Last month, the IRS published Notice 2020-68 which provides valuable clarification for sponsors of qualified plans, 403(b) plans, and 457(b) governmental plans, as well as IRA holders, in regard to major policy changes made as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act which was passed into law on December 20, 2019.
The guidance is presented as questions and answers in addressing matters under the following sections of the SECURE Act:
- Section 105 – addresses the small employer automatic enrollment credit
- Section 107 – repeals the maximum age for traditional individual retirement account (IRA) contributions
- Section 112 – mandates that defined contribution plans be open to participation by long-term, part-time employees
- Section 113 – focuses on qualified birth or adoption distributions
- Section 116 - allows excluded “difficulty of care payments” to be considered as compensation for purposes of determining certain retirement contribution limitations
Of particular interest are Sections 107 and 113.
Section 107 repeals the maximum age for traditional IRA contributions
Previously, individuals were not allowed to make IRA contributions for a taxable year if they attained age 70½ by the last day of that taxable year. The SECURE Act repeals that cap. In addition, it clarifies that:
- Financial institutions do not have to accept post-age 70½ contributions in 2020 or subsequent taxable years, but may choose to do so
- An individual’s post-age 70½ contributions may not be used to offset Required Minimum Distributions
- The amount of a charitable distribution from an IRA that is a qualified charitable distribution is reduced dollar-for-dollar by the amount of any post-age 70-½ contributions to the IRA in the same year or prior years, to the extent not already reflected in the amount of qualified charitable distributions
Section 113 focuses on the payment of qualified birth or adoption expenses
Below are 8 key points from Notice 2020-68’s significant discussion regarding Section 113’s qualified birth or adoption distributions:
- A qualified birth or adoption distribution is any distribution of up to $5,000 from an applicable eligible retirement plan to an individual, made during the one-year period beginning on the date on which the child of the individual is born or the child's legal adoption is finalized
- An individual may recontribute a qualified birth or adoption distribution (not exceeding the aggregate amount of all qualified birth and adoption distributions made to him or her) to an applicable eligible retirement plan to which a rollover can be made
- The payment must occur within one-year from birth or adoption and the recipient must include the new dependent on the tax return filed for the year of distribution
- A distribution is not a qualified birth or adoption distribution with respect to any child or eligible adoptee unless the individual distributee includes the name, age, and the Taxpayer Identification Number (TIN) of the child or eligible adoptee on the individual's tax return for the taxable year in which the distribution is made
- Eligible plans include: a qualified defined contribution plan (§ 401(a)), annuity plan (§ 403(a)), annuity contract (§ 403(b)), governmental plan (§ 457(b)), or an IRA. A distribution may not be made from a defined benefit plan
- The distribution is included in the distributee's gross income, but is not subject to the 10% early distribution tax.
- The new rule applies to the adoption of any individual who has not attained age 18, or is physically or not mentally capable of self-support
- A distribution is available to each parent and each child separately, e.g., twins could have two distributions per parent
Please reach out to your RINA tax professional with any questions or concerns.