The New IRS Opportunity: Penalty-Free Retirement Withdrawals for Long-Term Care Insurance

Under the SECURE 2.0 provisions, employers sponsoring defined contribution retirement plans, including 401(k), 403(b), and governmental 457(b) plans, may now choose to permit participants to take qualified long-term care insurance distributions directly from their retirement accounts.

If the employer adopts the provision, eligible employees under age 59½ may use retirement plan funds to pay qualifying long-term care insurance premiums without the standard 10% early withdrawal penalty. While the distributions are generally taxable as ordinary income, they are exempt from the usual 20% mandatory federal withholding requirement.

Key Highlights: Penalty-Free Retirement Withdrawals for Long-Term Care Insurance

Annual Distribution Limit: For 2026, employees may withdraw the lesser of:

• The actual long-term care insurance premium,

• 10% of the participant’s vested account balance, or

• $2,600 (indexed annually for inflation).

Personally Owned Policies: The long-term care insurance policy remains fully owned by the employee, allowing portability if they change employers or retire.

Administrative Simplicity: IRS Notice 2026-33 includes a safe harbor provision allowing plan administrators to rely on documentation provided directly by the insurance carrier verifying premium amounts and policy qualification status.

The Important Catch: Employers Must Elect to Offer the Provision

This benefit is not automatic.

The SECURE 2.0 long-term care distribution provision is entirely optional for employers. If a company does not formally amend its retirement plan documents to allow qualified long-term care distributions, employees cannot independently claim the tax advantages on their personal tax returns.

In other words, employees only gain access to these favorable tax rules if their employer actively adopts the provision within the company’s retirement plan.

For many employees, that makes employer participation the key that unlocks the opportunity.

Why Employers Should Consider Adding This Benefit

From both a strategic and cultural perspective, this new provision may offer meaningful advantages for employers.

1. High Employee Value Without Direct Employer Premium Contributions Employers can help employees address a major financial concern, future long-term care expenses, without taking on the cost of subsidizing premiums. Instead, the company simply enables employees to use their own retirement assets in a more flexible and tax-efficient manner.
   

2. Minimal Administrative Burden The IRS safe harbor framework was specifically designed to simplify implementation. Insurance carriers, rather than employers, bear the primary responsibility for certifying policy eligibility and premium reporting requirements. This helps reduce compliance complexity for HR and benefits departments.
   

3. Stronger Financial Wellness and Retention Initiatives Concerns surrounding aging, caregiving, and long-term care costs can create significant financial stress for employees and their families. Providing employees with access to a tax-advantaged long-term care funding strategy demonstrates a proactive commitment to their long-term financial security - potentially improving morale, loyalty, and retention.

Next Steps for Employers and Benefits Teams

Although the IRS has extended the formal amendment deadline for most non-governmental plans until December 31, 2027, many forward-thinking employers are already evaluating implementation strategies.

Companies interested in exploring this opportunity should consider the following steps:

1. Review the Provision with Plan Advisors and ERISA Counsel
   

   Employers should ask their retirement plan consultants and legal advisors to evaluate IRS Notice 2026-33 and determine the requirements for adding qualified long-term care distributions to their existing retirement plan.
   

2. Coordinate with Benefits and Insurance Professionals Employers may also consider offering voluntary long-term care insurance education and enrollment support through qualified insurance professionals. While employees would own and fund their policies personally, education and access to high-quality certified long-term care solutions can significantly improve participation and employee engagement.
   

3. Communicate the Benefit Clearly A thoughtful internal rollout explaining how the company is leveraging SECURE 2.0 to enhance employee financial wellness can create substantial perceived value among employees and leadership teams alike.

A New Era for Employee Financial Wellness

Long-term care planning is no longer solely a retirement issue. Increasingly, employees across multiple generations are concerned about protecting themselves, their spouses, and their families from future care-related financial strain.

By modernizing retirement plan flexibility under SECURE 2.0, employers now have an opportunity to offer a meaningful, tax-advantaged benefit that employees may value for decades to come. The abillity for employees to take out penalty-free retirement withdrawals for long-term care insurance is significant.

Now is the time for forward-thinking companies to evaluate how this new provision could strengthen their employee benefits strategy. To learn how your organization can implement this opportunity and educate employees on qualified long-term care solutions, contact TRC Financial today.

This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that neither TRC Financial, nor M Financial are engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Neither TRC Financial, nor M Financial should replace those advisors.