Secure 2.0 lets 401(k) withdrawals pay long-term care premiums

Section 334 of Secure 2.0 allows distributions from defined-contribution retirement plans after Dec. 29, 2025, to be used for qualified long-term care (LTC) insurance premiums without the 10% early-withdrawal penalty under IRC §72(t). The change applies only if an employer adopts the option in its plan. The IRS extended most plan amendment deadlines to Dec. 31, 2027.

Annual penalty-free distributions are limited to the smallest of three amounts: the actual premiums paid, 10% of the participant’s vested benefit, or $2,600 for 2026. That dollar amount will be indexed for inflation in future years. Distributions remain subject to ordinary income tax; the provision removes the early-withdrawal penalty but does not exempt the money from taxation.

Adoption of the provision has been limited. A recent industry survey found roughly 3% of plans have implemented the option while about 82% have not. Some plan sponsors and recordkeepers reported lack of awareness or technical barriers to offering the feature. Benefits professionals and financial advisers are advised to confirm plan terms and recordkeeper capabilities directly rather than assume availability.

Research on LTC need and coverage shows a gap between risk and private insurance ownership. Studies indicate about 80% of people aged 65 and older will require some form of long-term care, and about 40% will need high-intensity care for longer than a year. Yet only about 3% of Americans over 50 hold private LTC insurance. A 2025 survey found 58% of adults incorrectly believe Medicare pays for long-term care, which can leave households unprepared for costs.

Workplace caregiving affects labor and employer costs. One report found about 53% of full-time employees manage caregiving duties, leading to missed work and decreased productivity for employers.

Premiums vary by age and underwriting. Data show the average annual premium for a couple age 55 is roughly $2,080; premiums can more than double by age 65. Purchasing insurance at younger ages generally produces lower premiums and fewer insurability issues. The Secure 2.0 distribution option can be used to pay premiums during that earlier underwriting window when a policy is still obtainable at lower cost.

IRA-funded purchases carry different tax considerations. Any distribution from a traditional IRA is taxable as ordinary income even when the early-withdrawal penalty is waived. Some LTC carriers will accept IRA rollover dollars and report the taxable distribution spread over 10 years to moderate immediate tax impact; practices vary by carrier.

Other funding approaches include asset-based LTC policies, health savings account distributions where allowed, and life insurance policies with LTC riders. For higher-net-worth households, LTC planning can involve irrevocable life insurance trusts, charitable remainder trusts, Medicaid asset protection trusts and coordination with tax and estate advisers.

Advisers and benefits professionals suggest using the provision as a trigger for a benefits check with clients and employers. Chuck Greenblott, founder of Power 10 Financial, described the cost dynamics when people delay buying coverage as “the math is brutal.” Asking employers about plan options can increase awareness even when a plan has not adopted the provision.

The statutory $2,600 cap for 2026 is modest. Some advisers view the provision as a prompt for earlier planning and for checking whether an employer plan can help clients pay LTC insurance premiums before health issues limit options.