Workers under age 59 and a half now have a new way to pay for long-term care insurance without triggering the 10% early-withdrawal penalty on their retirement savings. IRS Notice 2026-33, published in Internal Revenue Bulletin 2026-24, lays out the rules for pulling up to $2,500 a year from a 401(k) or similar plan to cover qualified long-term care premiums. The money still counts as taxable income, but the penalty exemption removes a significant financial barrier for younger savers trying to lock in coverage while premiums are lower.
Why the $2,500 penalty-free withdrawal changes the math for younger workers
Before this guidance took effect, anyone who pulled money from a 401(k) before turning 59 and a half faced a 10% additional tax on top of ordinary income taxes, with only a handful of narrow exceptions. Long-term care premiums were not among them. That left workers in their 40s and 50s, the age range when insurers still offer relatively affordable policies, stuck choosing between paying premiums out of pocket or raiding retirement funds at a steep cost.
The new distribution category, authorized by SECURE 2.0 and codified under IRC Section 72(t)(2)(N), eliminates that penalty for distributions that meet a specific set of conditions. The annual cap is the lesser of several amounts tied to the premiums actually paid, with $2,500 as the statutory ceiling. Plans that already handle hardship withdrawals have the administrative plumbing to process a new distribution type. Plans without those systems face a steeper setup cost, which could slow adoption in the first two plan years after the notice. Form 5500 filings will eventually show how quickly different administrators move, but no public data on early adoption rates exists yet.
IRS Notice 2026-33 and the insurer disclosure gate
The rules are not as simple as requesting a check. A plan can release the funds only if the long-term care insurer has filed what the IRS calls an Issuer Disclosure for the specific product covering the participant. That requirement, set out under IRC Section 401(a)(39)(E), acts as a gatekeeper: if the insurer has not completed the filing, the plan cannot treat the withdrawal as a qualified long-term care distribution, and the 10% penalty applies. The IRS maintains a dedicated page explaining the Issuer Disclosure procedures, including the requirement that insurers submit a penalties-of-perjury declaration. No public count of how many insurers have completed these filings is available, which means participants cannot yet confirm whether their own policy qualifies without checking directly with their carrier or plan administrator.
The underlying definition of what counts as qualified long-term care insurance comes from IRC Section 7702B, which sets federal standards for contract terms, benefit triggers, and consumer protections. A policy that falls outside those boundaries, such as certain hybrid life-insurance riders, would not support a penalty-free distribution even if the plan were willing to process one. Employers and recordkeepers will need to map their existing product menus against these statutory requirements to determine which contracts are eligible.
Open questions about the $2,500 LTC distribution
Several practical gaps remain. The IRS has not published detailed enforcement examples or compliance FAQs explaining how it will police the interaction between plan administrators and insurer filings. For instance, the notice does not spell out how a plan should respond if an insurer’s Issuer Disclosure is later revoked or corrected, or whether participants who relied on a defective filing could be shielded from retroactive penalties. Administrators are also looking for clarity on how often they must re-verify that a policy remains in good standing under the disclosure regime.
Timing is another unresolved issue. Long-term care premiums are typically billed monthly or annually, but qualified distributions may be processed on a different schedule. The notice allows withdrawals only to the extent of premiums actually paid or owed for the year, which raises questions about how to handle midyear policy changes, refunds, or lapses. Plans will need procedures to reconcile distributions with proof of coverage, without turning each request into a manual audit that overwhelms back-office staff.
Participants face their own uncertainties. Because there is no public roster of approved products, workers must ask both their insurer and their plan whether a given policy has an accepted Issuer Disclosure on file. Some may discover that the long-term care policy they bought years ago is not eligible, while newer contracts from the same carrier are. Others may find that their employer’s plan has opted not to add this new distribution type at all, even though the law permits it. The statute is permissive, not mandatory, so access will vary by workplace.
Tax reporting mechanics add a final layer of complexity. The distribution is still taxable income, and plan sponsors will have to code it correctly on Form 1099-R so that the 10% additional tax does not apply. Participants who believe their withdrawal qualifies but receive a form showing an early-distribution penalty may need to challenge that treatment on their individual returns. The IRS’s online account tools may help some taxpayers track how these distributions are reported and resolve mismatches, but professional advice will likely be necessary in edge cases.
For now, the $2,500 long-term care distribution offers a promising but imperfect bridge between retirement savings and future care needs. Younger workers who can navigate the insurer disclosure gate and their plan’s administrative rules may be able to lock in coverage without sacrificing an extra 10% to penalties. Everyone else will be watching how quickly insurers file, how many employers opt in, and whether the IRS fills in the remaining blanks before the first wave of distributions hits tax returns.
