Domestic Abuse Withdrawal Penalty Exception

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Texas is representative of a common question on penalty-free early withdrawals.

“Can a client’s 401(k) plan, which requires spousal consent for distributions, be amended to adopt the new domestic abuse victim distribution option?”

Highlight of the discussion on domestic abuse victim distributions

Highlights of the Discussion

According to Notice 2024-55, unless your client’s plan is amended to fit within the spousal consent exemption, the 401(k) plan cannot be amended to adopt the new domestic abuse victim distribution option.

Spousal Consent Requirements

Plans subject to Internal Revenue Code Sections (IRC §§) 401(a)(11) and 417, such as defined benefit plans and certain defined contribution plans, require spousal consent for certain distributions and forms of benefit payments, and require the plan to provide for Qualified Joint and Survivor Annuity (QJSA) and Qualified Pre-Retirement Survivor Annuities (QPSAs). In general, these plans require a married participant’s spouse to consent to any change in the optional form of benefit payment offered under the plan, any in-service distributions or loans from the participant’s account.

It is not common for 401(k) plans to require spousal consent for distributions, including changes to the form of distribution, in-service distributions, or loans. Typically, 401(k) plans are designed to be exempt from the spousal consent requirement because they

• Require that the spouse is the named beneficiary of the full benefit, absent the spouse consenting to an alternative beneficiary;

• Do not permit annuities as a distribution option;

• Do not include funds which were a direct transfer from a plan that was subject to the QJSA requirements; and

• The plan is not part of a floor offset arrangement with a defined benefit plan [See IRC §401(a)(11)(B)(iii)].

Section 314 of SECURE Act 2.0

Section 314 of SECURE Act 2.0 (i.e., domestic abuse victim distributions) went into effect January 1, 2024, and is a discretionary feature, meaning sponsors do not have amend their plans to provide for this option. Section 314 permits plans to allow a penalty-free emergency distribution, up to the greater of $10,000 or 50 percent of the participant’s account balance, for participants who self-certify that they have experienced domestic violence and request the distribution within one year of the domestic violence incident. A participant is limited to one distribution per 12-month period.

Under this Section, domestic abuse is defined as, “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.” Plan sponsors may rely on a participant’s self-certification of domestic abuse.

On June 20, 2024, the IRS released Notice 2024-55, which provides guidance on the exceptions to the additional penalty tax for certain new distributions, including distributions for victims of domestic abuse. In this Notice, the IRS states that a domestic abuse victim distribution may be taken from an “applicable eligible retirement plan,” which is defined as “an eligible retirement plan other than a defined benefit plan or a plan to which IRC §§401(a)(11) and 417 apply. Under this language, a 401(k) plan is only an “applicable eligible retirement plan,” if it is exempt from the spousal consent requirements.

Conclusion

It is not common for 401(k) plans to require spousal consent for distributions, but if a plan does have this requirement, it should either be amended to remove the spousal consent requirement before adopting the domestic abuse victim distribution option or should not adopt this provision.