IRS, Treasury issue updated guidance on 401(k) emergency distributions

Employees can now withdraw up to $1,000 from their 401(k)s without penalties if the money is needed for an emergency expense. The Department of the Treasury and the Internal Revenue Service has issued final regulations updating the required minimum distribution (RMD) rules, reflecting changes made by SECURE 2.0 that impacts retirement plan participants, IRA owners and their beneficiaries.

The reasons for an emergency expense include medical care, funeral expenses, auto repairs, foreclosure and “any other necessary emergency personal expenses,” according to the IRS. “For purposes of determining whether an individual has an unforeseeable or immediate financial need, the administrator may rely on an employee’s written certification that the employee is eligible for an emergency personal expense distribution,” according to the IRS.

This new emergency withdrawal program, which is optional for employer plans, is meant for low- and moderate-income workers, since it is faster and cheaper than other ways to tap into retirement savings.

However, employees cannot leave their account balance below $1,000, and have three years from the day of withdrawal to pay back the funds and cannot take another emergency withdrawal for three years.

The change comes as a result of a provision in the SECURE 2.0 regulation that went into effect this year. At the same time, Treasury and IRS issued proposed regulations, addressing additional RMD issues under the SECURE 2.0. While certain changes were made in response to comments received on the proposed regulations issued in 2022, the final regulations generally follow those proposed regulations.

Specifically, the Treasury and IRS reviewed comments suggesting that a beneficiary of an individual who has started required annual distributions should not be required to continue those annual distributions if the remaining account balance is fully distributed within 10 years of the individual’s death as required by the SECURE Act. However, the Treasury and IRS determined that the final regulations should retain the provision in the proposed regulations requiring such a beneficiary to continue receiving annual payments.

The new proposed regulations include provisions for which the Treasury and IRS are soliciting public comments, including provisions addressing other changes relating to RMDs made by the SECURE 2.0 Act. Comments should be submitted in writing on or before October 7, 2024, and should be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS Notice 2024-55” in the search field).

Related: Emergency savings account: Workers prefer the new 401(k)-linked option in SECURE 2.0

These new regulations are effective on September 17, 2024.