Q&As for Retirement Plans and IRAs

On September 3, 2020, the IRS released Notice 2020-68, which provides guidance concerning implementation of the SECURE Act, which significantly changed the statutory rules for retirement plans and IRAs. The notice provides background details on several major sections of the SECURE Act accompanied by questions and answers. Notice 2020-68 is not intended to provide comprehensive guidance, and further regulations and direction are anticipated. The notice also includes a request for comments, with emphasis on remarks that relate to the reduction of potential administrative burdens related to counting years of service of long-time, part-time employees beginning January 1, 2021.

What You Should Know

  • Small employer automatic enrollment tax credit (Section 105): The SECURE Act amended the Internal Revenue Code (IRC) to provide for a business credit for an eligible employer that establishes an eligible automatic contribution arrangement under a qualified employer plan. The notice addresses questions regarding eligibility requirements for the credit and determination of the credit periods.
  • Repeal of maximum age for traditional IRA contributions (Section 107): A financial institution is not required to accept post-age 70.5 contributions although it may choose to accept them beginning on a date after December 31, 2019. An individual may not offset the amount of required minimum distributions from their IRA by the amount of post-age 70.5 contributions for the same taxable year.
  • Participation of long-term, part-time employees in 401(k) plans (Section 112): While the SECURE Act does not require employer contributions to a qualifying part-time employee’s 401(k) plan account, Notice 2020-68 provides guidelines for vesting if a plan sponsor chooses to do so. Generally, all years of service with the employer sponsoring the 401(k) plan must be taken into account for purposes of determining a long-term, part-time employee’s nonforfeitable right to employer contributions under the special vesting rules.
  • Qualified birth or adoption distributions (Section 113): The SECURE Act created a new category of distributions from an eligible retirement plan (which does not include defined benefit plans), the qualified birth or adoption distribution (QBAD). Although retirement plans have been permitted to make these distributions starting January 1, 2020, QBADs are not a mandatory qualified plan provision. Notice 2020-68 addresses several issues related to QBADs, including definitions, qualifications, the types of plans are eligible to permit QBADs, taxes, distribution restrictions, recontributions, and eligible adoptee rules.
  • Difficulty of care payments (Section 116): A difficulty of care payment is a type of qualified foster care payment that is excludable from gross income. The notice clarifies that difficulty of care payments made by employers must now be included in the definition of compensation for purposes of the contribution limits for defined contribution plans and IRAs.
  • Guidance on the timing for plans to amend provisions of the SECURE Act: The deadline to adopt a 401(k) plan amendment, which includes long-term, part-time employee participation provisions, is the last day of the first plan year beginning on or after January 1, 2022.

    Reference: Miscellaneous Changes Under the Setting Every Community Up for Retirement Enhancement Act of 2019 and the Bipartisan American Miners Act of 2019 (IRS Notice 2020-68)[1]