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IRS Provides Q&A Guidance on Changes in SECURE Act and Miners Act
(Parker Tax Publishing September 2020)
The IRS issued guidance in question and answer form on issues that have arisen under the following provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act): (1) the small employer automatic enrollment credit; (2) the repeal of maximum age for traditional IRA contributions; (3) the participation of long-term, part-time employees in Code Sec. 401(k) plans; (4) qualified birth or adoption distributions; and (5) the provision permitting excluded difficulty of care payments to be taken into account as compensation for purposes of determining certain retirement contribution limitations. The guidance also addresses issues under the Bipartisan American Miners Act of 2019 (Miners Act) relating to the reduction in minimum age for in-service distributions and provides guidance on deadlines for plan amendments. Notice 2020-68.
Background
On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020 (the Act), which included the Setting Every Community Up for Retirement Enhancement of 2019 (SECURE Act) and the Bipartisan American Miners Act of 2019 (Miners Act). Among the sections included in the SECURE Act were the following: Section 105 (small employer automatic enrollment credit), Section 107 (repeal of maximum age for traditional IRA contributions), Section 112 (participation of long-term, part-time employees in Code Sec. 401(k) plans), Section 113 (qualified birth or adoption distributions), and Section 116 (permitting excluded difficulty of care payments to be taken into account as compensation for purposes of determining certain retirement contribution limitations). Section 104 of the Miners Act addressed a change in the minimum age for certain in-service distributions.
In Notice 2020-68, the IRS addresses in a question and answer format issues that have arisen under the SECURE Act and the Miners Act. The notice also provides guidance on deadlines for plan amendments.
Small Employer Automatic Enrollment Credit
Section 105 of the SECURE Act added Code Sec. 45T, which provides a business credit for an eligible employer that establishes an eligible automatic contribution arrangement (EACA) under a qualified employer plan. The credit is equal to $500 for any tax year of an eligible employer that occurs during a credit period. Under Code Sec. 45T(b)(2), a tax year is not treated as occurring during a credit period unless the arrangement is included in the plan for the tax year. This credit applies to tax years beginning after December 31, 2019. A "credit period" is defined as the period of three tax years beginning with the first tax year for which an eligible employer includes an EACA in a qualified employer plan that it sponsors (3-year credit period). With respect to the question of whether an employer can receive this credit with respect to tax years in more than one 3-year credit period, Notice 2020-68 provides that the answer is no. An eligible employer may receive a credit for tax years only during a single 3-year credit period that begins when the employer first includes an EACA in any qualified employer plan.
Example: Employer W is an eligible employer who first includes an EACA in one of its qualified employer plans, Plan A, during Employer W's 2021 tax year (so that the 2021, 2022, and 2023 tax years included in Employer W's 3-year credit period are all tax years after Code Sec. 45T is applicable). Employer W also includes an EACA in a second qualified employer plan, Plan B, during the 2022, 2023, and 2024 tax years. Employer W may receive no more than a $500 credit for each tax year during the 3-year credit period that begins with the 2021 tax year and is not permitted to receive the credit for the 2024 tax year.
Repeal of Maximum Age for Traditional IRA Contributions
The SECURE Act repealed Code Sec. 219(d)(1). Before its repeal, an individual could not make contributions to the individual's traditional individual retirement arrangement (IRA) for a tax year if the individual had attained age 70 1/2 by the last day of the year. The question arose as to whether an individual can offset the amount of required minimum distributions for a tax year from the individual's IRA by the amount of post-age 70 1/2 contributions for the same tax year. The IRS said that an individual may not offset the amount of required minimum distributions from the individual's IRA by the amount of post-age 70 1/2 contributions for the same tax year. The IRS noted that contributions and distributions are each separate transactions and are independently reported by the financial institution to the IRS.
The SECURE Act also amended Code Sec. 408(d)(8)(A), which provides for exclusion from an individual's gross income of up to $100,000 in qualified charitable distributions. The excludable amount of qualified charitable distributions for a tax year is not reduced by the amount of post-age 70 1/2 contributions that caused a reduction in the excludable amount of qualified charitable distributions for earlier tax years. In Notice 2020-68, the IRS provides an example as to how this provision works.
Example: Bob turned age 70 1/2 before 2020 and deducts $5,000 for charitable contributions for each of 2020 and 2021 but makes no contributions for 2022. Bob makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022. The 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 1/2 contributions for 2021 and earlier tax years. For Bob, 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 the $6,500 of qualified charitable distributions reduced by the portion of the $10,000 aggregate amount of post-age 70 1/2 contributions deducted that did not reduce the excludable portion of the qualified charitable distributions for earlier tax years. Thus, $6,000 of the aggregate amount of post-age 70 1/2 contributions deducted does not apply for 2022 because that amount has reduced the excludable amount of qualified charitable distributions for 2021. The remaining $4,000 of the aggregate amount of post-age 70 1/2 contributions deducted reduces the excludable amount of any qualified charitable distributions for subsequent tax years. Accordingly, 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 1/2 contributions remains to reduce the excludable amount of qualified charitable distributions for subsequent tax years.
