SECURE 2.0: Penalty-Free Terminal Illness Withdrawals from Retirement Plans

Originally published May 12, 2025, Updated September 2, 2026 | 6-7 Minute Read

SECURE 2.0 has given plan sponsors of 401(k), 403(b), and governmental 457 plans (also available in IRAs) a way for those diagnosed with a terminal illness to access their retirement plan savings that is exempt from the 10% early withdrawal penalty.

Please note that Terminally Ill 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: Penalty-Free $1,000 Emergency Withdrawals
• 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: What Plan Sponsors Need to Know About Pension-Linked Emergency Savings Accounts (PLESAs)

When it Becomes Effective

This provision became applicable effective for terminally ill individual distributions made after December 29, 2022 — the date SECURE 2.0 was enacted into law. A plan sponsor may choose to adopt this optional distribution feature at any time; the deadline for formally amending the plan document to add it is a separate matter, addressed under “Other Considerations” below.

How it Works

Here is how the Penalty-Free Terminal Illness Withdrawals work:

• Retirement Plan Savers who have been medically certified as terminally ill, with a life expectancy of 84 months (7 years) or less may request a penalty-free distribution for a distributable event.
• 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.
• The participant must have written certification from a physician in hand, prior to taking the withdrawal. “Physician” means an M.D. or D.O. licensed to practice medicine in the relevant state — not a nurse practitioner, physician assistant, or other licensed provider. The certification must include specific required elements: a statement that the individual’s illness or physical condition can reasonably be expected to result in death within 84 months; a narrative description of the medical evidence supporting that conclusion; the physician’s name and contact information; and the dates of examination and certification. An employee who is a physician may not certify their own terminal illness.
• Participants may repay all or part of the distribution within three years to any eligible retirement plan including a 401(a), 403(a), or 403(b) plan, a governmental 457(b) plan, or an IRA in which the participant has ownership or is a beneficiary and that accepts rollover contributions.  Repayment is not limited to the plan from which the distribution was originally taken. Any taxes that were paid on the distribution are refunded by filing an amended tax return. The repayments are treated as a rollover into the plan or IRA and don’t count towards annual contribution limits.

Other Considerations

Prior to adopting, Plan Sponsors should consider the following administrative requirements for the terminal illness withdrawal 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). Adoption of this provision does not create a new distributable event. The participant must have a distributable event (such as severance from employment, hardship, plan termination, or qualify for in-service distribution). This provision only waives the 10% penalty once a distribution is otherwise permissible. Conversely, even without a plan amendment, a participant who receives an otherwise-permissible in-service distribution that also meets the terminal-illness certification requirements may claim the penalty exception directly on their own federal income tax return
• For plans wanting to allow repayment of terminal illness 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 of this article, not all recordkeeper’s systems are fully updated to allow for all the provisions of SECURE 2.0.
• Distributions that are subject to the Terminal Illness 10% penalty waiver are eligible rollover distributions. So they are subject to mandatory 20% federal withholding and require a § 402(f) rollover notice, unlike several other SECURE 2.0 distribution types (birth/adoption, disaster, domestic abuse, emergency personal expense) that are exempt from both.
• 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.
• Due to the medical and sensitive nature of this type of distribution, these distributions should be handled with discretion and care.

Benefits² Administrators clients: If you have questions about adding terminal illness distributions to your plan, we encourage you to reach out to your dedicated Retirement Plan Consultant. 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 terminal illness distributions, if a plan document needs to be 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, QKS

Jeremiah “JP” Perryman, QKA, QKS, is the Director of Operations at Benefits² Administrators. He has more than 17 years of retirement-plan industry experience.