By Pension and Benefits Editorial Staff
The ERISA Industry Committee (ERIC) has requested guidance from the IRS on three provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Specifically, ERIC is asking for guidance on the required minimum distribution rules, withdrawals in case of birth or adoption, and nondiscrimination testing relief for closed plans.
“ERIC appreciates the IRS’s work during the COVID-19 pandemic to allow Americans more financial flexibility during this unprecedented time,” said Aliya Robinson, Senior Vice President of Retirement and Compensation Policy, ERIC. “And now, additional guidance is needed to ensure uniform implementation of the SECURE Act. We believe the clarifications we are asking for will give plan sponsors and beneficiaries the proper tools to aid in retirement security.”
Required minimum distributions. The changes for required minimum distributions (RMDs) began on December 31, 2019 under the SECURE Act. ERIC explains that this implementation date was not possible for plans to make needed changes, and caused some distributions made in 2020 to be mistakenly treated as an RMD by administrative systems. ERIC further notes that RMDs are treated differently from other plan distributions. These distributions cannot be rolled over to another plan, they are not subject to 20% withholding, and the plan is not required to provide a notice under Code Sec. 402(f).
ERIC appreciates the guidance provided in IRS Notice 2020-51, which provides guidance on required minimum distribution (RMD) suspensions as well as rollovers of waived RMDs under the Coronavirus Aid, Relief, and Economic Security (CARES Act). Now, ERIC requests additional guidance concerning the RMD provisions under the SECURE Act:
- clarification that a plan would not be disqualified if it makes a distribution in 2020 for someone who turns 70 ½ this year under the rules prior to the enactment of the SECURE Act;
- finding that a distribution that would have been an RMD prior to the SECURE Act should not be subject to 20% withholding, and a plan that fails to provide a Code Sec. 402(f) notice, in good faith, should not be penalized;
- allowing flexibility in the determination of whether a distribution that would have been a RMD prior to the SECURE Act is eligible for a rollover; and
- confirmation that the remedial amendment provision under SECURE Act section 601 covers any anti-cutback issues that might occur due to the change to the RMD.
Withdrawals related to birth or adoption. The SECURE Act allows for withdrawals upon the birth or adoption of a child beginning on January 1, 2020. ERIC requests that the IRS provide clarifying guidance concerning this provision. ERIC wants confirmation that withdrawals upon the birth or adoption of a child as of January 1, 2020, are optional for plan sponsors to include. If the provision is optional and a plan sponsor decides not to include it, guidance is needed on how to treat a distribution for tax purposes when the participant is otherwise eligible for this distribution. ERIC seeks guidance confirming that for any distribution otherwise allowed by the plan, the plan administrator can treat the distribution as an eligible rollover distribution even if the participant states that this distribution is being made in connection with a birth or adoption. In addition, ERIC urges confirmation that no special code is required on the Form 1099-R. ERIC further thinks that the IRS should provide clarification on the time limits for repayment of withdrawals for a birth or adoption. Lastly, ERIC requests clarification concerning whether a plan that does not otherwise accept after-tax contributions would be compelled to create an after-tax source to hold these repayments.
Nondiscrimination testing relief for closed plans. ERIC says that the SECURE Act provides much-needed nondiscrimination testing relief for closed defined benefit plans. Code Sec. 401(o), as added by the SECURE Act, generally requires closed defined benefit plans to satisfy nondiscrimination testing “for the plan year as of which the class closes and the two succeeding plans years” before the SECURE Act testing relief is available. Code Sec. 401(o) also eliminates the requirement that plans must have the same plan year to be aggregated for testing purposes.
According to ERIC, in some cases, a plan sponsor who closed its plan pre-SECURE Act had to change the closed plan’s plan year, so that it would have the same plan year - and thus could be aggregated with - one or more of the sponsor’s other plans. ERIC states that there is now some uncertainty about whether the resulting “short plan year” may be counted as one of the “2 succeeding plan years” toward the SECURE Act testing relief. If the short plan year is not counted, meaningful benefits provided during that short year are disregarded, which would not have been required post-SECURE Act given the ability to aggregate plans with different plan years.
ERIC is asking for clarification that the SECURE Act will not penalize plan sponsors who, in good faith, implemented changes to allow their closed plans to satisfy nondiscrimination testing based on pre-SECURE Act requirements.
Source: ERIC press release and ERIC letter to the IRS, July 22, 2020; eric.org.
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