A 52-year-old worker paying $1,800 a year for long-term care insurance just got a new way to cover that bill: pull the money straight from a 401(k), skip the usual 10 percent early-withdrawal penalty, and keep the policy in force. The catch is that the annual limit is $2,500, the withdrawal is still taxed as ordinary income, and the employer’s plan has to opt in.
The option comes from Section 334 of the SECURE 2.0 Act, signed into law as part of the Consolidated Appropriations Act, 2023. The provision carried a three-year delayed effective date, meaning distributions made after December 29, 2025 are the first to qualify. By mid-2026, the first wave of workers and plan administrators are working through how it operates in practice, and several important details remain unsettled.
How the penalty exemption works under the tax code
Congress added a new category called “qualified long-term care distributions” to Internal Revenue Code Section 72(t), the section that lists every exception to the 10 percent early-withdrawal penalty on retirement accounts. If a participant under 59½ takes money from an employer-sponsored defined contribution plan and directs it toward premiums on a policy that meets the federal definition of qualified long-term care insurance under 26 U.S.C. Section 7702B, the penalty does not apply.
The statute builds in several hard limits:
- $2,500 per person, per year. The cap is indexed for inflation, but the IRS has not yet published an adjusted figure. For 2026, $2,500 remains the operative number.
- Only qualified policies count. The insurance contract must satisfy the Section 7702B definition. Hybrid life-insurance products with long-term care riders may or may not qualify depending on how the LTC component is structured; short-term care plans generally do not. Workers should ask their insurer for written confirmation of 7702B status.
- Applies to 401(k) and 403(b) plans. The statute covers “applicable eligible retirement plans,” a category that includes 403(b) accounts. Workers in education, healthcare, and nonprofits with 403(b) plans should not assume they are excluded.
- No rollovers allowed. Once the money leaves the plan, it cannot be returned to any retirement account. The withdrawal is permanent.
- Still taxable as ordinary income. The penalty waiver does not make the withdrawal tax-free. A worker in the 22 percent federal bracket would owe roughly $550 in federal income tax on a $2,500 distribution; someone in the 32 percent bracket would owe about $800. But both avoid the additional $250 penalty that would otherwise apply.
- Premium statement required first. No distribution qualifies unless a long-term care premium statement has been filed with the plan before the funds are released. Workers cannot request a withdrawal and self-certify after the fact. The plan must have documentation in hand.
Where the IRS stands on guidance
The IRS has been steadily building out compliance infrastructure for the broader set of SECURE 2.0 changes. In updated safe-harbor rollover notices, the agency revised the explanations that plan administrators must hand to participants, incorporating post-2020 law changes including several SECURE 2.0 provisions.
But as of June 2026, the IRS has not published a sample premium-statement form, has not issued specific guidance on what documentation plan administrators should accept, and has not released the technical details of how the inflation adjustment to the $2,500 cap will be calculated or rounded. That vacuum leaves plan sponsors, recordkeepers, and participants working from the statutory text alone, with no standardized template to follow. The IRS SECURE 2.0 resource page is the most reliable place to watch for new notices and forms.
Why many plans have not added it yet
The provision is optional. Employers are not required to offer the long-term care distribution category, and many have not.
The practical reasons are straightforward. Processing a $2,500 distribution that requires verifying an insurance contract’s qualification status, collecting a premium statement, tracking the withdrawal against an annual cap, and coding it correctly for tax reporting is administratively heavy relative to the dollar amount involved. Large employers with dedicated benefits teams and automated platforms can absorb that work more easily. Smaller plans, particularly those run through third-party administrators serving dozens of unrelated small businesses, face higher per-participant costs to stand up an entirely new distribution type.
“Most of the small-plan recordkeepers I work with are taking a wait-and-see approach,” says Rebecca Marsh, an ERISA compliance consultant at a benefits administration firm in Denver. “They want to see the IRS put out a model form before they invest in building a new workflow for a $2,500 distribution.”
No public survey data from organizations like the Plan Sponsor Council of America or the SPARK Institute yet shows how many plan sponsors intend to adopt the feature. Workers who want to use it should check with their HR department or plan administrator directly rather than assume it is available.
How far $2,500 actually goes
For younger buyers, $2,500 covers a meaningful share of annual long-term care insurance premiums. A single 50-year-old man might pay roughly $1,200 to $1,800 a year for a basic policy, while a 55-year-old woman could pay $2,000 or more, based on pricing estimates published by the American Association for Long-Term Care Insurance (figures reflect the association’s most recently available cost data and may not capture 2026 rate changes). For those buyers, a single penalty-free withdrawal could cover most or all of a year’s premiums.
The math shifts quickly at older ages and higher coverage levels. A 60-year-old couple seeking robust coverage can easily face $4,000 to $6,000 or more annually. At that level, $2,500 helps but does not close the gap.
This is also not the only way to use tax-advantaged dollars for long-term care premiums. Workers with Health Savings Accounts can pay qualified LTC premiums from an HSA tax-free, subject to age-based limits the IRS sets each year. Taxpayers who itemize may be able to deduct a portion of LTC premiums as a medical expense. The SECURE 2.0 provision adds a new tool to that kit, but it works best when layered with other strategies rather than used alone.
Questions the statute does not answer
Beyond the missing IRS forms and inflation-adjustment details, several practical questions remain unresolved:
- Timing of the distribution. The law refers to amounts paid for premiums but does not spell out whether a participant can request a withdrawal in anticipation of an upcoming bill or only after an invoice has been issued. Plan administrators will have to decide whether to require proof of payment, a statement of amounts due, or some combination. Those decisions could vary from plan to plan.
- Roth 401(k) balances. The 10 percent penalty under Section 72(t) applies to the earnings portion of Roth 401(k) distributions taken before 59½. The statute does not explicitly address whether the new exemption covers Roth earnings, and the IRS has not clarified the point. Workers with significant Roth 401(k) balances should consult a tax adviser before assuming the exemption applies.
- State-level tax treatment. Some states do not conform to all federal retirement-plan tax rules. Workers in those states may need to verify whether their state recognizes the penalty exemption or treats the distribution differently for state income tax purposes.
Steps to take before requesting a withdrawal
- Ask your plan administrator. Find out whether your 401(k) or 403(b) plan has adopted or plans to adopt the qualified long-term care distribution option. If it has not, ask whether it is under consideration and when a decision is expected.
- Verify your policy’s qualification status. Confirm that your long-term care insurance contract meets the Section 7702B definition. Your insurer should be able to provide a written confirmation. Policies purchased through state partnership programs typically qualify, but hybrid products require closer scrutiny.
- Run the tax math. A $2,500 withdrawal is still taxable income. Compare the federal and state tax cost against the alternative of letting a policy lapse or paying premiums from after-tax savings that could otherwise stay invested.
- Coordinate with other accounts. If you also have an HSA, compare the tax treatment. HSA withdrawals for qualified LTC premiums are both penalty-free and income-tax-free, which makes them more efficient dollar for dollar. Use the 401(k) option to fill the gap after HSA limits are reached, not as a first resort.
Why $2,500 a year may be enough to keep a policy alive
This provision will not transform how Americans pay for long-term care. The dollar amount is too small and the paperwork requirements too heavy for that. But for a worker in their 40s or 50s who is one tight budget year away from dropping coverage, the ability to pull $2,500 from a retirement plan without the usual penalty could be enough to keep a policy in force. That policy could be worth tens or hundreds of thousands of dollars decades later when care is actually needed. The gap between having coverage and not having it is enormous; $2,500, used at the right moment, can sit on the right side of that line.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
