Optional LTC Penalty-Free Withdrawals
One new provision introduced by the SECURE Act 2.0 allows taxpayers to withdraw up to $2,500 each year from traditional retirement plans to cover the costs of long-term care insurance without triggering the 10 percent early withdrawal penalty. These withdrawals will still be subject to ordinary income taxation. The funds can be used to pay for standalone long-term care insurance or for certain life insurance or annuity contracts that also provide for meaningful financial assistance in the event that the insured person requires long-term care in a nursing home or home-based long-term care. Like many newly introduced retirement plan features, this provision is optional.
We asked two professors and authors of ThinkAdvisor’s Tax Facts with opposing political viewpoints to share their opinions about the optional nature of the penalty-free retirement plan withdrawal feature for employees who use retirement dollars to pay for long-term care insurance.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: The fact of the matter is that retirement plan sponsors should have choices when it comes to adding complex new features to their retirement plans—which are already governed by a complex set of rules that we should be striving to simplify. By making new hardship distributions features optional, we give employers the option of tailoring their retirement plans to suit their participants’ needs without forcing these options on plan sponsors who would prefer to keep things simple.
Bloink: Long-term care planning is one of the most important things a taxpayer can do during their working years. The fact of the matter is, Medicare does not cover many long-term care needs--especially the most expensive nursing home care. By making the penalty-free long-term care premium feature mandatory, we draw attention to the importance of seeking ways to cover long-term care expenses later in life.
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Byrnes: Yes, we want to allow employers to offer certain valuable choices when it comes to retirement plans--but making them mandatory could have unanticipated negative impacts. In fact, making all of these new features mandatory could discourage employers from sponsoring retirement savings plans in the first place.
Bloink: When a 401(k) feature is made mandatory by the government, it becomes standard. There’s no way around that. Yes, the feature may initially be viewed as a complication--but in the long run, it simply becomes a standard feature that all plan sponsors and participants become accustomed to. Sometimes we have to impose a burden in recognition of the important benefit generated by that burden.
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Byrnes: When employers are offering retirement savings options, they're typically geared toward attracting and retaining talented employees. If this feature is important to those employees, employers will elect to add it without the need for the government to mandate the feature. The optional nature of the new long-term care feature is unlikely to have a meaningful impact on whether employers and plan sponsors choose to offer the option.
Bloink: Making the valuable penalty-free long-term care feature optional means that many retirement plan sponsors will simply choose to look the other way. We all know that people often choose the simplest route. Unfortunately, in this situation, it means that many individuals will lack access to a valuable way to cover the costs of long-term care insurance—which, of course, will ultimately mean that those individuals will simply choose not to carry long-term care insurance at all.