FLASHPOINT: IRS ISSUES QUALIFIED LONG-TERM CARE DISTRIBUTION GUIDANCE
(AND THE INSURANCE INDUSTRY CHEERS)

By: Alison J. Cohen, Esq.

The SECURE 2.0 Act of 2022, §334, allows a defined contribution plan to make a new distribution option available to its participants, complete with the Internal Revenue Code (the “Code”) §72(t) 10% penalty waiver. This option permits a participant to take a distribution from the plan to pay for long-term care insurance coverage. These distributions are available effective after December 29, 2025, so it’s probably a nice thing we finally got guidance this month in Notice 2026-33 (the “Notice”).

Under this provision, a defined contribution plan may be amended to permit a participant to take a distribution each year to pay for qualified long-term care (called, appropriately enough, a “qualified long-term care distribution” (“QLCD”)). The feature may now be added operationally, effective anytime.

The sponsor of a plan that isn’t a governmental plan, section 403(b) plan maintained by a public school, or applicable union plan then has until December 31, 2027, to amend the plan (if it so desires) to permit a participant to take a QLCD. The deadline for a union plan to be amended to document the addition of this feature is December 31, 2028. A governmental plan has until December 31, 2029, to document the addition of the distribution form any time before that date. The Notice – apparently accidentally – fails to state the due date for 403(b) plans sponsored by public schools (after clearly stating that the 2027 deadline does not apply to them). Presumably, the due date is the same as for other governmental plans – December 31, 2029. (Note: non-profit 403(b) plans must amend by the end of 2027.)

Because this is brand new guidance, none of the upcoming mandatory amendments (i.e., the interim SECURE amendment or Cycle 4 restatement for a standard defined contribution plan) will contain the QLCD language.  The amendment will continue to be a “tack-on” to the document until the next restatement cycle.

What is a QLCD?

SECURE 2.0 added Code §401(a)(39), which contains the law relating to these distributions. This section defines the term “qualified long-term care insurance” (“QLCI”) as a qualifying long-term care insurance contract, as defined in Code §7702B(b), covering qualified long-term care services, as defined in Code §7702B(c). Lovely. What does that mean?  The Notice clarifies.

The type of coverage that these policies would offer relates to the risk that the insured would become chronically ill, defined in Code §101(g)(4)(B), permitting payment for qualified long-term care services. These services must provide “meaningful financial assistance” in the event the insured needs home-based or nursing home care. The policy may cover the plan participant or their spouse.

And the QLCD? The participant may take an amount from the plan equal to the least of (a) the QLCI premium for the year; (b) 10% of his or her vested accrued benefit under the plan; or (c) $2,600, as adjusted for inflation for 2026, to pay for the QLCI premium.

Example: XYZ Company sponsors a 401(k) plan and has announced to its employees that qualified long-term care distributions from the plan are now available. Francine is an employee with XYZ company in 2026 who has just recently purchased long-term care insurance for herself. The premium for the insurance is $250 per month, or $3,000 per year. Her vested account balance in the XYZ 401(k) plan is $100,000.

Francine’s potential QLCD for this year is the LEAST of:

1. The premium for her insurance for 2026:  $3,000;
2. 10% of her vested interest:  10% x $100,000 = $10,000; or
3. $2,600.

The lowest amount of these three possible limits is $2,600. This is the maximum QLCD that the plan can pay Francine.

Example: If Francine’s vested account was only $10,000, the maximum QLCD would be 10% of that account, or $1,000.

This withdrawal is taxable income (except to the extent that it is after-tax or Roth funds) and may not be rolled over (and is not an eligible rollover distribution for purposes of mandatory withholding or the provision of the 402(f) notice).

Insurer Obligations

Code section §6050Z and the Notice provide several requirements for the company that provides the QLCI policy (called the “Issuer”), including providing an initial Issuer Disclosure to the IRS before any QLCI policies are offered.

