XVI. Distribution limitations

Statement of Requirement: Code §§ 72(t)(2)(H); 401(k)(2)(B); 414(u)(12)(B); Reg. § 1.401(k)-1(d); Notice 2010-15, 2010-6 I.R.B. 390; Notice 2020-50, 2020-28 I.R.B. 35; Notice 2020-68, 2020-38 I.R.B. 567

(Note to reviewer: Elective Deferrals, Qualified Nonelective Contributions, and Qualified Matching Contributions, and income allocable to each, must comply with the distribution limitations under Code § 401(k)(2)(B) and Regulation § 1.401(k)-1(d).)

Sample Plan Language:

A participant's Elective Deferrals, Qualified Nonelective Contributions, and Qualified Matching Contributions, and income allocable to each are not distributable earlier than upon the participant's severance from employment, death, or disability.

(Note to reviewer: The following distributable events may be included in either the basic plan document or as elective provisions in the adoption agreement. Note that some of the described distributable events are contained in the basic plan document (events 1 thru 6) and some are shown as subject to an adoption agreement election (events 7 thru 10).)

Such amounts may also be distributed upon:

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1. Termination of the Plan without the Employer maintaining another defined contribution plan (other than an employee stock ownership plan as defined in Code sections 4975(e)(7) or 409(a), a simplified employee pension plan as defined in Code section 408(k), a SIMPLE IRA plan as defined in Code section 408(p), a plan or contract described in Code section 403(b) or a plan described in Code sections 457(b) or (f)) at any time during the period beginning on the date of plan termination and ending 12 months after all assets have been distributed from the Plan. Such a distribution must be made in a lump sum.

2. The attainment of age 59½ in the case of a profit-sharing plan.

3. The hardship of the participant as described in section [ ].

(Note to reviewer: The blank should contain the section of the Plan that corresponds to CODA LRM XVII.)

4. The participant’s call to active duty after September 11, 2001, because of the participant’s status as a member of a reserve component, for a period of at least 180 days or for an indefinite period. (A “qualified reservist distribution.”)

5. The participant’s service in the uniformed services while on active duty for a period of at least 30 days. If a participant receives a distribution as a result of a deemed severance of employment under this provision, the participant’s Elective Deferrals (and Employee Contributions) will be suspended for 6 months after receipt of the distribution. However, a distribution under this provision that is also a qualified reservist distribution within the meaning of Code section 72(t)(2)(G)(iii) is not subject to the 6-month suspension of Elective Deferrals.

(Note to reviewer: If an individual receives a distribution that meets the definition of a qualified reservist distribution, the distribution will be treated as a qualified reservist distribution, even if the distribution would also have been permitted as a result of a deemed severance of employment under Code § 414(u)(12)(B). Therefore, the 6-month suspension of Elective Deferrals and employee contributions otherwise required will not apply. For example, if a plan provides for qualified reservist distributions and for distributions on account of a deemed severance under Code § 414(u)(12)(B), a distribution to an individual that could be either type of distribution will be treated as a qualified reservist distribution, and thus not subject to the 6-month suspension of Elective Deferrals. See Notice 2010-15, Q&A-15.)

6. A federally declared disaster, where the disaster is treated as a hardship under section ___, or where resulting legislation or guidance otherwise authorizes such a distribution.

(Note to reviewer: See changes made to Code § 72(t)(2)(M) enacted by section 331 of the SECURE 2.0 Act. “Qualified disaster recovery distributions” have a $22,000 limit per disaster and are subject to specific rules that may be included in the plan document.)

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7. The participant’s Qualified Birth or Adoption. If elected by the Employer in the Adoption Agreement, a Participant’s Elective Deferrals may be distributed on or after the date specified in the Adoption Agreement as a Qualified Birth or Adoption Distribution. A Qualified Birth or Adoption Distribution is any distribution of up to $5,000 (or lesser amount as provided in the Adoption Agreement) from the Plan to a Participant if made during the 1- year period beginning on the date the child of the Participant is born or the legal adoption by the Participant of an eligible adoptee is finalized. A distribution of up to $5,000 for each child can be made with respect to multiple births and adoptions if the distribution is made within the 1-year period following the date on which the children are born, or the adoptions are finalized. An eligible adoptee is defined as any individual who has not attained age 18 or is physically or mentally incapable of self-support. An individual is physically or mentally incapable of self-support if they are unable to engage in any substantial gainful activity as described in section of the Plan.

