SECURE Act 2.0 and Long-Term Care Insurance: How 401(k) Withdrawals Can Fund LTC Premiums

SECURE Act 2.0 and Long-Term Care Insurance: How 401(k) Withdrawals Can Fund LTC Premiums

The SECURE Act 2.0, enacted as part of the Consolidated Appropriations Act of 2023, introduced a powerful new funding mechanism for long-term care protection: the ability to withdraw funds from 401(k) retirement plans to pay long-term care insurance premiums without incurring the 10 percent early withdrawal penalty. For employees and employers alike, this creates a strategic opportunity to align long-term care protection with retirement savings strategies. Employers offering group long-term care insurance through Clinicians Care Association (CCA) can educate employees about leveraging SECURE Act 2.0 benefits to fund coverage.

SECURE Act 2.0 LTC Withdrawal Rules

Under SECURE Act 2.0, qualified retirement plan participants can withdraw up to $35,000 annually (or a lifetime maximum of $35,000, with some proposed variations in legislative discussions) from their 401(k), 403(b), or similar qualified retirement plans to pay premiums for long-term care insurance without triggering the 10 percent early withdrawal penalty that normally applies to distributions taken before age 59.5.

The distribution is treated as ordinary income and is subject to income taxation, but the early withdrawal penalty is waived. This creates a tax-advantaged funding pathway for long-term care insurance that was not previously available.

The $35,000 limit applies per individual, meaning a married couple could potentially withdraw up to $70,000 combined if both have separate qualified plans. For households with substantial retirement savings, this represents a meaningful funding source for long-term care insurance.

How SECURE Act 2.0 Coordinates with Group LTC Coverage

Employer-sponsored group long-term care insurance through CCA typically costs $180-480 annually per employee, depending on benefit tier and age. SECURE Act 2.0's $35,000 annual withdrawal limit is far in excess of the annual premium cost, meaning employees can fully fund group LTC insurance from retirement account distributions for many years.

An employee with an employer group LTC policy costing $300 annually can withdraw $300-$400 from their 401(k) to pay the full annual premium. The withdrawal avoids the early withdrawal penalty, reducing the net cost compared to withdrawing the same amount for non-qualified purposes. Because long-term care insurance premiums qualify under SECURE Act 2.0, this withdrawal is not considered a hardship distribution and does not trigger other plan restrictions.

This coordination enables a strategic funding approach: employees contribute to 401(k) accounts throughout their working years, then use SECURE Act 2.0 distributions to fund long-term care insurance at the point in life when protection becomes critical (typically ages 40-60 when care costs loom).

The Tax Advantage: Income Taxation Without Early Withdrawal Penalty

Understanding the tax treatment of SECURE Act 2.0 distributions clarifies why this mechanism is valuable. When an employee withdraws funds from a traditional 401(k) before age 59.5, two taxes normally apply: ordinary income tax on the distribution, plus a 10 percent penalty tax. The penalty adds substantially to the cost of early access.

SECURE Act 2.0 eliminates the 10 percent penalty for distributions used to pay long-term care insurance premiums. Ordinary income tax still applies. An employee in the 24 percent federal tax bracket withdrawing $400 to pay a long-term care insurance premium would owe $96 in federal income tax, but avoids the $40 penalty tax that would normally apply.

This advantage compounds over years. An employee funding $300-$500 annually in long-term care insurance from their 401(k) avoids approximately $30-$50 per year in penalty taxes. Over a 20-year span of active premiums, this creates $600-$1,000 in aggregate penalty tax avoidance.

Additionally, for self-employed individuals and those owning S-corps or partnerships with self-employment income, tax-qualified long-term care insurance premiums may be deductible as medical expenses subject to AGI limitations (2 percent haircut on Schedule A). While the deduction is not dollar-for-dollar equivalent to business deduction status, it provides incremental tax benefit.

Integrating Employer Group LTC with 401(k) Education

Employers offering group long-term care insurance should integrate SECURE Act 2.0 education into 401(k) plan education and communications. When employees understand that they can use 401(k) funds to pay long-term care insurance premiums without penalty, enrollment in group coverage often increases.

Effective integration approaches include the following:

Open Enrollment Communication: When introducing or re-promoting group LTC insurance during annual benefits open enrollment, mention SECURE Act 2.0 as a funding option. A simple message: "You can use SECURE Act 2.0 distributions from your 401(k) to pay your long-term care insurance premiums without the 10 percent early withdrawal penalty."

401(k) Plan Materials: Include language in 401(k) Summary Plan Descriptions (SPD) or participant education materials noting the availability of penalty-free distributions for long-term care insurance premiums. This signal that the plan supports LTC protection encourages eligible participants to consider group enrollment.

Holistic Retirement Planning: Frame long-term care insurance as part of comprehensive retirement security. Employees who understand their 401(k) will help fund care cost protection in retirement are more likely to view group LTC coverage as an essential retirement benefit rather than an optional expense.

Financial Wellness Programs: If your organization offers financial wellness or planning resources, include information about SECURE Act 2.0's LTC funding option as part of comprehensive retirement planning guidance.

