When we think of retirement, we think of reaching that magical age of 65 and living our remaining years on the funds we worked so hard saving. An individual can work for a great company that offers a pension or a 401(k) that is used to save for when they are ready to call it quits and travel off into the sunset in a nice RV. That’s what I was always taught to be the retirement dream. The funds in your retirement account were meant for that, to use in retirement.

Universally, a participant can take a distribution from their retirement account for three reasons: termination of employment (including retirement), death, or plan termination. Additional options became available such as an in-service withdrawal (age 59½), hardships and disability. These options are dependent on the plan provisions.

Throughout time, the regulations have been updated allowing for supplementary distribution choices. Many have requirements and/or limitations and are specific to the design of the plan. Several options historically included an early withdrawal penalty if the participant was under the age of 59½.

The CARES Act allowed participants to take a distribution if they were financially affected by the COVID-19 pandemic between the period of January 1, 2020 to December 31, 2020. The 10% early withdrawal penalty was waived for these distributions, however, the amount was still taxable income to the participant. The participant must have been directly impacted by COVID-19 to be eligible for the distribution, however no proof was required.

In January 2020, the SECURE Act became effective. The SECURE Acts (both 1.0 and 2.0) drastically changed the qualified retirement world with more than 90 provision changes. Of those changes, there were additional distribution options that became available with qualified retirement plans, many of which allow the participant to bypass the early withdrawal penalty.

Starting with SECURE 1.0, plans were allowed to add distribution options such as Qualified Birth and Adoption Distributions (QBAD). Participants were allowed to distribute up to $5,000 for each child within a one-year period after the birth or finalized adoption. The participant would not incur the early withdrawal penalty on this distribution but would need to include the child on their federal tax return. This option became effective on January 1, 2020.

SECURE 2.0 also expanded on the available distribution options for plan sponsors. Now plan sponsors can allow participants to self-certify for hardship distributions, provide distributions for domestic abuse victims, emergency expense distributions (EPED’s), Qualified Long-Term Care Distributions (available after December 29, 2025), Disaster Loss Distributions, and my least favorite, Pension-Linked Emergency Savings Accounts (PLESA). Each of these options has their own requirements and limitations and all but the hardship option allows the participant to waive the early withdrawal penalty.

The new SECURE 2.0 distribution options are just that: options. The IRS does not require a plan sponsor to adopt anything, but the sponsor can pick what they would like to be available to their participants. The final regulations are still in process, but a sponsor can operate their plan to allow these forms of distributions now.

As additional guidance is received, Greenleaf Trust continues to gain more knowledge of the SECURE 2.0 regulations and the various distribution options available. If you have any questions on the requirements or limitations or what may work best for your plan, please contact the Greenleaf Trust Retirement Plan Division, we would be happy to assist you.