IRS notice clarifies long-term care distribution rules for retirement plans

What KPMG teams need to change first

Benefits, retirement, executive compensation, payroll, and tax reporting teams need to move together on Notice 2026-33, because the IRS has turned a policy concept into an administration problem. The practical work is not just deciding whether a plan will allow qualified long-term care distributions; it is rewriting plan language, updating participant communications, building approval checks, mapping withholding and reporting, and making sure downstream tax forms match the new rule set.

That matters because a mistake on a long-term care distribution is not a paper cut. If a client applies the wrong limit, fails to confirm that insurance is certified, skips a required disclosure, or reports the payment incorrectly, the result can be audit exposure, amendment cleanup, or participant remediation work. For KPMG specialists, this is exactly the kind of crossover assignment that starts in benefits design and ends in tax reporting.

How the new distribution rule works

Notice 2026-33 clarifies how qualified long-term care distributions are supposed to work under section 72(t)(2)(N) of the SECURE 2.0 framework. The option comes from section 334 of the SECURE 2.0 Act of 2022, enacted on December 29, 2022 as part of the Consolidated Appropriations Act, 2023, and it becomes effective for distributions made after December 29, 2025.

The distribution cap is tightly defined. In any taxable year, a qualified long-term care distribution is limited to the least of three amounts: the premiums paid or assessed during the year for certified long-term care insurance for the employee or the employee’s spouse, 10% of the participant’s vested accrued benefit under the plan, or $2,600 for 2026, indexed for inflation. That means plan teams cannot treat the feature like a broad hardship withdrawal or a simple health-related distribution. It has to be tested against a specific annual ceiling every time.

The notice also makes clear that this is optional, not mandatory, for a defined contribution plan. That gives sponsors room to decide whether the feature fits their population, service model, and recordkeeper setup, but it also means the operational burden lands on the sponsor once the feature is adopted. For KPMG advisers, the decision point is not only legal eligibility. It is whether the client can administer the feature cleanly enough to avoid later corrections.

Why safe harbors matter for administrators

One of the most useful parts of Notice 2026-33 is the safe harbor for plan administrators making qualified long-term care distributions. In practice, that is the sort of detail clients want before they commit to a new distribution feature, because it helps define what a reasonable administrative process looks like when the underlying facts come from a third party.

The guidance also addresses certified long-term care insurance issuers and reporting under sections 401(a)(39), 6050Z, and 72(t)(2)(N). That puts issuers, administrators, and tax reporting teams into the same workflow. Industry commentary says administrators may rely on issuer statements to confirm that the insurance is certified and to confirm premium amounts, which is important because those are exactly the facts that will drive the annual limit test.

There is also a reporting wrinkle to watch. Industry commentary says Form 1099-LPS is still in draft form, which means firms advising clients now need to think about how current payroll and tax reporting systems will handle a feature that is not fully baked in the forms pipeline. For KPMG tax reporting teams, that is a classic control gap risk: the plan may be allowed, but the reporting architecture may still be catching up.

What plan sponsors should do before the feature goes live

Defined contribution plan sponsors that want to permit qualified long-term care distributions should not treat the notice as a simple green light. They need to confirm the plan document allows the feature, decide which transactions qualify, and define the data inputs that will be used to test the annual limit. If the plan is silent on the feature, or if the process for substantiating premiums is vague, the sponsor may be creating a future correction project before the first distribution is even paid.

For public school 403(b) plan sponsors and applicable collectively bargained plans, the amendment timeline matters just as much as the distribution rules. Industry summaries report that the deadline for conforming amendments has been extended to December 31, 2027 for eligible non-governmental defined contribution plans, section 403(b) plans maintained by a public school, and applicable collectively bargained plans. That gives sponsors more time, but it does not remove the need to stage changes now, especially if payroll, recordkeeping, and participant communications all sit with different vendors.

This is the point where the operational work gets real. Benefits teams have to define the participant-facing language. Retirement teams have to align the distribution feature with plan terms. Payroll has to know whether the transaction affects withholding or employee-level records. Tax reporting has to map the payment to the right reporting treatment. Executive compensation teams may need to check whether any nonqualified arrangements, supplemental benefits, or executive medical reimbursements are being described too loosely in internal materials and should not be confused with the plan feature.

What this means inside a firm like KPMG

For KPMG, this is not just another IRS notice to file away. It is a practical implementation job that crosses tax, human capital, and retirement advice, and it arrives while client teams are already balancing busy season demands, plan cycle deadlines, and a steady flow of SECURE 2.0 follow-on guidance. The firms that move fastest will be the ones that can translate technical text into a checklist clients can actually use.

That checklist should be specific. It should tell clients who verifies certification, what documentation supports the premium amount, how the plan applies the annual cap, whether the sponsor is using a safe harbor process, what goes into participant communications, and how the payment is reported. It should also define what happens if a distribution is misclassified, because that is where remediation work begins and where a seemingly small benefits decision can spill into audit questions later.

Notice 2026-33 is a reminder that SECURE 2.0 is still unfolding in practice. The headline policy may already be familiar, but the operational details are still being written into plan documents, payroll workflows, and tax reporting systems. For the specialists who have to make the rule work, the risk is not misunderstanding the concept. The risk is letting the concept outpace the controls.