(Note to reviewer: Insert the Plan section number that defines “disabled” in the above blank. See Q&A D-6 of Notice 2020-68. See also DC LRM #8. Unless the Administrator of the Plan has actual knowledge to the contrary, the Administrator may rely on reasonable representations from the Participant in determining whether a Participant is eligible for a Qualified Birth or Adoption Distribution. If the Plan permits Qualified Birth or Adoption Distributions, it must accept the recontribution of a Qualified Birth or Adoption Distribution at any time during the 3-year period beginning on the day after the date on which the distribution was received, if the Participant is eligible to make a rollover contribution to the Plan at the time of recontribution, as provided in DC LRM #51A (Recontributions).)

8. Coronavirus-Related Distributions. If elected by the employer in the Adoption Agreement, a Participant’s Elective Deferrals may be distributed as a coronavirus-related distribution. A coronavirus-related distribution is any distribution made from the Plan on or after January 1, 2020, and before December 31, 2020, to a qualified individual, as defined in section 2202(a)(4)(A)(ii) of the Coronavirus Aid, Relief, and Economic Security Act, Pub L 116-136 (CARES Act) and Section 1B of Notice 2020-50, which does not exceed, in the aggregate, ___ the amount specified in the Adoption Agreement under the Plan and other retirement plans maintained by the Employer and Related Employers.

(Note to reviewer: The Administrator of the Plan may rely on an individual’s certification that they satisfy the conditions to be a qualified individual unless the Administrator already has actual knowledge to the contrary. A distribution properly designated as a coronavirus-related distribution under the Plan is treated as satisfying the above distribution restrictions if the Plan is amended to allow it by the last day of the first plan year beginning on or after January 1, 2022. See DC LRM #51A for recontribution provisions.)

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9. Cases of Domestic Abuse. If elected by the Employer in the Adoption Agreement, a Participant’s Elective Deferrals may be distributed on or after the date specified in the Adoption Agreement as a Distribution in Case of Domestic Abuse. A Distribution in Case of Domestic Abuse is any distribution equal to the lesser of $10,000 or fifty percent of the present value of the nonforfeitable accrued benefit of the employee (or lesser amount as provided in the Adoption Agreement) from the Plan to a Participant if made during the 1-year period beginning on any date that the participant is a victim of domestic abuse by a spouse or domestic partner. The term “domestic abuse” means physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household. Distributions in Case of Domestic Abuse shall not be treated as an Eligible Rollover Distribution as defined in section ____

(Note to reviewer: The blank section should correspond to the definition of Eligible Rollover Distribution (see DC LRM #51).)

(Note to reviewer: The Administrator of the Plan may rely on an individual’s certification that the individual is a victim of domestic abuse. If the Plan permits Distributions in Case of Domestic Abuse, it must accept the recontribution of a Distribution in Case of Domestic Abuse at any time during the 3-year period beginning on the day after the date on which the distribution was received, if the Participant is eligible to make a rollover contribution to the Plan at the time of recontribution, as provided in DC LRM #51A (Recontributions).)

10. Emergency Personal Expenses. If elected by the Employer in the Adoption Agreement, a Participant’s Elective Deferrals may be distributed on or after the date specified in the Adoption Agreement as an Emergency Personal Expense Distribution. An Emergency Personal Expense Distribution is a distribution equal to the lesser of $1,000 (or a lower amount as provided in the Adoption Agreement) or the excess of the participant’s nonforfeitable account balance over $1,000, made for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.

(Note to reviewer: The $1,000 Emergency Personal Expense distribution limit is not indexed for inflation.)

The plan administrator may rely on the requesting participant’s written certification that the participant is eligible for an Emergency Personal Expense Distribution. However, notwithstanding either the above limitation or written certification furnished by a requesting participant, no amount of any subsequent distribution can be an Emergency Personal Expense Distribution during the immediately following three calendar years, except where:

a) the previous Emergency Personal Expense Distribution is fully repaid to the Plan

pursuant to section _______ (INSERT PLAN SECTION CORRESPONDING TO PLAN RECONTRIBUTION / REPAYMENT PROVISIONS), or

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b) the aggregate of the individual’s Elective Deferrals and employee contributions after the

previous Emergency Personal Expense Distribution is at least equal to the amount of the previous Emergency Personal Expense Distribution that has not been repaid.

(Note to reviewer: See DC LRMs 35 through 38 for permissible employee contributions which may be considered for this purpose.)

Emergency Personal Expense Distributions shall not be treated as an Eligible Rollover Distribution as defined in section ____. (INSERT PLAN SECTION CORRESPONDING TO PLAN ELIGIBLE ROLLOVER PROVISIONS.) However, the Plan must accept repayment of an Emergency Personal Expense Distribution if the participant is eligible to make a rollover contribution to the Plan at the time of repayment.

(Note to reviewer: See DC LRM 51A for sample recontribution language in this regard.)

