New Opportunity: 401(k) Participants Can Access Long-Term Care Insurance
New Opportunity for 401(k) Participants: Long-Term Care Insurance Access
The recent rule under the Secure Act 2.0 introduces a significant opportunity for 401(k) plan participants. Now, employees can make early, penalty-free withdrawals to pay for long-term care insurance premiums. Effective December 29, 2025, this legislative adjustment aids in preparing for potential long-term care needs, presenting a new avenue for financial planning.
Traditionally, withdrawing funds from a 401(k) before age 59½ incurs a hefty 10% penalty, alongside regular taxes. However, certain exemptions exist for specific medical expenses and other qualified events. The new provision notably adds long-term care insurance payments to this list, benefiting participants seeking alternative funding solutions.
Understanding Long-term Care Needs
The U.S. Department of Health & Human Services reports that individuals reaching 65 face a 70% likelihood of needing long-term care. Despite this, Medicare does not typically cover these services, driving many to explore alternative funding or insurance solutions. A 2024 Genworth Financial survey highlights escalating care costs, with home health aides averaging $77,792 annually and nursing home facilities reaching $127,750 for private rooms.
Impact on Retirement and Insurance Plans
Industry experts like Carolyn McClanahan, founder of Life Planning Partners, caution against disrupting long-term financial goals by tapping into retirement funds. The cost of premiums can be substantial, and the claims process complex. For instance, a 55-year-old male may pay $2,200 annually for a long-term care insurance policy, as per the American Association for Long-Term Care Insurance. Some insurers offer hybrid policies, blending long-term care riders with life insurance, though these face scrutiny over the lack of guaranteed returns.
Challenges and Regulatory Considerations
Implementation challenges persist, as 401(k) sponsors have discretion over plan amendments. Alexander Papson of Schneider Downs emphasizes that despite the new option, it's not guaranteed to be available widely due to the need for extensive plan modifications. Withdrawals cap at either the annual premium or $2,600, indexed for inflation, with further restrictions based on account balance proportions.
Brad Campbell of Faegre Drinker underscores that these withdrawals are still subject to taxes, affecting participants based on their tax bracket. Ambiguities remain, particularly regarding hybrid policy premiums' eligibility, necessitating ongoing IRS guidance for clarity. Participants will need insurer verification for premium payments on qualified policies to leverage this benefit.
Overall, this new rule introduces novel flexibility in retirement planning. It requires careful evaluation as industry stakeholders assess its broader impact on retirement savings strategies.