On December 20, the IRS provided guidance surrounding the terminal illness distribution rules from IRAs including self-directed IRAs and 401k plans including self-directed solo 401k plans. The updated guidance is found in Notice 2024-02 is in a question-and-answer format and the specific section relating to terminal illness distribution rules is found in Section 326 which starts on page 31.
The 10% Early Penalty Tax
The purpose of the terminal illness distribution rule is to waive the 10% early distribution penalty that applies to self-directed IRAs and 401k plans including solo 401k plans when the participant is under age 59 1/2. Note, however, that applicable state and federal taxes still apply to distributions made on account of the terminal illness distribution exception.
Following are some of the main rules found in th 2024-2 ntoice applicable to distributions from solo 401k plans and IRAs due to a terminal illness:
- Certification to Plan Administrator: The employee must provide the plan administrator with a physician’s certification, meeting specified requirements, to qualify for a terminally ill individual distribution. Plan administrators may not rely on self-certification from an employee; a physician’s certification is required.
- Terminally Ill Individual: A terminally ill individual means an individual who 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. See Q. F-4 on page 32.
- Physician Certification Requirement: The physician must be legally authorized to practice medicine and surgery by the State in which the doctor performs such function or action. See Q. F-6 on page 33. The physician’s certification must include A statement that the individual’s illness or physical condition can be reasonably expected to result in death in 84 months or less after the date of certification. A narrative description of the evidence that was used to support the statement of illness or physical condition. The name and contact information of the physician making the statement. The date the physician examined the individual or reviewed the evidence provided by the individual, and the date that the certification is signed by the physician. The signature of the physician making the statement, and an attestation from the physician that, by signing the form, the physician confirms that the physician composed the narrative description based on the physician’s examination of the individual or the physician’s review of the evidence provided by the individual.
- Timing of the Distribution: If from a 401k plan including a solo 401k plan, the distribution is required to be made on or after the date on which the employee (the solo 401k participant) has been certified by a physician as having a terminal illness. See Q. F-1 on page 31.
- No Distribution Limit: In general, there is no limit on the amount that an employee is permitted to receive as a terminally ill individual distribution. See Q. F-8 on page 34.
- Recontribution Option: Yes. An employee may recontribute any portion of a terminally ill individual distribution (up to the entire amount of the terminally ill individual distribution) to a qualified retirement plan in which the employee is a beneficiary and to which a rollover can be made under sections 402(c), 403(a)(4), 403(b)(8), or 408(d)(3), as applicable. ReSee Q. F-9 on page 35.
