IRS Offers Supplemental Guidance to Clarify Provisions in SECURE Act
Long ago, before COVID-19 became a pandemic, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed by Congress and signed into law. The importance of the SECURE Act was eclipsed by the spread of the virus, the onset of remote work, business closures, layoffs and furloughs and a myriad of other issues that employers have had to address during 2020.
The SECURE Act re-emerged on September 2, when the IRS published supplemental guidance in a question-and-answer format. The supplement offers information that may affect how plan sponsors manage qualified retirement plans and how individuals contribute to IRAs.
The key sections of the SECURE Act discussed in the publication include:
1. Section 105, Automatic Enrollment Credit for Smaller Employers. The SECURE Act created incentives for eligible employers (with up to 100 employees, paid at least $5,000 a year) that amend plan documents and begin automatically enrolling employees in qualified workplace retirement plans, including 401(k) plans, SIMPLE IRAs and SEP IRAs.
Employers that choose automatic enrollment will receive a tax credit of $500 a year for up to three years. The credit is available for taxable years beginning after December 31, 2019. Among other things, the IRS supplement clarified that eligible employers will only receive a credit for a single three-year credit period.
2. Section 107, Repeal of Maximum Age for Traditional IRA Contributions. Prior to the passage of the SECURE Act, Americans could not contribute to IRAs after age 70½. The legislation eliminated this restriction for contributions made in taxable years that start after December 31, 2019.
The IRS supplement clarified that post-age 70½ contributions may not be used to offset required minimum distributions (RMDs). In addition, IRA trustees, issuers and custodians are not required to accept post-70 ½ contributions. However, if they choose to do so, IRA contracts must be amended to reflect the change by December 31, 2022. A copy of the amendment and a new disclosure statement must be provided to those who will benefit from the amendment 30 days after the amendment is adopted or becomes effective, whichever is later.
The SECURE Act also reduced the amount of qualified charitable distributions that Americans age 70½ and older can exclude from their taxes. The IRS supplement provided an example to illustrate how a qualified charitable deduction exclusion should be calculated.
3. Section 112, Eligibility of Long-Term, Part-Time Employees. The SECURE Act changed the rules regarding plan participation eligibility. It established that any employee who has worked 500 hours a year for at least three years and is age 21 by the end of the three-year period is eligible to participate in an employer’s qualified retirement plan.
The IRS offered additional information about employer contribution vesting for part-time employees, clarifying that the exclusion of 12-month periods beginning before January 1, 2021 for purposes of participation does not exclude 12-month periods beginning before January 1, 2021 for purposes of determining a long-term, part-time employee’s nonforfeitable right to employer contributions.
4. Section 113, Penalty-Free Birth or Adoption Distributions. Since it can be difficult to estimate the costs associated with the birth of adoption of a child, the SECURE Act made it possible for new parents to take penalty-free distributions to help cover those expenses.
The IRS supplement defined a qualified birth or adoption distribution as,“…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.”
The IRS defined an eligible adoptee as “…any individual who has not attained age 18 or is physically or mentally incapable of self-support, excluding the child of a taxpayer’s spouse.”
Plan sponsors and administrators may rely on a reasonable representation from participants requesting a distribution that they are eligible. In addition, distributions:
- May be taken from § 401(a) qualified defined contribution plans, § 403(a) annuity plans, a § 403(b) annuity contracts, government § 457(b) plans or IRAs,
- Are eligible for re-contribution to the plan,
- May be taken by each parent for each child or eligible adoptee; and
- Are not eligible for rollover.
Finally, qualified retirement plans are not required to adopt these distributions. If they choose to do so, any amendment must be made by the last day of the plan year beginning on or after January 1, 2022.
While the clarifications offered by the IRS are welcome, they do not answer all of the questions or address all of the issues created by the new legislation. Look for additional guidance in the future.
Visit irs.gov for the full guidance.
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The material in this blog is presented for general informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.