Case Studies
Tax Compliance Case Study: Avoiding Penalties Through Secure 2.0 Long-Term Care Distributions
The SECURE 2.0 Act introduced qualified long-term care distributions to allow penalty exceptions—but compliance lapses can lead to costly mistakes. This case study shows how to navigate safely.
By NomadicTax Research Team • 5-8 min read • June 11, 2026
## Background: What Are Qualified Long-Term Care Distributions (QLTCD)?
Under the **SECURE 2.0 Act** (enacted December 2022), the IRS amended the tax code to allow certain distributions from defined contribution plans for certified long-term care insurance for the **employee or the spouse**, effective **after December 29, 2025**. These are now **exempt** from the 10% penalty for early distributions under section 72(t) and reported under section 401(a)(39) and new reporting requirement 6050Z. ([irs.gov](https://www.irs.gov/irb/2026-24_IRB?utm_source=openai))
## The Case: Jane’s RMD Mistake vs. Proper Implementation
**Jane’s Scenario**
- Jane is 58 and has a 401(k) plan with a certified long‐term care option.
- In March 2026, she takes a distribution of $10,000 to pay a certified LTC premium she and her spouse have already been incurring.
- She assumes she’ll incur no penalty.
**What Went Wrong**
- Jane didn’t provide the required documentation to the issuer reporting under **section 6050Z** (issuers must issue premium statements and report distributions).
- Her plan administrator had not adopted the safe harbor the IRS published for plan amendments and disclosures.
- As a result, IRS treated the distribution as a **regular early withdrawal**, imposed **10% penalty**, and included regular withholding.
## Correct Implementation Steps
1. **Issuer Requirements**: Insurance companies must be certified LTC issuers, issue statements under 6050Z and make proper disclosures.
2. **Plan Administrator Responsibilities**: Adopt required provisions under section 401(a)(39), including allowing QLTCD distributions and following safe harbors.
3. **Individual Actions**: Retain receipts (premiums paid), proof that LTC insurance is certified. Make sure distributions are used **only** for qualified LTC premiums.
4. **Reporting**: File forms accurately; ensure reporting on W-2 or 1099, etc., matches issuer’s statements.
5. **Call in Safe Harbor**: Notice 2026-33 provides safe harbor for administrators for certain plan amendments and disclosure deadlines. ([irs.gov](https://www.irs.gov/irb/2026-24_IRB?utm_source=openai))
## Lessons Learned & Takeaways
- Distributions made after December 29, 2025 qualify, but rules must be followed strictly—and lack of documentation is the biggest trigger for IRS audits.
- Plan administrators should be proactive—adopt and amend plan documents ahead of deadlines. Individuals should confirm plan’s readiness.
- Use IRS notices (like Notice 2026-33) which clarify how to comply. Jane’s case might have been avoided if she’d checked safe harbor provisions. ([irs.gov](https://www.irs.gov/irb/2026-24_IRB?utm_source=openai))
## Final Thoughts
Qualified long-term care distributions are powerful tools introduced by SECURE 2.0. When used correctly, they avoid penalties and help with healthcare planning. But missteps in compliance can cost dearly. Knowing the rules, saving documentation, and coordinating between insurance issuer, plan, and IRS requirements are essential.