May 12, 2025 | 4-5 Minute Read
When it comes to finances, we all seem to hit those small, unexpected bumps in the road. Whether it is unexpected auto repairs, a kid’s broken arm, or a surprise vet bill, access to a little extra money can be helpful. SECURE 2.0 has given plan sponsors of 401(k), 403(b), and governmental 457 plans (not available in IRAs) a way for participants to access up to $1,000 (or less if the participant’s vested balance is smaller) once per calendar year for emergency personal expenses for “unforeseeable or immediate financial needs.” The distributions are exempt from the 10% early distribution tax penalty.
Please note that Penalty Free Withdrawals are just one of the new distribution options provided under SECURE 2.0. For more information on the other types please see our other articles on new distribution types:
- SECURE 2.0: Disaster Relief Distributions and Loans for Retirement Plans
- SECURE 2.0: Penalty-Free Retirement Withdrawals for Victims of Domestic Abuse
- SECURE 2.0: Penalty-Free Terminal Illness Withdrawals from Retirement Plans
- SECURE 2.0: What Plan Sponsors Need to Know About Pension-Linked Emergency Savings Accounts (PLESAs)
When it Becomes Effective
This provision became applicable for distributions taken after January 1, 2024 in plans that are adopting this feature.
How it Works
Here is how the Penalty-Free Emergency Withdrawals work:
- Retirement Plan Savers may take up to the lesser of their vested account balance or $1,000 once per calendar year for emergency personal expenses.
- These withdrawals are not subject to the 10% early withdrawal excise tax.
- Distribution is still subject to income tax in the year it was distributed.
- Participants may self-certify that they meet the criteria. Plan sponsors do not have to ask for documentation of the expenses.
- Participants may, and are encouraged to, repay the amount of the emergency distribution back into the plan within three years of taking it. Repayments are treated as rollovers into the plan.
- Eligibility for subsequent penalty free emergency withdrawals is restricted for three years from the distribution, unless the following conditions are met:
- The distribution has been repaid; or
- The amount of the distribution has effectively been replaced through new contributions.
Other Considerations
Prior to adopting this provision, Plan Sponsors should consider the following administrative requirements for this provision:
- This is an optional plan feature, and the plan must be amended to allow for these withdrawals. Plans intending to adopt this provision can offer this feature now, but the amendment will need to happen by the end of the remedial amendment period (the end of 2026 for non-governmental plans and 2029 for governmental plans).
- For plans wanting to allow repayment of emergency distributions back into the plan, they will want to ensure that their plan document allows for rollovers into the plan, if not, they will need to amend their plan document.
- It is important to first check with the recordkeeper for the plan to ensure that they currently support this provision. At the writing time of this article, not all recordkeeper’s systems are fully updated to allow for all the provisions of SECURE 2.0.
- You will also want to have a system in place that to track participant eligibility for this feature and track repayments.
- Participants will need to receive communications of these added provisions, through the distribution of the Summary of Material Modifications and Summary Plan Description. Your document provider can supply these documents for distribution.
It is important to note that this provision is much easier to administer than the Pension-Linked Emergency Savings Accounts (PLESAs) that were introduced by SECURE 2.0, and might be a better way of encouraging those concerned about not having access to their retirement funds in an emergency to save in the plan.
Benefits² Administrators clients: If you have questions about adding Penalty Free Emergency Distributions to your plan, we encourage you to reach out to your dedicated Retirement Analyst. They can help you determine if your plan document will need to be amended to allow this provision and if it needs to be updated to allow for rollovers into the plan.
For non-clients or plan advisors seeking guidance: Feel free to contact Leslie Wood (lwood@benefits2llc.com) for additional information and support. Leslie can provide an overview of the SECURE 2.0 Penalty Free Emergency Distributions, if a plan document needs amended for this provision, or additional strategies for increased retirement savings.
Whether you are a current client or not, our goal at Benefits² Administrators is to ensure every plan sponsor has the knowledge and support to remain compliant and help participants navigate difficult situations and succeed in saving for retirement.
JP Perryman, QKA
Jeremiah “JP” Perryman, QKA is the Director of Retirement Plan Compliance at Benefits² Administrators. He has more than 15 years of experience working with qualified retirement plans.