IRS Issues Guidance on Qualified Long-Term-Care Distributions

The IRS issued guidance on May 20 clarifying the reporting requirements for plan sponsors and insurance carriers making qualified long-term-care distributions from defined contribution plans and for individuals receiving those distributions. The notice also extended the deadline for sponsors to amend their plans to permit the distributions.

Section 334 of the SECURE 2.0 Act of 2022 is an optional provision that, if adopted, allows DC plan sponsors to enable their participants to use money from their retirement plans to make QLTCDs to pay for long-term-care insurance premiums, up to $2,600 for 2026 (indexed for inflation). Participants are permitted to make annual distributions totaling the smallest figure among $2,600, 10% of the vested benefit, or the cost of the premiums, without incurring the 10% tax penalty that is typical of withdrawals made from a defined contribution plan before the age of 59.5. SECURE 2.0 made the option available for distributions made after December 29, 2025.

The 22-page guidance release stated that “no distribution will be treated as a qualified long-term care distribution unless a long-term care premium statement with respect to the employee has been filed with the plan.”

A statement must be provided by the insurance carrier “upon request of the coverage owner, that contains certain specified information, such as the identities of the issuer and the employee owning the coverage, as well as such other information” such as a description of the coverage provided, according to the guidance.

As a safe harbor, plan administrators are explicitly permitted to rely on the carriers’ long-term-care premium statement to verify that: an issuer disclosure was made to the secretary of the treasury by the provider of the long-term-care coverage; the insurance is certified; and the premium amounts are correct.

The notice also stated that a QLTC distribution is not treated as a rollover distribution, meaning plan administrators do not need to provide notice requirements to participants under Section 402(f) of the Internal Revenue Code. The distributions are also exempt from the mandatory 20% withholding generally required under Section 3405 of the IRC.

Plan sponsors now have until December 31, 2027—extended from the initial deadline of the end of 2026—to amend their plans to permit QLTCDs. The deadline for collectively bargained plans is year-end 2028, and governmental plans have until the end of 2029.

Whether and when a plan sponsor chooses to adopt the discretionary plan amendment permitting QLTCDs —if they have not already done so—will likely depend upon their plan’s participant demographics, as well as whether the sponsor already offers long-term-care insurance as a voluntary benefit through the company, according to Eric Keller, a partner in the Wagner Law Group.

But the first steps sponsors should take, Keller says, are to gauge whether insurance carriers will be able to furnish the information necessary for the long-term premium care statements, as well as determine whether recordkeepers can handle the distributions, should sponsors choose to outsource that responsibility to them.