IRS Clarifies New Hardship Distribution Exception Based on Terminal Illness

SECURE 2.0 creates a new exception to the IRC Section 72(t) 10% early distribution penalty for distributions made on account of a participant’s terminal illness (the distribution is not exempt from income tax). The IRS clarified that self-certification is not sufficient and the employee must provide evidence and documentation as required by the employer. That evidence must include the certifying physician’s name and contact information, as well as a description of the evidence used to conclude that the individual suffers from a terminal illness. The IRS also clarified that terminal illness means that the individual has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification. While plans are not strictly required to offer the terminal illness exception, the employee may elect to treat an otherwise permissible in-service distribution as a distribution based on terminal illness via Form 5329, filed with their income tax return. For more information on the new exemptions to the early distribution penalty, visit Tax Facts Online. : Q 3969. Note: Q is updated.