Workers younger than 59½ now have a narrow but real escape hatch from the 10 percent early-withdrawal penalty on 401(k) distributions. A provision added to the Internal Revenue Code allows them to pull up to $2,500 per year from a defined-contribution plan, penalty-free, to cover premiums on certified long-term care insurance. The catch: their employer’s plan must opt in, and the insurance issuer must meet new federal disclosure and reporting rules that the IRS spelled out in Notice 2026-33.
Why the $2,500 LTC withdrawal matters in 2026
The provision sits in section 401(a)(39) of the tax code, titled “Defined contribution plan rules for distributions to pay certified long-term care insurance premiums; issuer disclosure requirement.” It does not force any employer to offer the option. A plan sponsor must amend its documents before participants can tap the benefit, which means the speed of adoption depends entirely on how quickly companies and their recordkeepers act.
That distinction creates a practical gap. Large employers with dedicated benefits teams and existing relationships with third-party administrators can absorb the compliance work more easily. Smaller plans face the same fixed costs for amending plan documents, updating payroll systems, and handling new IRS reporting. The added burden of section 6050Z, which requires insurers to file reports on long-term care premium statements, adds another layer of coordination. Insurers must produce the right paperwork, and plan administrators must verify it. Those fixed administrative costs scale poorly for a plan with 20 participants compared to one with 20,000.
No public data yet shows how many plans have adopted the feature. The IRS has not released utilization statistics or Form 1099-R breakdowns specific to these certified long-term care premium distributions. That absence of data makes it impossible to confirm whether the size gap in adoption is already forming, but the structural incentives point in that direction.
For workers, the potential value is straightforward. Long-term care insurance premiums are typically paid with after-tax dollars. If a participant can instead route up to $2,500 per year directly from a 401(k), they effectively turn a slice of tax-deferred savings into a funding stream for coverage that might otherwise be unaffordable. The trade-off is that every dollar withdrawn reduces the account balance available for retirement, and the $2,500 cap is unlikely to cover the full cost of comprehensive policies, especially at older ages.
IRS Notice 2026-33 and the issuer disclosure framework
The IRS published Notice 2026-33 in Internal Revenue Bulletin 2026-24, laying out the disclosure obligations that long-term care insurers must satisfy before their policies qualify for penalty-free 401(k) distributions. The agency also posted a dedicated guidance page for retirement plans explaining what counts as a certified policy and where insurers can find the authoritative requirements.
The certification requirement is the gatekeeper. A worker cannot simply buy any long-term care policy and then request a distribution. The insurer must meet specific disclosure standards, and the plan administrator must confirm the policy qualifies. That two-step verification is designed to prevent abuse, but it also means a participant’s ability to use the benefit depends on whether their chosen insurer has done the work to comply.
Notice 2026-33 spells out the information insurers must furnish, including policy terms, premium schedules, and attestations that the coverage meets federal criteria for long-term care insurance. Insurers must provide this information both to the IRS and, in a form usable by plan administrators, to the retirement plans whose participants intend to pay premiums from their accounts. Plans, in turn, need processes to review the documentation, record certified status, and track distributions that are tied to specific policies.
This creates a new dependency chain. If an insurer delays in meeting the disclosure standards, a plan sponsor that wants to offer the feature may still be unable to implement it for affected participants. Conversely, even if an insurer is fully compliant, a plan that has not updated its documents or systems will not be able to process penalty-free distributions. Workers must therefore navigate three layers: their employer’s willingness to amend the plan, the recordkeeper’s operational readiness, and the insurer’s certification status under Notice 2026-33.
What plan sponsors and workers should watch
Plan sponsors considering adoption need to weigh administrative complexity against perceived employee demand. For large plans, the incremental effort may be justified as part of a broader financial wellness strategy, especially if a significant portion of the workforce is approaching retirement age and concerned about future care costs. Smaller employers may hesitate until vendors offer turnkey solutions that bundle plan amendments, payroll coding, and data exchange with insurers.
Workers interested in using the new option should start by asking whether their plan has been amended to permit certified long-term care distributions and, if so, which insurers’ policies qualify. They should also confirm how the $2,500 cap is applied-typically on a per-year, per-individual basis-and whether the plan imposes any additional administrative fees or restrictions beyond what the statute requires.
Because the provision is narrowly targeted and highly conditional, it is unlikely to transform either the retirement or long-term care markets on its own. But for participants whose employers and insurers align on compliance, it offers a modest, tax-advantaged way to hedge one of the biggest financial risks of aging without waiting until 59½. Over time, adoption patterns will reveal whether the complexity of Notice 2026-33 and related reporting rules becomes a barrier, or whether standardization makes the $2,500 withdrawal a routine feature of defined-contribution plans.
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.
