Navigating the Expanding Landscape of In-Service Distributions

With everything else going on in our retirement plan world, you may have missed the latest in-service distribution option to come online. Participants can now request in-service distributions for long-term care (LTC) insurance premiums. This option was included in SECURE 2.0 and became effective December 30, 2025. The IRS recently released guidance about this new option – Notice 2026-33.

The ability to pay for LTC premiums merely adds to a lengthy list of in-service distributions now available. Prior to the SECURE Act in 2019, if participants wanted access to 401(k) funds while still working, they were limited to hardship distributions unless they were over age 59 ½. Now, participants may have access to at least six different in-service distribution options. Even hardship distributions are easier to obtain than they were before 2019.

It’s time for a refresher on what is available and how the options compare and contrast. Knowing each of these options and their differences can help you better serve your clients.

Comparing In-Service Distribution Options

All of the in-service distribution options share a common trait. None of them have mandatory withholding or require a special tax (402(f)) notice. This not only makes processing easier but also provides a higher net amount for participants who may be in dire need of their money. The table below details other features for each option.

Please note that the “General Limit” column is a simplified overview. Each of these options includes additional complexities related to the amount and timing of distributions. It would be best to evaluate those nuances when discussing the specific options with your clients.

You may wonder why distributions for terminal illness are not included in the table. Although these distributions are no longer subject to the 10% early withdrawal penalty under SECURE 2.0, they are not a standalone distributable event. There have been discussions within Congress about allowing this type of payment to be a distributable event, but to date, there is no law permitting it.

Optional Features, Strategic Decisions

Another characteristic of each in-service distribution is that they are all optional. Plan sponsors are not required to include any of these in-service distributions in their plans. Whether these distribution options are beneficial for the goals or intent of retirement plans can lead to deep conversations, with valid arguments on both sides. Plan sponsors and service providers are being asked to strike an increasingly delicate balance between participant access and long-term retirement security.

Regarding participant access, if participants know this money may be available under certain circumstances, they should be more willing to contribute to the plan. If you agree with this argument, the ability for participants to self-certify that the requirements particular to each option have been met is critical. Transferring the burden and responsibility from the employer or service provider to the participant makes offering these options much easier to administer.

However, plan sponsors should be deliberate in choosing whether to offer any of these options because there does not appear to be a “trial run” opportunity. To illustrate, an employer allows emergency in-service distributions for a couple years, then – based on perceived abuse – decides to take it away. Taking it away creates administrative complexity because these in-service distributions (except hardship distributions) are considered protected benefits. Consequently, removing the ability to take an emergency in-service distribution (or other distribution options) would only apply to future contributions. In other words, any balance up to the effective date would still be available for emergency in-service distributions. This highlights that plan sponsors should approach the addition of these in-service distribution options as a lasting, rather than temporary, decision.

In-Service Distribution Options Have Increased – Are Plan Sponsors Ready?

As in-service distribution options expand, plan sponsors and service providers must consider new layers of administrative oversight, participant education, and plan design considerations. Moreover, the upcoming SECURE 2.0 amendment deadline, generally December 31, 2026, requires the documentation of both past and future operations. Understanding not just what is available, but how each option works and interacts with plan provisions is essential to helping clients make informed, deliberate decisions.

Each plan sponsor must evaluate whether allowing these distribution options aligns with their participant needs and retirement plan objectives. They also need to recognize that these decisions should be long-lasting as they can be difficult to unwind. You can help assess whether the options enhance, rather than undermine, the primary goal of retirement readiness by taking a thoughtful, informed approach.

About the Author

Brian Furgala, Esq., CPC, QPA is Senior Director, Retirement Services Strategy for PenChecks, a leader in outsourced retirement plan distribution processing and Automatic Rollover/Missing Participant IRAs and related services. His broad experience as an ERISA attorney and senior executive for several leading retirement plan service providers gives him a unique perspective on the industry.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.