This Issuer Disclosure describes the type of coverage, confirms that it is a certified long-term care insurance policy, confirms that the coverage has been filed with and approved by a State regulatory authority (and who that authority is), and contains a penalty of perjury statement confirming that the disclosure complies with the requirements. There is a procedure for the IRS to review this filing and confirm its completeness.

There is no IRS online portal to submit this information. Just the fax, Ma’am. Just the fax. Yes, the Issuer Disclosure must be faxed into the IRS, along with a cover sheet with specific language. (We suppose it could be worse.  They could have requested a floppy disc.)

Once policies are sold to participants, the Issuer must annually do the following:

• By February 1 of the year following the year of the premium payment, file with the IRS a Form 1099-LPS, reflecting the amount of premiums and confirming that the insurance is a QLCI policy.

• By January 31 of the same year, provide a copy of the Form 1099-LPS to the participant.

A participant may request that the Issuer provide the form earlier, including during the year. The Issuer may either provide an early Form 1099-LPS in response to that request or it may simply provide contact information for the Issuer, as well as the total premiums and charges paid on the policy as of the date of the request. Even if it provides the Form 1099-LPS early, the Issuer is still required to provide a form for the entire year to both the participant and the IRS by the above due dates.

Upon the participant’s request (and if the participant provides the information the Issuer needs to comply with the request), the Issuer must also provide a QLCI Premium Statement each year to the Plan Administrator of the plan making the distribution. That Statement must clearly list the insured (and his/her relationship to the participant), the Issuer of the policy, the premium owed, confirm that the policy is a QLCI, and provide whatever additional information that the Secretary of the Treasury ultimately requires.

Mechanics of the QLCD Process for the Plan

As we said, the plan sponsor may elect to amend its plan to permit the QLCD. It is not required to offer this feature.

If the plan permits QLCDs, the participant must arrange for the Issuer to submit the long-term care Premium Statement each year to the Plan Administrator.

If the plan makes any QLCDs during the year, it is also required to file Form 1099-R (just as with any other distribution) to reflect the payout.

A couple of additional details on the distribution:

• The participant cannot claim the distribution as a QLCD unless the above steps are complied with. Unlike some other special distribution options under SECURE and SECURE 2.0, the plan must permit this distribution, and it must be supported by Forms 1099-LPS and 1099-R.

• Unlike the other SECURE/SECURE 2.0 distributions, there is no repayment option for this distribution. (Most of the other options allow repayment within 3 years, with appropriate tax adjustments.)

If this whole process is sounding convoluted and overly complex to you, you’re not alone. One has to wonder why this level of scrutiny is being provided for this distribution option, when others, such as hardship distributions, may be made simply on participant certification.

So, Who Wants This Option?

Great question. We haven’t heard of a single participant or plan sponsor clamoring for this QLCD at the time SECURE 2.0 was signed. The answer to the “who” question is most likely the insurance broker/agent. There are trillions of dollars sitting in qualified retirement plans.  Now that the insurance industry has worked hard to ensure its agents aren’t considered fiduciaries for selling policies within a retirement plan, they now have an opportunity to tap into those assets by selling other products, such as the qualified long-term care policies, to participants. We have also seen of late a big push by private equity and other interested parties to get their hands on retirement funds by offering investments like cryptocurrency.

Should the Plan Sponsor Offer QLCDs?

If a plan sponsor sees a need among its employees, it should consider two more things. First, the complexity of these rules is daunting.  Second, this is another way for plan benefits to be depleted before the participant retires, leaving him or her short on resources for living after working days are over (which is called “leakage” in the industry). Does the sponsor really want to encourage that?

Having said that, long-term care insurance is expensive, and this may be the only way a participant has to afford that coverage. Therefore, QLCDs address what may be an actual need for some people.

Conclusion

A plan sponsor does NOT need to permit these attempts by interested parties to take a portion of their participants’ retirement assets. Any choice by a plan sponsor to offer or not offer QLCDs should be made solely for the benefit of its participants and that decision should be made free of outside influences that may gain a financial benefit as a result.

If you have any questions about this Notice, or the new distribution option available, feel free to reach out to our team. After all, we are your ERISA solution.