May 12, 2025 | 5-6 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. While no employer wants to imagine one of their employees needing this provision, adopting it as part of your plan shows empathy and forward thinking.
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 for distributions taken after January 1, 2024 in plans that are adopting this feature.
How it Works
Here is how the victims of domestic abuse withdrawal provision 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.
- 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.
- Participants may repay all or part of the distribution within three years to either the qualified plan it was taken from (if the plan allows for rollovers) or to an IRA. 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).
- 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.
- 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 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 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
Jeremiah “JP” Perryman, QKA is the Compliance and Operations Manager at Benefits² Administrators. He has more than 15 years of experience working with qualified retirement plans.