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New IRS Secure 2.0 Notice Affects Terminally Ill Clients

By Allison Bell

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The Internal Revenue Service has published a batch of Secure 2.0 Act guidance that could have a big effect on employer-sponsored retirement plans and some effect on individual clients under age 59½ who are terminally ill.

The IRS released IRS Notice 2024-2  to answer questions about sections in the Setting Every Community Up for Retirement Enhancement 2.0 Act concerning topics such as automatic enrollment in employer-sponsored retirement plans and use of small, immediate financial incentives to encourage employees to contribute to employer plans.

Other answers concern Secure 2.0 Section 326, which waives the 10% penalty on early retirement plan withdrawals for individuals with a terminal illness.

Tom Morgan, the notice author, confirmed that section 326 penalty relief applies to holders of individual retirement accounts and individual retirement annuities as well as participants in employer plans.

What it means: Clients who are terminally ill and might be subject to the 10% early retirement savings withdrawal penalty will have to include early IRA and individual retirement annuity distributions in taxable income but will not have to pay the penalty.

The new notice may also signal how the IRS will address other Secure 2.0 questions. Morgan noted that the IRS is continuing to analyze the law and expects to issue further guidance, including regulations.

The early withdrawal penalty: Federal law normally encourages retirement savers to keep cash in retirement savings arrangements by imposing the 10% penalty on withdrawals taken before the savers turn 59½.

Lawmakers have created many exceptions to the penalty requirement, including for qualified higher education expenses and cases of a retirement saver becoming totally and permanently disabled.

The notice answers: Morgan writes that Section 326 applies to distributions from individual retirement arrangements as well as 401(k) plans, 403(a) annuity plans and 403(b) annuity contracts.

The provision expanded the definition of “terminally ill” to include a retirement saver certified by a medical doctor or osteopathic doctor to have 84 or fewer months to live.

For purposes of life insurance accelerated death benefits, the Internal Revenue Code defines “terminally ill” to mean having 24 or fewer months to live.

Although Morgan mentions individual retirement arrangements, he often refers to the terminally ill people receiving the distributions as employees.

Elsewhere, he notes that employers need not let terminally ill plan participants take early withdrawals. He also discusses the documentation employers need to collect when providing distributions to terminally ill plan participants.

The Internal Revenue Service building in Washington. Credit: General Services Administration

Allison Bell

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