'Must Pass' Spending Bill Includes 401(k) LTCI Premium Provision in Secure 2.0 Act

What You Need to Know

A 401(k) plan participant could spend up to $2,500 per year in distributions on long-term care insurance premiums.
The distributions would be included in taxable income but not subject to the 10% early withdrawal tax.
The language is similar to the language in section 213 in the stand-alone version of the EARN Act.

The new $1.7 billion 2023 omnibus appropriations bill includes the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act of 2022. Within that act is a provision that could help some clients pay for long-term care insurance.

The provision would let a 401(k) plan participant use up 10% of the “nonforfeitable accrued benefits,” or up to $2,500 of the total, to pay premiums for inflation-adjusted long-term care insurance coverage that met federal quality standards.

The participant would have to include the distributions in taxable income but would not have to pay the 10% tax penalty on early 401(k) plan asset withdrawals.

The omnibus bill — the Consolidated Appropriations Act 2023 bill — includes legislation needed to fund and operate the federal government.

Senate Majority Leader Chuck Schumer, D-N.Y., said the government must pass the bill by the end of the week to avert a government shutdown.

What It Means

Clients who are thinking about buying LTCI coverage could get a small boost from CAA 2023.

Legislative Mechanics

Senate drafters put the LTCI premium provision on page 2,305 of the 4,155-page PDF version of the CAA 2023 bill, in section 334 of Division T.

The Senate Appropriations Committee has posted a version of the text here.

Division T is the Secure 2.0 Act of 2022 part of the omnibus. The LTCI premium version in the bill is based on the language in section 213 of the Enhancing American Retirement Now Act bill, or EARN Act bill.

The EARN Act LTCI premium provision was based, in turn, on S. 2415, a bill introduced by Sen. Pat Toomey, R-Pa. Toomey is retiring from the Senate at the end of his current term.

One major difference between the version in the omnibus bill and S. 2415 is that Toomey wanted to keep the 401(k) plan distributions used to pay LTCI premiums out of taxable income.

Certified Long-Term Care Insurance

The CAA 2023 LTCI premium provision would let workers use retirement plan money to pay for “certified long-term care insurance,” with the term “certified long-term care insurance” being based on the definition of “qualified long-term care insurance” given in section 7702B(b) in the Internal Revenue Code.

Practical Implications

One question is how many insurers will be interested in selling 401(k) participants long-term care insurance.

Many issuers have pulled out of the LTCI market in recent years because of concerns about problems with forecasting benefits obligations and low-interest earnings on the portfolios of bonds supporting the benefits.

In recent years, however, some insurers, including New York Life, Northwestern Mutual, Thrivent, Mutual of Omaha and National Guardian Life, have emphasized their commitment to the LTCI market.

Other CAA 2023 Long-Term Care Provisions

The omnibus also includes long-term care provisions aimed at police officers, firefighters and military veterans.

Section 328, which is based on the Police and Fire Health Care Protection Act of 2022, a draft bill developed by Sen. John Thune, R-S.D., would let retired first responders exclude retirement plan distributions used to pay either health insurance or LTCI premiums from taxable income, regardless of whether the distributions were sent to the insurers or paid to the retirees.

Today, to qualify for the exclusion, retirees must have the distributions sent directly to the insurers.

Subtitle E of Division U of the CAA 2023 bill calls for the government to develop a strategy for long-term care for aging veterans, to improve state veterans homes and to pay for medical foster homes for veterans even when the foster homes are outside of the Department of Veteran Affairs medical foster home system.