted this provision have until December 31, 2027, to amend their plan document. For collectively-bargained plans, the deadline is December 31, 2028, and for governmental plans, December 31, 2029. Operational compliance is required during the period before the amendment deadline.
What are the Industry’s Initial Expectations?
The loss during legislative negotiations of tax-free status for qualified LTC distributions appears to have dampened initial enthusiasm for this SECURE 2.0 provision. Implementing it may place significant administrative burdens on eligible retirement plans and their service providers, as well as interested insurance contract providers. For now, “wait and see” seem to be the watchwords.