Strategy: Front-Loading 401(k) Contributions, Back-Loading LTC Funding

SECURE Act 2.0 creates a strategic funding model that some employers and financial advisors are beginning to recommend: increase 401(k) contributions during peak earning years (ages 30-50), then use SECURE Act 2.0 distributions to fund long-term care insurance starting at ages 40-45 when care risk becomes material.

This approach accomplishes several objectives simultaneously: maximizes retirement savings in peak earning years (when tax-deferred compounding is most valuable), creates a funding source for long-term care insurance without requiring separate out-of-pocket premium payments, ensures long-term care protection begins at a critical life stage, and maintains retirement savings for retirement income needs.

For professional organizations with high-earning clinicians, this strategy is particularly effective. A physician in their 40s with substantial 401(k) balances can use SECURE Act 2.0 to fund $300-400 annually in long-term care insurance while maintaining full retirement savings trajectory.

Employer Action Steps

Employers seeking to integrate SECURE Act 2.0 messaging with group LTC coverage should take the following steps:

Review 401(k) Plan Documents: Confirm your 401(k) plan permits distributions for long-term care insurance premiums under SECURE Act 2.0. Most modern plans include this language, but older plans may require amendment. Work with your plan administrator or benefits counsel to ensure compliance.

Update Participant Materials: Include language in SPDs, annual benefit statements, and educational materials noting the availability of penalty-free distributions for long-term care insurance premiums. Make this information prominent.

Coordinate with Group LTC Promotion: When introducing or promoting group long-term care insurance, mention SECURE Act 2.0 as a funding option. This addresses a common employee concern: "How will I afford the premium?" Answer: from your 401(k) with no penalty.

Partner with Financial Advisors: If your organization uses external financial wellness providers or advisors, brief them on the SECURE Act 2.0 opportunity so they can include it in recommendations to participants.

Capture Enrollment: Make enrollment in group LTC coverage simple and linked to 401(k) education. Employees who understand both the benefit and a funding mechanism are significantly more likely to enroll.

Who Does What: Roles in the CCA Group LTC Program

Three parties work together to deliver employer-sponsored long-term care coverage:

Clinicians Care Association (CCA) serves as the policyholder and access structure. CCA holds the group policy. Employees enroll through CCA's framework, and CCA maintains the administrative relationship with the insurance carrier. CCA is not the plan sponsor, does not contribute to premiums, and does not administer the plan on the employer's behalf.

Hollowtree manages education, enrollment, billing, and member-change administration. Hollowtree works directly with the employer to communicate about the benefit, supports clinicians through the enrollment process, handles ongoing billing, and manages membership changes (additions, terminations, coverage updates). Hollowtree is the primary contact for employers and clinicians regarding program questions and administration.

The insurance carrier provides the insurance policy and claims administration. The carrier's underwriting establishes rates, manages claims, communicates benefit changes, and pays approved claims. The policy terms, limitations, and coverage rules are governed by the carrier's policy documents.

This three-party structure is intentional. The program is structured so the organization is not the plan sponsor or policyholder and is intended to fit within the Department of Labor voluntary-plan safe harbor -- meaning the organization does not administer the plan, does not contribute to premiums, and does not take on fiduciary responsibility. This is the intended design; confirm specifics with legal counsel as appropriate.

Important Limitations

Coverage is subject to plan terms, eligibility requirements, waiting periods, and any applicable pre-existing condition provisions. Benefit amounts, elimination periods, and coverage rules are governed by the carrier's policy documents. Full details are available in the enrollment portal and policy documents. SECURE Act 2.0 distributions are subject to your qualified retirement plan's terms and conditions -- consult with your plan administrator or benefits counsel regarding withdrawal procedures and any plan-specific limitations.

Frequently Asked Questions

How much can employees withdraw from 401(k) for long-term care insurance under SECURE Act 2.0?

Employees can withdraw up to $35,000 annually from their 401(k) for long-term care insurance premiums without the 10 percent early withdrawal penalty. The distribution is subject to ordinary income taxation, but the penalty is waived.

Can employers coordinate group long-term care insurance with SECURE Act 2.0 benefits?

Yes. Employers can offer group long-term care insurance while educating employees about using SECURE Act 2.0 distributions to pay premiums. This coordination makes group coverage more affordable and improves enrollment.

What are the tax advantages of using 401(k) funds for long-term care insurance?

SECURE Act 2.0 distributions avoid the 10 percent early withdrawal penalty, reducing the net cost of withdrawals. Additionally, tax-qualified long-term care insurance policies may provide deduction benefits for self-employed individuals or those with self-employment income.

Does SECURE Act 2.0 require employer action for long-term care insurance funding?

No employer action is required for SECURE Act 2.0 itself -- the rule applies automatically to qualified plans. However, employers can enhance the benefit by coordinating group long-term care offerings with 401(k) plan education about this funding option. Employers should confirm their 401(k) plan permits distributions for LTC insurance under SECURE Act 2.0.

This article provides general information about SECURE Act 2.0 and long-term care insurance funding. Tax treatment of distributions, plan-specific rules, and eligibility for long-term care insurance premium deductions vary by individual circumstance. Consult with tax advisors and plan administrators regarding your specific situation.