Generally, an additional 10% tax applies to early distributions from tax-preferred retirement accounts unless an exception applies.

SECURE 2.0 Act Sec 115; adds new IRC Sec 72(t)(2)(I) that provides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses.

Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within 3 years.

No further emergency distributions are permissible during the 3-year repayment period unless repayment occurs.

Effective Date: Applies to distributions made after December 31, 2023.

SECURE 2.0 Act Section 127 provides employers the option to offer to their non-highly compensated employees’ pension-linked emergency savings accounts.

Employers may automatically opt employees into these accounts at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer).

Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap.

Contributions are made on a Roth-like basis and are treated as elective deferrals for purposes of retirement matching contributions with an annual matching cap set at the maximum account balance – i.e., $2,500, or lower as set by the plan sponsor.

The first four withdrawals from the account each plan year may not be subject to any fees or charges. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or IRA.

Effective Date: Applies to plan years beginning after December 31, 2023.