Buried in the IRS instructions for Form 1099-R is a sentence that costs people real money. Payers are told to use distribution code 1 — "Early distribution, no known exception" — even if the distribution is a terminally ill individual distribution under section 72(t)(2)(L).
So the tax form arrives looking like an ordinary penalized withdrawal. Hand it to tax software or a preparer without comment, and the 10% additional tax gets calculated on a distribution that does not owe it. Nobody at the custodian is going to flag this. The exception exists, but claiming it is entirely the account owner's job.
Seven Years, Not Months
The SECURE 2.0 Act added section 72(t)(2)(L), waiving the 10% early distribution penalty for individuals certified as terminally ill. The word "terminal" does most of the damage here, because people assume it means hospice care.
It does not. The statute borrows the definition from section 101(g)(4)(A) but substitutes 84 months for 24 months. As IRS Notice 2024-02 puts it, a terminally ill individual is someone "certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification."
Eighty-four months is seven years. That window covers a great many diagnoses that no one would call imminent — and it is considerably easier to meet than the separate disability exception, which requires proof that you cannot engage in any substantial gainful activity because of a condition of "long, continued, and indefinite duration."
What the Certification Must Contain
A physician's certification is sufficient evidence, and self-certification by the taxpayer is never enough. Notice 2024-02 requires five elements: the 84-month statement itself; a narrative description of the evidence supporting it; the physician's name and contact information; the date of examination or record review plus the signature date; and the physician's signature with an attestation that they composed the narrative from their own examination or review.
"Physician" means a doctor of medicine or osteopathy licensed in the state where they practice. A physician who owns the account cannot certify their own terminal illness.
Two further points matter more than they appear to. First, the certification cannot come later. Q&A F-7 is unambiguous: the distribution must be made on or after the certification date. A withdrawal taken in March cannot be rescued by a July certification. Second, the underlying medical records need not go to the custodian — but you must keep them, along with a copy of the certification, in your tax files under section 6001 in case the IRS asks.
The Plan Does Not Have to Offer It
Here is where the mechanics get genuinely confusing. Offering terminally ill individual distributions is optional — for employer plans and for IRAs alike. And section 72(t)(2)(L) waives only the penalty; it does not override the distribution restrictions in a 401(k) or 403(b).
If your plan has not adopted the provision, you can still get there. Notice 2024-02 walks through an example: a 50-year-old whose 401(k) permits hardship distributions but not terminally ill distributions takes a $15,000 hardship withdrawal after a valid certification, then claims the terminal illness exception on Form 5329. The $1,500 penalty disappears. You need some otherwise permissible in-service distribution as the vehicle — the exception handles the tax, not access to the money.
IRA owners have it simpler, since IRAs carry no comparable in-service restriction.
Practical Takeaways
Know the code: 20. On Form 5329, exception code 20 is "Distributions due to terminal illness." That single entry is what removes the penalty. Tell your preparer the code; do not assume the 1099-R communicates anything.
Get the certification before the withdrawal. This is the most common way to lose the exception entirely, and it is unfixable after the fact.
There is no dollar cap. Unlike the $1,000 emergency personal expense distribution or the hardship rules, the amount is unlimited for penalty purposes.
You get three years to change your mind. Any portion may be recontributed during the three-year period beginning the day after receipt — and it can go into an IRA even if it came out of a 401(k) as a hardship distribution, which ordinary hardship withdrawals never permit. Repayments are reported with code "TI" in box 14b.
The distribution is still taxable income. The exception removes the 10% additional tax and nothing else. Ordinary income tax, Medicare IRMAA thresholds, and the taxability of Social Security benefits all still apply — which is exactly why spreading a large withdrawal across tax years, or using the three-year recontribution window, can be worth modeling before the money moves.
Sources: IRS Notice 2024-02, Section F (Q&A F-1 through F-15); Instructions for Form 5329 (2025), Exception Code 20; 2026 Instructions for Forms 1099-R and 5498; 26 U.S.C. 72(t)(2)(L); 26 U.S.C. 101(g)(4)(A)