IRS Guidance Addresses Qualified Birth or Adoption Distributions, Other Issues Under SECURE Act

The IRS has issued Notice 2020-68 providing guidance on certain issues arising under the SECURE Act (see our Checkpoint article), which significantly changed the statutory rules for retirement plans and IRAs. Some changes, like those affecting required minimum distributions (see our Checkpoint article) and multiple employer plans (MEPs) (see our Checkpoint article), have already been the subject of guidance. This notice addresses qualified birth or adoption distributions, long-term part-time employees’ accelerated opportunity to make elective deferrals, the small-employer tax credit for establishing automatic contribution arrangements, and the inclusion of certain qualified foster care payments when applying the Code § 415(c) compensation limit. The notice also addresses the repeal of the maximum age for IRA contributions and the reduction of the minimum age for in-service pension plan distributions. Highlights of interest to 401(k) plans include the following:

• Qualified Birth or Adoption Distributions

  • Definition and Amount. Distributions are not treated as qualified birth or adoption distributions unless the recipient’s tax return reports the name, age, and TIN of the child or eligible adoptee. Eligible adoptees must be under age 18 or physically or mentally incapable of self-support (under the Code § 72(m)(7) disability definition) and cannot be the child of the recipient’s spouse. Each parent may receive a qualified birth or adoption distribution of up to $5,000 per child or adoptee.
  • Plan Requirements. Plans are not required to offer these distributions. But if they are offered, the plan must accept recontributions, up to the amount of qualified birth or adoption distributions received from the same plan, provided the distribution recipient is, at the time of recontribution, eligible to make a rollover contribution to the plan. Plan sponsors or administrators may rely on a recipient’s reasonable representation of eligibility for a distribution, absent actual knowledge to the contrary. Distributions are not treated as eligible rollover distributions under the direct rollover rules, Code § 402(f) notice requirements, or the 20% mandatory withholding rules, but recontributions from plans other than IRAs are treated as direct rollovers.
  • Recharacterization. Otherwise permissible distributions from a plan that does not specifically permit qualified birth or adoption distributions may be treated as qualified birth or adoption distributions on the recipient’s federal tax return (subject to applicable requirements and limits). Such distributions may be recontributed to an IRA.
• Long-Term Part-Time Employees. Under the SECURE Act, part-time employees must be allowed to make elective deferrals after attaining age 21 and completing at least 500 hours of service during three consecutive 12-month periods; there are special vesting rules for employees who become eligible to contribute under this rule. The notice explains that 12-month periods beginning before 2021 can be disregarded for purposes of applying the deferral eligibility rule, but they cannot be disregarded for vesting purposes (unless another rule permits this—e.g., the rule allowing plans to disregard service prior to age 18).
• Small Employer EACA Credit. The $500 per-taxable-year credit that is available during the first three years a small employer offers an eligible automatic contribution arrangement (EACA) may only be used for one three-year credit period. If an employer’s credit period started before the effective date of the credit, the credit will only be available for any remaining years during the credit period. For example, if an employer first established an EACA for 2018, the employer would only be eligible for a credit for 2020 (which is the first year for which the credit is available and the last year of the employer’s three-year credit period). Credits are available for the second and third year only if the same EACA is provided under the same plan for those years. Employers participating in a MEP may each qualify for their own credit if they meet the applicable requirements.
• Difficulty of Care Payments. The notice clarifies that a subset of qualified foster care payments known as “difficulty of care payments” must be treated as compensation when determining the limit on annual additions to an employee’s benefit under a qualified retirement plan. This may allow a participant to make or receive contributions, even if the participant has no other compensation. Only difficulty of care payments from a participant’s employer must be counted; if an employer does not make such payments, they do not have to be mentioned in the employer’s plan.
• Plan Amendments. The deadline for both required and discretionary plan amendments under the SECURE Act, and the regulations thereunder, is the end of the first plan year beginning on or after January 1, 2022 (2024 for governmental plans). Any later amendments to reflect the SECURE Act (e.g., discretionary amendments to permit qualified birth or adoption distributions) must follow the usual remedial amendment deadline rules (see our Checkpoint article) and are not entitled to relief from the anti-cutback rules under the Code and ERISA.

EBIA Comment: The notice indicates that the IRS intends to issue regulations addressing the recontribution rules for qualified birth or adoption distributions, and that it anticipates providing additional guidance under the SECURE Act “as appropriate.” Comments, particularly about counting pre-2021 service by part-time employees, are requested by November 2, 2020. For more information, see EBIA’s 401(k) Plans manual at Sections II.H.3 (“Small Employer Automatic Enrollment Credit”), V.D.2.h (“Difficulty of Care Payments”), VII.D.2.d (“Long-Term Part-Time Employees”), and XII.G.3 (“Qualified Birth or Adoption Distributions”).

Contributing Editors: EBIA Staff.