Recordkeepers are Starting to Roll Out New Withdrawal Provisions Created by Secure Act 1.0 and 2.0.

The Secure Act 2.0, passed by Congress and signed into law on December 29, 2022, contained provisions that many recordkeepers are now implementing, in particular, relating to retirement plan withdrawal options.

Currently, participants can only withdraw their money via a loan, hardship distribution, or after termination of employment. Recent law changes (SECURE Act 1.0 and SECURE Act 2.0) have given plan sponsors some new types of withdrawal options that they may, or may not, elect to offer to their participants.

NOTE: So far, there has been very little implementation of any of these withdrawal options across the country, due to (among other things):

• The increased burden it places on HR departments.
• The fact that any withdrawals have an adverse effect on employee retirement readiness.
• The reality that most recordkeepers are still working on the systems and software changes needed to offer these options to plans.

Four New Withdrawal Options

CRS believes that it will take at least three years (if not more) before we know if any of these new distribution types will become commonplace.

The four new withdrawal options available are:

1. Qualified Birth or Adoption Distribution (QBAD)

The SECURE Act 1.0 introduced a new provision that allows plan participants to take a distribution from their retirement accounts for qualified birth or adoption expenses. Here are the key details:

• Eligibility – Participants can withdraw up to $5,000 per child, without incurring the 10% early withdrawal penalty, following the birth or legal adoption of a child.
• Tax Treatment – While the distribution is not subject to the 10% early withdrawal penalty, it is still considered taxable income.
• Repayment – QBADs must be repaid to an eligible retirement plan within three years of the distribution date to qualify as a rollover contribution. This three-year period begins the day after the distribution is received.

2. Withdrawals for Emergency Expenses

The SECURE Act 1.0 also allows for withdrawals to cover certain emergency expenses, providing financial relief in unforeseen situations:

• Eligibility – Participants can withdraw up to $1,000 annually for emergency expenses, without facing the 10% early withdrawal penalty.
• Definition of Emergency Expenses – While the Act does not explicitly define what constitutes an emergency, it generally includes expenses such as medical emergencies, unexpected car repairs, or urgent home repairs.
• Repayment – Participants have the option to repay the withdrawal within three years. If repaid, the participant can take another emergency withdrawal. If not repaid, additional emergency withdrawals are restricted until repayment is made.

3. Withdrawals for Federally Declared Disasters

The SECURE Act 2.0 introduced a provision allowing for withdrawals in the event of federally declared disasters:

• Eligibility – Participants can withdraw up to $22,000 per disaster, without incurring the 10% early withdrawal penalty, to cover expenses related to the disaster.
• Tax Treatment – The distribution is included in taxable income but can be spread over three years to ease the tax burden.
• Repayment – Participants have up to three years to repay the distribution, allowing them to restore their retirement savings once they recover from the disaster.

4. Eligible Distributions for Domestic Abuse Victims

The SECURE Act 2.0 also introduced a provision to support domestic abuse victims:

• Eligibility – Participants who have experienced domestic abuse can withdraw up to the lesser of $10,000 or 50% of their vested account balance, without incurring the 10% early withdrawal penalty.
• Tax Treatment – This distribution is subject to regular income taxes but is exempt from the early withdrawal penalty.
• Repayment – Participants have the option to repay the distribution within three years, helping them to rebuild their retirement savings after escaping an abusive situation.

IMPORTANT NOTE:

Repayment options for these withdrawals would be an additional coordination effort for HR teams should plan sponsors allow them to be repaid to the plan. This alone is causing many plan sponsors to take a “wait and see” approach before adding these options.

Please review our full SECURE 2.0 guide that outlines the key provisions put forth by the new laws.

Reach out to CRS if you or your clients have questions about these provisions.

Alex Powell has been in the retirement plan industry since 2014 and is our Regional Director of Sales in Southern Ohio, Indiana, and Kentucky.  Alex can be reached via email at .