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A recent call with a financial advisor in North Dakota is representative of a common question on the tax benefits of certain distributions made on account of long-term care policy premiums.
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.
“ What are “Long-Term Care (LTC) distributions” from defined contribution (DC) plans and their potential tax benefits?”
The IRS’s LTC distribution rules allow participants to take withdrawals up to the limit[1] from a DC plan (if the plan allows) to pay premiums on qualifying LTC policies. While still taxable, distributions to cover LTC policy premiums are not subject to the 10 percent premature distribution penalty tax. Adding an LTC distribution provision to a plan is optional for a plan sponsor. A plan amendment would be necessary to allow LTC distributions.
In general, LTC policies, certain life insurance riders, and certain insurance/annuity contract riders can qualify if they provide meaningful financial assistance for home-based care or nursing home care. LTC policies are owned by the participant and held outside the plan. If the DC plan permits, a participant may take an LTC distribution to pay all or part of the annual premium.
According to Notice 2026-33, a qualified LTC insurance contract under IRC Sec. 7702B(b) means an insurance contract that:
· Covers only qualified long-term care services,
· Does not duplicate Medicare-reimbursable expenses,
· Is guaranteed renewable,
· Does not provide cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
· Applies refunds and dividends to reduce future premiums or increase future benefits, and
· Satisfies consumer protection requirements.
To utilize the LTC distribution opportunity, a participant must request that the LTC issuer send an “LTC premium statement” for the policy to the plan sponsor. This request is made annually. If the statement requirements are met, the participant may take an LTC distribution and avoid the 10% premature distribution penalty tax. In addition, the issuer will file Form 1099-LPS, Long-Term Care Premiums Paid Statement
with the IRS, noting the premiums paid, and provide a copy to the participant. Additional details regarding the statements and reporting requirements can be found at Guidance on Qualified Long-Term Care Distributions.
LTC distributions are subject to the following criteria:
· Discretionary: Employers are not required to offer LTC distributions; if allowed, a plan amendment is required.
· Taxable: The distribution will be taxed according to the participant’s current tax bracket.
· Penalty Relief: The rule waives the 10 percent penalty on premature distributions, not the underlying income tax.
· Annual Cap: Withdrawals are capped at the lowest of the actual insurance premium cost, 10 percent of the participant’s vested balance, or $2,600 for 2026.
· 20 Percent Withholding Exemption: The IRS does not require the standard 20 percent mandatory federal tax withholding on LTC distributions; however, the distributions remain subject to the withholding requirements for nonperiodic payments (10 percent or waiver).
· No Repayments: Participants cannot pay back or "roll over" these funds into the retirement account later.
Notice 2026-33 creates a workable administrative framework for qualified LTC distributions, but the feature requires coordination among the participant, issuer, plan sponsor, and recordkeeper.
[1] The limit for 2026 is the lesser of the amount needed for the year to pay for LTC insurance coverage, 10% of the vested account balance, or $2,600.