SECURE Act 2.0 – Long Term Care Premiums

Take-Away: The SECURE Act 2.0 permits the use of some retirement plan assets to pay for long term care premiums.

Background: Historically, any distribution from a retirement account or IRA to its owner prior to age 59 1/2 was subject to the 10% early distribution excise tax. Only a few exceptions existed to this avoid this 10% excise tax, e.g. substantially equal payments. The SECURE Act 2.0 creates some exceptions from this excise tax, e.g. distributions to victims of domestic violence. One lesser known exception is with respect to long term care insurance premiums.

SECURE Act 2.0, Section 334: The SECURE Act 2.0 amends IRC 401 to create a limited exception to the 10% early distribution excise tax. It permits retirement plans to distribute up to $2,500 a year to the account owner for the payment of premiums for certain, specific, long term care insurance contracts. Distributions for this purpose will be exempt from the additional 10% excise tax for early distributions, but the distribution itself will still be subject to ordinary income tax. However, only a long term care policy that provides high quality coverage will be eligible for the early distribution and waiver of the 10% excise tax. We will have to wait for the SECURE Act 2.0 Regulations to tell us what constitutes a high quality coverage long term care policy.

Effective Date: This provision of the SECURE Act 2.0 becomes effective 3 years after the effective date of the Act, which would make it an available option beginning in 2026.