Workers younger than 59½ now have a narrow but real escape hatch from the 10% early-withdrawal penalty on retirement savings. A provision added to the tax code by SECURE 2.0 lets participants in 401(k) and similar defined-contribution plans pull up to $2,500 a year, penalty-free, to pay qualified long-term-care insurance premiums. The rule took effect for distributions made after Dec. 29, 2025, and the IRS has begun building the reporting infrastructure to support it.
How the SECURE 2.0 LTC provision changes early 401(k) withdrawals
The mechanism sits in a single new subsection of the tax code. Section 401(a)(39), added by SECURE 2.0 Section 334, authorizes defined-contribution plans to offer these distributions as an optional feature. Plans are not required to add the option, which means access depends entirely on whether an employer chooses to amend its plan document. The penalty exemption itself lives in IRC Section 72, which now lists “any qualified long-term care distribution to which section 401(a)(39) applies” among the exceptions to the additional tax on early distributions. The money still counts as taxable income. Only the 10% penalty disappears.
For the withdrawal to qualify, the insurance product must meet federal standards. The IRS requires the insurer to file an Issuer Disclosure confirming the policy is a certified long-term-care contract. Plan administrators can rely on that filed statement rather than conducting their own product review, according to recent guidance for issuer disclosures. This shifts the compliance burden to the insurance company, but it also means distributions cannot begin until an insurer has actually completed the filing process with the IRS.
On the reporting side, the IRS is developing a brand-new information return called Form 1099-LPS, short for Long-Term Care Premiums Paid Statement. The form is tied to IRC Section 6050Z and is being prepared for the 2026 tax year filing season, according to Internal Revenue Bulletin 2026-24. While the new form is still being built, the IRS is signaling that it will fit into the broader family of information returns described in Publication 1099, which outlines how payers report taxable distributions to both taxpayers and the agency. Until the form and its instructions are finalized, the mechanics of how plans and insurers will report these distributions to the IRS and to participants remain partly unresolved.
What plan sponsors and savers still do not know
Several practical questions sit unanswered. No public list of insurers that have completed the Issuer Disclosure filing exists yet, so workers cannot easily confirm whether a specific long-term-care policy qualifies. The interaction between the $2,500 annual distribution and existing plan loan provisions has not been addressed in the IRS notices or statutory text reviewed so far. And while the statute references an inflation-adjustment formula for the annual cap, the detailed calculation method is not spelled out in the available code text or published IRS guidance.
The broader question is adoption. Because the distribution feature is optional, each employer must decide whether to amend its plan. Adding the feature requires coordination among plan sponsors, recordkeepers, and insurers, along with updates to summary plan descriptions and enrollment materials. Some sponsors may see the provision as a valuable financial-wellness tool that helps employees manage long-term-care risk without turning to hardship withdrawals. Others may worry that even small, recurring withdrawals could undermine retirement readiness or add administrative complexity for a relatively modest benefit.
Participants who do gain access will face their own trade-offs. Using pre-tax dollars to pay long-term-care premiums can be attractive, especially for workers in higher tax brackets who might otherwise pay those premiums with after-tax income. But every dollar pulled from a 401(k) still increases taxable income for the year, and frequent use of the provision could slow the growth of retirement balances. Younger workers, in particular, may be better off prioritizing contributions and investment growth, while those closer to retirement might see more value in shifting some savings toward insuring against future care costs.
There are also timing and coordination issues. The annual $2,500 cap may not fully cover premiums for comprehensive long-term-care policies, which can be significantly higher, especially at older ages. Workers will need to decide whether to split premiums between retirement-plan distributions and other sources, and how to handle missed or late payments if a plan does not process distributions in time to meet insurer due dates. Employers and recordkeepers will have to design workflows that link plan withdrawals to premium payments without turning HR departments into de facto insurance bill-pay services.
For now, the new long-term-care distribution stands as a narrowly tailored exception to the early-withdrawal penalty, not an invitation to treat retirement accounts as general-purpose savings. Workers who are interested in using it will need to confirm that their employer’s plan has adopted the feature, that their policy qualifies under IRS rules, and that they understand the tax consequences. Plan sponsors, in turn, will have to weigh employee demand against administrative burden as the IRS finalizes forms and guidance in the run-up to the 2026 filing season.
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Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
