Penalty-Free 401(k) for LTC Insurance: Notice 2026-33 Guide
Long-term care insurance is one of the most commonly skipped pieces of a retirement plan — premiums sting when paid from cash flow. SECURE 2.0 created a pressure valve: qualified long-term care distributions let participants tap their 401(k) or similar plan, penalty-free, to pay certified long-term care insurance premiums. With the provision live for distributions after December 29, 2025, IRS Notice 2026-33 fills in the mechanics that plans, insurers, and participants were waiting for.
At SW Accounting & Consulting Corp, we advise Los Angeles area individuals and plan-sponsor employers on retirement distributions and their tax treatment. Below: who can use this, the three-part limit, the penalty exemption, what Notice 2026-33 requires of insurers and plans, and the planning angles.
What is a qualified long-term care distribution? 🏥
SECURE 2.0 §334 added IRC §401(a)(39): a qualified defined contribution plan may distribute funds to pay for “certified long-term care insurance” covering the employee or the employee’s spouse — without jeopardizing the plan’s qualified status. The provision is effective for distributions made after December 29, 2025.
“Certified long-term care insurance” generally means a qualified long-term care insurance contract under IRC §7702B(b) covering qualified long-term care services (§7702B(c)), including coverage of the risk that the insured becomes chronically ill.
How much can you take? The three-part limit 📐
The annual qualified long-term care distribution is capped at the LEAST of three amounts (IRC §401(a)(39)(B)):
| Limit | Detail |
|---|---|
| 1. Actual premiums | The amount paid by or assessed to the employee during the year for certified LTC insurance for the employee or spouse |
| 2. 10% of vested benefit | 10% of the present value of the employee’s vested accrued benefit under the plan |
| 3. Dollar cap | $2,600 for 2026 — a $2,500 base amount, inflation-indexed (rounded to the nearest $100) |
A participant pays $3,200/year in certified LTC premiums and has a $400,000 vested 401(k) balance. The three limits: premiums $3,200; 10% of vested = $40,000; dollar cap $2,600 (2026). The least is $2,600 — so up to $2,600 can come out penalty-free this year toward those premiums. The distribution is still includible in income (it’s a pre-tax account); what’s waived is the 10% EARLY-distribution additional tax.
The 10% penalty exemption ⚡
Under IRC §72(t)(2)(N), the 10% additional tax on early distributions does NOT apply to qualified long-term care distributions. That makes this one of the few ways a participant under 59½ can reach plan money for a current need without the penalty — alongside exceptions like disability and certain emergency distributions.
Keep the tax frame straight:
- Ordinary income tax still applies — a pre-tax distribution remains includible in gross income.
- The 10% additional tax is waived — the §72(t) early-distribution penalty does not attach.
- Plan adoption is optional — a plan must choose to offer these distributions; participants can’t demand one from a plan that hasn’t added the feature.
What does Notice 2026-33 add? 📑
Notice 2026-33 is the operating manual for the new regime — guidance for insurance issuers, plan administrators, and individuals, plus an extended plan-amendment deadline.
- Long-term care premium statement — a plan cannot make a qualified LTC distribution unless the insurance issuer has provided a “long-term care premium statement” for the specific coverage product (IRC §401(a)(39)(E)). The notice details what the statement must contain.
- Issuer disclosure to the IRS — issuers must file an Issuer Disclosure with the IRS for the coverage product (and receive an acknowledgment letter) before filing premium statements.
- New §6050Z reporting — Form 1099-LPS — SECURE 2.0 added §6050Z reporting for these arrangements; the notice flags the new Form 1099-LPS for long-term care premium statements.
- Safe harbors for plan administrators — administrators get safe-harbor procedures for making qualified LTC distributions (e.g., reasonable reliance on participant certifications and issuer statements).
- Plan amendment deadline extended — the notice extends the deadline for non-governmental DC plan sponsors (and certain 403(b)/collectively bargained plans) to amend plan documents to permit these distributions.
The distribution is only “qualified” if the chain is intact: the insurer filed its Issuer Disclosure and received IRS acknowledgment → the insurer issued a long-term care premium statement for the product → the plan made the distribution within the three-part limit. A missing link can turn a planned penalty-free distribution into an ordinary early distribution with the 10% additional tax. Verify before distributing.
Planning angles 🧭
- For individuals — if LTC premiums have kept you from buying coverage, the penalty-free channel (up to $2,600 in 2026) lowers the friction. Pair with the medical-expense itemized deduction rules for LTC premiums where applicable.
- For employers / plan sponsors — adding the feature is optional but increasingly expected; coordinate the plan amendment (deadline extended by the notice), administrative procedures, and the safe harbors.
- For spouses — premiums for the employee’s spouse count toward the limit, useful where one spouse has no plan of their own.
- Watch the indexed cap — the dollar limit adjusts with inflation ($2,600 for 2026); revisit annually.
Frequently asked questions
No. A pre-tax distribution is still includible in gross income. What §72(t)(2)(N) waives is the 10% additional tax on early distributions — valuable for participants under 59½.
The least of: your actual certified LTC premiums for you or your spouse, 10% of your vested accrued benefit, or $2,600 (the inflation-adjusted cap for 2026).
The §401(a)(39) provision is built for qualified defined contribution plans (with the notice also addressing certain 403(b) and collectively bargained plans). Check plan type and whether your plan has adopted the feature — and consult a professional for your specific account.
Plan adoption is optional. Employers must amend the plan to permit qualified LTC distributions — Notice 2026-33 extended the amendment deadline for most non-governmental DC plans. Ask your employer or plan administrator.
How can SW Accounting help? 💼
At SW Accounting & Consulting Corp, we help LA-area individuals fold qualified long-term care distributions into a retirement and insurance plan — verifying the three-part limit, confirming the issuer/premium-statement chain before distributing, and coordinating the income-tax treatment. For employers, we coordinate the plan amendment, administrative safe harbors, and Form 1099-LPS-era reporting with your TPA and counsel.
📩 Schedule a long-term care distribution consultation
Disclaimer: This article is for informational purposes only and is not legal or tax advice. Always consult a qualified professional regarding your specific facts. Primary sources: SECURE 2.0 Act of 2022 §334 (P.L. 117-328); IRC §§401(a)(39), 72(t)(2)(N), 6050Z, 7702B; IRS Notice 2026-33 (Guidance on Qualified Long-Term Care Distributions).
