By Pension and Benefits Editorial Staff
The IRS has released guidance in the form of questions and answers with respect to certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the Bipartisan American Miners Act of 2019.
The IRS notes that the questions and answers are not intended to provide comprehensive guidance as to the specific provisions of the SECURE Act and the Miners Act it addresses, but instead is intended to provide guidance on particular issues to assist in the implementation of these provisions. The subjects covered include the small employer automatic enrollment credit, the repeal of maximum age for traditional IRA contributions, the participation of long-term, part-time employees in Code Sec. 401(k) plans, qualified birth or adoption distributions, and permitting excluded difficulty of care payments to be taken into account as compensation for purposes of determining certain retirement contribution limitations. Also addressed are issues under Code Sec. 104 of the Miners Act (reduction in minimum age for in-service distributions) and guidance on deadlines for plan amendments.
Small employer automatic contribution credit. The SECURE Act added a new Code Sec 45T, which provides a business credit to an eligible employer that establishes an eligible automatic contribution arrangement under a qualified employer plan. The credit is equal to $500 per year and applies to tax years beginning after December 31, 2019.
The notice clarifies than an eligible employer can only receive a credit during a single three-year credit period. For example, if Employer X includes an automatic contribution arrangement for Plan A during 2021, 2022, and 2023 and then includes an automatic contribution arrangement for Plan B during 2022, 2023, and 2024, they can receive no more than $500 as a credit for 2021, 2022, and 2023, and are not permitted to receive a credit for 2024. The employer must include the same arrangement in the same plan for years two and three.
The credit applies separately to each eligible employer that participates in a multiple employer plan.
IRA contribution age limit. Prior to the SECURE Act, an individual was not permitted to make contributions to their IRA if they were age 70 and ½ or older by the last day of the year. The SECURE Act eliminated that age limit for contributions after 2019.
The notice clarifies that a financial institution is not required to accept contributions after age 70 and ½, but if it does choose to accept them, it must amend its IRA contract and distribute a copy of the amendment and disclosure statement to each individual. Note that a financial institution may choose to accept post-age 70 ½ contributions beginning on a date after December 31, 2019, as selected by the financial institution.
The IRS expects to issue revised model IRAs and prototype language addressing changes made to the relevant Code provisions under the SECURE Act.
Individuals are not permitted to offset the amount of their required minimum distributions by the amount of their post-age 70 ½ contributions for the same year. Contributions and distributions are each separate transactions and are independently reported by the financial institution to the IRS.
Individuals are able to take their required minimum distributions as qualified charitable distributions. The example below illustrates how this would interact with the new lack of age limit on contributions.
Bob is over 70 and a ½ before 2020. He deducts $5,000 for contributions for 2020 and 2021 but makes no contribution for 2022. He makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022. Bob’s excludable amount of qualified charitable distributions for 2021 is the $6,000 of qualified charitable distributions reduced by the $10,000 aggregate amount of post-age 70 ½ contributions for 2021 and earlier taxable years. For this individual, these amounts are $5,000 for each of 2020 and 2021, resulting in no excludable amount of qualified charitable distributions for 2021 (that is, $6,000 - $10,000 = ($4,000)). The excludable amount of the qualified charitable distributions for 2022 is $2,500 ($6,500 - $4,000 = $2,500). Because the $4,000 amount reduced the excludable amount of qualified charitable distributions for 2022, that $4,000 amount does not apply again in later years, and no amount of post-age 70 ½ contributions remains to reduce the excludable amount of qualified charitable distributions for subsequent taxable years.
Participation rights expanded for part-time employees. Prior to the SECURE Act, employers that maintained a 401(k) plan were not required to allow plan participation for part-time employees who worked less than 1,000 hours per year. The rules required only that employers offer the plan to any employee who has both attained age 21 and has completed at least one year of service. A “year of service” is defined as a 12-month period during which the employee has worked at least 1,000 hours.
Under the SECURE Act, employers with 401(k) plans must offer employees who work between 500- and 1000-hours a year an additional track to 401(k) participation. Employees must be able to satisfy participation requirements by completing either:
- the existing one year of service requirement, working at least 1,000-hours, or
- the new three consecutive 12-month periods of service requirement working at least 500 hours in each period.
The three-consecutive-years-of-service track is not available for an employee unless the employee reaches age 21 by the close of the last of the 12-month periods.
For purposes of determining vesting rights to employer contributions for 500-hour track employees, each 12-month period for which the employee has at least 500 hours of service is treated as a year of service. For purposes of the break-in-service rules, the special vesting rules of Code Sec. 401(k)(15)(B)(iii) continue to apply to a long-term, part-time employee even if the long-term, part-time employee subsequently finishes a 12-month period during which the employee completes at least 1,000 hours of service.
These amendments apply to plan years beginning after December 31, 2020, except that 12-month periods beginning before January 1, 2021 are not taken into account for determining eligibility to participate in the plan. The IRS guidance clarifies that this exception does not extend to the special vesting rules. Thus, unless a long-term, part-time employee’s years of service may be disregarded under Code Sec. 411(a)(4), all years of service with the employer or employers maintaining the plan must be taken into account for purposes of determining the long-term, part-time employee’s nonforfeitable right to employer contributions under Code Sec. 401(k)(15)(B)(iii), including 12-month periods beginning before January 1, 2021.
