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The “Setting Every Community Up for Retirement Enhancement” Act of 2019 (SECURE Act) was signed into law on December 20, 2019.  Forbes stated of this Act, “it is one of the most dynamic changes to retirement legislation since the Pension Protection Act of 2006, and addresses a wide variety of retirement planning topics.”  However, with COVID-19 and other interesting phenomena of 2020, this law has seemingly been neglected. The IRS has recently issued guidance in a questions and answers format.  It is worth reviewing.

SITUATION

Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

The Controller at MBC called to ask us about the SECURE Act.  “Please tell me what I need to know about this law and what is in it for MBC.”

“Well,” we start, “there is a lot there and it would behoove you to review IRS Notice 2020-68 which is a series of questions and answers that address items such as:  (A) the eligible (small) employer automatic enrollment credit; (B) the repeal of the maximum age (post-age 70.5) for traditional IRA contributions; (C) the participation of long-term, part-time employees in 401(k) plans; (D) qualified birth or adoption distributions; and other provisions.”

“Wow.  We are especially interested in the provision where distributions from a qualified retirement plan for birth or adoption expenses do not have to pay the additional 10% early distribution tax.  What does the notice say about that?”

“Put simply, the SECURE Act – in Section 113 – allows an individual to take a distribution from their qualified retirement plan of up to $5,000 without being required to pay the 10% additional tax if the distribution is made during the 1-year period beginning on the date on which the child of the individual is born or the legal adoption by the individual of an eligible adoptee is finalized.  Also, each parent may qualify for the $5,000 distribution and there is a provision for distributions for each multiple birth or qualified adoption.  For these purposes, a qualified birth or adoption distribution is includible in gross income, but is not subject to the 10% additional tax.”

“Okay.  What is a ‘qualified retirement plan’ for these purposes?  Does a 403(b) plan work?”

“Yes, a 403(b) is an ‘applicable eligible retirement plan’ for the purposes of the SECURE Act Section 113.”

 

RULES

From IRS Notice 2020-68 – September 2, 2020:

D-1: What is a qualified birth or adoption distribution?

D-1: A qualified birth or adoption distribution, as defined in § 72(t)(2)(H)(iii)(I), is any distribution of up to $5,000 from an applicable eligible retirement plan to an individual if made during the 1-year period beginning on the date on which the child of the individual is born or the legal adoption by the individual of an eligible adoptee is finalized.

D-2: Are there any additional requirements for a distribution to be a qualified birth or adoption distribution?

D-2: Yes. Section 72(t)(2)(H)(vi)(III) provides that a distribution to an individual will not be treated as a qualified birth or adoption distribution with respect to any child or eligible adoptee unless the individual 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.

D-5: Who is an eligible adoptee?

D-5: Section 72(t)(2)(H)(iii)(II) defines the term ” eligible adoptee” as any individual who has not attained age 18 or is physically or mentally incapable of self-support. However, an eligible adoptee does not include an individual who is the child of the taxpayer’s spouse.

D-8: May an individual receive qualified birth or adoption distributions with respect to multiple birthsof children or adoptions of eligible adoptees (for example, twins or triplets)?

D-8: Yes. An individual is permitted to receive qualified birth or adoption distributions with respect to the birth of more than one child or the adoption of more than one eligible adoptee if the distributions are made during the 1-year period following the date on which the children are born or the legal adoption for the eligible adoptees is finalized. For example, Employee A gives birth to twins in October 2020. Employee A takes a $10,000 distribution from her § 401(k) plan in January 2021. The entire $10,000 distribution is a qualified birth or adoption distribution, assuming that Employee A includes the TINs of her twins and other required information on her 2021 tax return.

 

BOTTOM LINE

  • The SECURE Act provides benefits that many of us have not taken the time to review.
  • Included in the IRS Q&A (which is very informative) of Notice 2020-68 is detailed information on each facet of the Act.
  • There is a very beneficial opportunity for “birth or adoption” distributions.
  • Also, check out the provision for participation of part-time employees in a 401(k) plan.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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