Workers saving for retirement through a 401(k) can now pull up to $2,500 a year to cover long-term care insurance premiums without triggering the 10% early-withdrawal penalty. The change stems from Section 334 of the SECURE 2.0 Act, enacted as part of the Consolidated Appropriations Act, 2023. IRS guidance published in Internal Revenue Bulletin 2026-06 confirms the new exception applies to qualifying distributions, and the agency has begun requiring insurers to file formal disclosures before plans can accept premium statements for these withdrawals.
Why the $2,500 long-term care withdrawal exception matters right now
Before this provision took effect, a 401(k) participant under age 59½ who wanted to pay for a long-term care policy had two bad options: absorb the 10% additional tax on an early distribution or find the money elsewhere. SECURE 2.0 Section 334 created a narrow escape hatch by adding a new exception under section 72(t)(2)(N) to the list of penalty-free withdrawals and inserting a companion plan qualification rule under section 401(a)(39). Together, the two provisions let an eligible plan distribute up to $2,500 per year, per participant, specifically for certified long-term care insurance premiums, free of the extra tax.
The practical bottleneck is on the employer side. A 401(k) plan must formally amend its governing documents to satisfy the section 401(a)(39) qualification requirement before it can offer these distributions. That typically means working with counsel or recordkeepers to add specific language authorizing qualified long-term care distributions, updating summary plan descriptions, and revising administrative procedures. Plans that move quickly to update their documents and notify participants are likely to see measurable uptake within two filing cycles, while sponsors that delay will leave eligible savers without access regardless of demand. No public data yet shows how many plan sponsors have completed amendments or whether particular industries are moving faster than others.
IRS reporting rules and insurer filing requirements for QLTCDs
The IRS has built a compliance chain that runs from the insurance company through the plan administrator to the individual tax return. Insurers that issue certified long-term care contracts must submit an issuer disclosure before a plan can accept a premium statement for a qualified long-term care distribution, or QLTCD. The agency warns that procedures may change and filers must check for current instructions, signaling that the operational details of this regime may continue to evolve as more insurers participate.
On the reporting side, the 2026 Instructions for Form 1099-R now include references to qualified long-term care distribution reporting. Plan administrators will use Form 1099-R to separately identify these withdrawals so the IRS can confirm they fall within the $2,500 annual cap and qualify for the penalty waiver. Coding these distributions correctly is critical, because the form data feeds directly into IRS matching programs that check whether taxpayers improperly claimed the 72(t)(2)(N) exception or exceeded the permitted amount.
Trustees and custodians must also coordinate with payroll systems and recordkeepers to ensure that distributions designated as QLTCDs are paid directly to insurers as premium payments, rather than to participants. The expectation is that this direct-payment structure will reduce the risk that participants divert funds for other purposes while still claiming the penalty exception. In addition, plan administrators will need internal controls to prevent duplicate designations across multiple plans if a worker participates in more than one employer’s 401(k) during the year.
Open questions around the $2,500 QLTCD provision
Several gaps remain in the public record. The IRS has not released Form 1099-R data or tax-return statistics reflecting actual use of the new 72(t)(2)(N) exception, so there is no way to measure how many savers have taken advantage of the withdrawal option so far. The issuer disclosure filings that insurers must submit are also not publicly available, making it impossible to gauge how many long-term care products have been certified or how concentrated the market is among a few carriers.
There are also unresolved policy questions. The $2,500 annual cap is not indexed for inflation in the statutory text, raising the possibility that its real value will erode over time even as long-term care premiums rise. It is unclear whether Congress will revisit the limit or whether the IRS will provide additional flexibility through future guidance. For now, participants with higher premiums may still need to cover a significant share of their costs with after-tax dollars, even if they fully utilize the penalty-free withdrawal each year.
Finally, plan sponsors and advisors are still working through how to communicate this benefit without encouraging premature depletion of retirement savings. While the exception can make long-term care coverage more affordable for some workers, it also diverts money from tax-deferred growth. Until more data emerges on actual usage and outcomes, employers and participants will be weighing the trade-offs with limited empirical guidance, relying largely on the statutory framework and the IRS’s evolving administrative rules.
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