IRS Provides Clarifying SECURE Act Guidance
To provide clarification and guidance on several provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act—the December 2019 legislation that comprehensively reshaped retirement regulations—the IRS recently issued Notice 2020-68. The SECURE Act, as new legislation often does, left several unanswered questions for retirement plan sponsors and retirement account owners upon its passage. Notice 2020-68 answers many of those questions. The summary below, though not exhaustive, highlights the important clarifications that affect how plan sponsors might administer employer-sponsored retirement plans and retirement accounts.
Small Employer $500 Automatic Enrollment Credit
The SECURE Act created a new tax credit opportunity for small employers (defined in the SECURE Act as businesses with 100 or fewer employees) that included an automatic enrollment feature in their new or existing 401(k), 403(b), SEP IRA, or SIMPLE IRA plans. Employers would be eligible for a $500 credit for adding an auto-enroll feature to their plan (the credit applies for new plans and existing plans that didn’t already offer this feature).
Notice 2020-68 clarifies that employers may receive a credit for each year during a three-year period, starting in the first year an employer adds the auto-enroll feature. In addition, employers that maintain more than one qualified employer plan must offer the automatic contribution feature in the same qualified plan for each year of the three-year period.
Participation of Long-Term, Part-Time Employees in 401(k) Plans
Beginning in 2021, the SECURE Act mandates that employers offer 401(k) plan eligibility to long-term, part-time employees once they complete either one full year of service with more than 1,000 hours worked or three consecutive years of service with at least 500 hours worked per year.
Notice 2020-68 clarifies that all years of service, even years before 2021, must be considered for determining a long-term, part-time employee’s vesting in any employer contributions allocated to that participant’s account, unless those years may otherwise be excluded due to age restrictions or other terms of the plan’s document.
Qualified Birth or Adoption Distributions
The SECURE Act created a rule that exempts parents from the 10 percent early withdrawal penalty for distributions up to $5,000 for a qualified birth or adoption (QBAD). The distribution must be taken after the date of birth or date on which adoption is finalized and within one year of the birth or adoption. The amount withdrawn generally may be paid back to the eligible qualified plan or IRA.
Notice 2020-68 clarifies several nuances of this provision, including the following:
- A distribution to an individual will not be treated as a QBAD unless the name, age, and taxpayer identification number of the child or eligible adoptee appears on the individual’s tax return for the taxable year in which the distribution is made.
- An eligible retirement plan distribution for purposes of a QBAD may be made from a 401(a) (including 401(k), 403(b), governmental 457(b), or an IRA). Notably, defined benefit plans are excluded in this definition.
- An eligible adoptee is defined as any individual who has not attained age 18 or is physically or mentally incapable of self-support. An eligible adoptee does not include an individual who is the child of the taxpayer’s spouse.
- For purposes of determining a “physically or mentally incapable” person, an individual is considered to be disabled if that individual is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.
- Each parent may receive a QBAD of up to $5,000 with respect to the same child or eligible adoptee and may receive QBADs with respect to multiple births or adoptions of eligible adoptees, provided they are made during the one-year period following the date on which the children are born or the legal adoption is finalized.
- Employers are not required to permit in-service withdrawals for QBADs; it is optional.