Qualified birth or adoption distributions. Code Sec. 72(t)(1) generally imposes a 10% additional tax on an early distribution from a qualified retirement plan (including an IRA or Roth IRA), unless the distribution qualifies for an exception. The SECURE Act amended the Code to add a new exception to the 10% penalty for any qualified birth or adoption distribution up to $5,000 from an applicable retirement plan if made during the one-year period beginning on the date on which the child is born or the adoption is finalized. The parent must include the name, age, and the Taxpayer Identification Number of the child on their tax return for the taxable year in which the distribution is made.
The distribution can be made from any eligible retirement plan described in Code Sec. 402(c)(8)(B), other than a defined benefit plan. Therefore, a Code Sec. 401(a) qualified defined contribution plan, a Code Sec. 403(a) annuity plan, a Code Sec. 403(b) annuity contract, a governmental Code Sec. 457(b) plan, or an IRA is eligible to permit a qualified birth or adoption distribution. Eligible adoptees include any individual who has not attained age 18 or is physically or mentally incapable of self support as defined in Code Sec. 72(m)(7), but does not include an individual who is a child of the taxpayer’s spouse. Each parent can receive a qualified distribution up to $5,000 with respect to the same adoptee and can receive multiple distributions if they have multiple births (e.g., twins or triplets).
Eligible retirement plans are not required to permit distributions for qualified birth or adoption distributions, but if they do not, individuals who meet the requirements for a qualified birth or adoption distribution can still take the distribution and treat it as a qualified birth or adoption distribution on their federal tax return. Note that the distribution, while includible in gross income, is not subject to the 10% additional tax under Code Sec. 72(t)(1). Plans must accept recontribution of the distribution under certain conditions.
Qualified birth or adoption distributions are not treated as eligible rollover distributions for purposes of the direct rollover rules, Code Sec. 402(f) notice requirements, and the mandatory withholding rules.
Difficulty of care payments. Code Sec. 408(o) provides that designated nondeductible contributions may be made on behalf of an individual to an IRA. A difficulty of care payment is a type of qualified foster care payment that is excludable from gross income.
The IRS clarifies that difficulty of care payments received by an employee from a person other than his or her employer are not included as compensation. If an employer does not make difficulty of care payments, then the plan does not need to amend the plan to include the payments in the plan’s definition of compensation. However, if the employer begins to make difficulty of care payments, the plan must be amended.
The IRS notes that the applicability of the excise tax on excess IRA contributions under Code Sec. 4973 to nondeductible IRA contributions that are based on difficulty of care payments will be addressed in future guidance.
Reduction in minimum age for in-service distributions. A qualified pension plan cannot make distributions to an employee who is still in-service (that is, working for the employer) prior to a certain age. The Miners Act lowered the minimum age from age 62 to age 59 ½. Similarly, the Miners Act changed the rule for an eligible government deferred compensation plans under Code Sec. 457(b), reducing the minimum age to the calendar year the participant turns age 70 ½ to age 59 ½. These amendments apply to plan years beginning after December 31, 2019.
The IRS guidance clarifies that neither a qualified plan nor a Code Sec. 457(b) governmental plan is required to provide for in-service distributions due to changes in the Miners Act. For example, a qualified plan that provides for in-service distributions commencing at age 62 is not required to be amended to provide for in-service distributions commencing at age 59 ½.
Also, the guidance clarifies that a change in the in-service distribution minimum age does not necessarily affect the plan’s existing normal retirement age. Any change to a pension plan’s definition of normal retirement age must satisfy the requirements in IRS Reg. §1.401(a)-1(b)(2), including the requirement that a normal retirement age must be an age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. A normal retirement age of age 62 or later is deemed to satisfy the reasonably representative requirement. For purposes of the reasonably representative requirement, governmental pension plans may continue to rely on proposed regulations that were published in the Federal Register on January 27, 2016 (81 FR 4599), according to the IRS.
Plan amendments. The IRS discussed the deadlines to amend a retirement plan for provisions of the SECURE Act, the regulations thereunder, or Act Sec. 104 of the Miners Act. Note these amendment deadlines apply to both required and discretionary plan amendments.
- Qualified plans. For a qualified plan that is not a governmental plan or an applicable collectively bargained plan, the deadline is the last day of the first plan year beginning on or after January 1, 2022. The plan amendment deadline for a qualified governmental plan or for an applicable collectively bargained plan is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
- Section 403(b) plans. The deadline for a Code Sec. 403(b) plan that is not maintained by a public school is the last day of the first plan year beginning on or after January 1, 2022. The deadline is for a plan maintained by a public school is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
- Code Sec. 457(b) governmental plans. The deadline is the later of (i) the last day of the first plan year beginning on or after January 1, 2024, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).
- IRAs. The deadline to amend the trust governing an IRA is December 31, 2022, or a later date as the Secretary prescribes in guidance. In the case of a deemed IRA, the deadline is the deadline applicable to the plan under which the deemed IRA is established.
Comments requested. The IRS invites comments and suggestions regarding the matters discussed in this guidance. Comments should be submitted in writing on or before November 2, 2020 and should include a reference to Notice 2020-68.
Source: IRS Notice 2020-68.
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