(Note to reviewer: Section 326 of the SECURE 2.0 Act of 2022 amended § 72(t)(2) to provide special rules for an employer that makes a distribution to a Participant on or after the date on which such employee has been certified by a physician as having a terminal illness. For this purpose, a Participant who is terminally ill means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 84 months or less after the date of the certification. An employee is not be considered to be a terminally ill individual unless the participant furnishes evidence of this physician certification to the plan administrator. Act section 326 was not included on the Cumulative List and sample plan language is therefore not provided. However, see Part F of Notice 2024-2 for administrative guidance.

Code § 72(t)(L) does not provide an exception to the otherwise applicable distribution restrictions at § 401(k)(2)(B)(i). Therefore, to permit a terminally ill individual to receive a distribution, the employee must otherwise be eligible for a permissible in-service distribution, such as a hardship or disability. See, for example, CODA LRM XVII and DC LRM #8. However, for a hardship or disability distribution to also meet the requirements of a terminally ill individual distiribution, the distribution must also meet the applicable requirements of a terminally ill individual distribution. See Q&As F-6, F-7 and F-13 of Notice 2024-2.

It is optional for a qualified retirement plan to permit distributions to terminally ill individual pursuant to Code § 72(t)(2)(L). If a plan permits distributions on account of terminal illness, it must accept the recontribution of the distribution at any time during the 3-year period beginning on the day after the date on which the distribution was received, if the Participant is eligible to make a rollover contribution to the Plan at the time of recontribution, as provided in DC LRM #51A (Recontributions). Plan amendments adopted to permit terminally ill individual distributions are discretionary amendments.)

Sample Adoption Agreement Language:

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A. Qualified Birth or Adoption Distributions

1. The Plan permits Qualified Birth or Adoption Distributions of a Participant’s Elective Deferrals:

___ Yes (Complete remainder of this section) ___ No

2. A Qualified Birth or Adoption Distribution may be distributed on or after __________

[insert date no earlier than January 1, 2020].

3. A Participant may take a Qualified Birth or Adoption Distribution in an amount equal to _________ [insert an amount no greater than $5,000] for each child of the participant.

B. Coronavirus-Related Distributions

1. The Plan permits coronavirus-related distributions of a Participant’s Elective Deferrals: ___ Yes (Complete remainder of this section) ___ No

2. The Plan permits coronavirus-related distributions of a Participant’s Elective Deferrals in an amount that does not exceed, in the aggregate _______[insert amount no greater than $100,000] under the Plan and other retirement plans maintained by the Employer and Related Employers.

C. Distribution in Case of Domestic Abuse

1. The Plan permits Distributions in Case of Domestic Abuse of a Participant’s Elective Deferrals: ___ Yes (COMPLETE REMAINDER OF THIS SECTION) ___ No

2. A Distribution in Case of Domestic Abuse may be distributed on or after ________

[INSERT DATE NO EARLIER THAN JANUARY 1, 2024].

3. A Participant may receive a Distribution in Case of Domestic Abuse in an amount equal to the lesser of:

a. ( ) $_______ (cannot exceed $10,000), or b. ( ) _______ percent of the present value of the participant’s accrued benefit (CANNOT EXCEED FIFTY PERCENT)

4. The dollar amount in a. will be increased for cost of living adjustments in accordance with Code section 1(f)(3) for taxable years beginning on or after January 1, 2025.

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(Note to Reviewer: The dollar amount of a distribution on account of domestic abuse may not exceed $10,000; the percentage limitation may not exceed fifty percent of the present value of the participant’s accrued benefit.)

D. Distribution for Emergency Personal Expenses

1. The Plan permits Distributions of a Participant’s Elective Deferrals for Emergency Personal Expenses:

___ Yes (COMPLETE REMAINDER OF THIS SECTION) ___ No

2. A Distribution for Emergency Personal Expenses may be distributed on or after ________

[INSERT DATE NO EARLIER THAN JANUARY 1, 2024].

3. A Participant may receive a Distribution for Emergency Personal Expensess in an amount up to $_______ (amount selected cannot exceed $1,000, however the amount permissibly distributed cannot exceed the excess of the participant’s nonforfeitable account balance under the plan determined on the date of distribution over $1,000)

All distributions that may be made pursuant to one or more of the foregoing distributable events are subject to the spousal and participant consent requirements (if applicable) contained in Code sections 401(a)(11) and 417.

(Note to reviewer: Distributions from Roth Elective Deferral accounts (other than corrective distributions) are not includible in the participant's gross income if made after 5 years and after the participant's death, disability, or age 59 ½. Earnings on corrective distributions of Roth Elective Deferrals are includible in gross income the same as earnings on corrective distributions of Pre-tax Elective Deferrals. Effective for taxable years beginning after December 31, 2023, Roth Elective Deferral accounts are not subject to the Required Minimum Distribution Rules of DC LRM #49.)