Participation of Long-Term, Part-Time Employees in Section 401(k) Plans
Before the enactment of the SECURE Act, Code Sec. 401(k)(2)(D) provided that a cash or deferred arrangement (CODA) was not permitted to require an employee to complete a period of service that extended beyond the period permitted under Code Sec. 410(a)(1) (disregarding Code Sec. 410(a)(1)(B)(i)). In general, the period permitted under Code Sec. 410(a)(1) is the later of attainment of age 21 or completion of a 12-month period during which the employee has at least 1,000 hours of service. Section 112(a) of the SECURE Act amended Code Sec. 401(k)(2)(D) to provide that a CODA may not require an employee to complete a period of service that extends beyond the close of the earlier of: (1) the period permitted under Code Sec. 410(a)(1) (disregarding Code Sec. 410(a)(1)(B)(i)); or (2) subject to Code Sec. 401(k)(15), the first period of three consecutive 12-month periods during each of which the employee has completed at least 500 hours of service.
Section 112(b) of the SECURE Act provides that the amendments made by Section 112 of the SECURE Act apply to plan years beginning after December 31, 2020, except that, for purposes of Code Sec. 401(k)(2)(D)(ii), 12-month periods beginning before January 1, 2021, are not taken into account. The question arose as to whether this exception also applies for purposes of the special vesting rules in Code Sec. 401(k)(15)(B)(iii) of the Code. The IRS said that no, generally, all years of service with the employer or employers maintaining the 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 in Code Sec. 401(k)(15)(B)(iii).
Qualified Birth or Adoption Distributions
Code Sec. 72(t)(1) generally imposes a 10-percent additional tax on an early distribution from a qualified retirement plan (including an IRA or Roth IRA), unless the distribution qualifies for one of the exceptions listed in Code Sec. 72(t)(2). Section 113 of the SECURE Act amended Code Sec. 72(t)(2) to add a new exception to the 10-percent additional tax for any qualified birth or adoption distribution. Code Sec. 72(t)(2)(H) permits an individual to receive a distribution from an applicable eligible retirement plan of up to $5,000 without application of the 10-percent additional tax if the distribution meets the requirements to be a qualified birth or adoption distribution.
A question arose as to whether each parent may receive a qualified birth or adoption distribution up to $5,000 with respect to the same child or eligible adoptee to which the IRS responded yes. Each parent may receive a qualified birth or adoption distribution of up to $5,000 with respect to the same child or eligible adoptee. Another question asked whether an individual can receive qualified birth or adoption distributions with respect to multiple births of children or adoptions of eligible adoptees (for example, twins or triplets), to which the IRS also replied 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 one-year period following the date on which the children are born or the legal adoption for the eligible adoptees is finalized.
Example: Employee Ann gives birth to twins in October 2020. Ann 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 Ann includes the taxpayer identification numbers of her twins and other required information on her 2021 tax return.
Difficulty of Care Payments Taken Into Account as Compensation
Section 116(a) of the SECURE Act added Code Sec. 408(o)(5) to allow a taxpayer to elect to increase the nondeductible IRA contribution limit by the amount of excludable difficulty of care payments in a situation in which the taxpayer does not have sufficient compensation that is includible in the taxpayer's gross income to equal the deductible amount under Code Sec. 219(b)(5). The addition of Code Sec. 408(o)(5) applies to contributions made after December 20, 2019.
Section 116(b) of the SECURE Act added Code Sec. 415(c)(8) to increase the annual additions limit for retirement plans to include difficulty of care payments. Code Sec. 415(c)(8)(A), as amended, provides that a participant's compensation for purposes of Code Sec. 415(c)(1) is increased by the amount of excludable difficulty of care payments. Accordingly, a participant may make contributions to, or receive allocations under, the plan that are based on the participant receiving difficulty of care payments, even if the participant has no other compensation.
Notice 2020-68 includes a question as to whether difficulty of care payments received by an employee from a person other than his or her employer are includible in the definition of compensation under that employer's plan. The IRS said the answer is no. Compensation under Code Sec. 415(c)(3) only includes compensation from an individual's employer. Thus, difficulty of care payments received by an employee from a person other than his or her employer are not includible in the definition of compensation under that employer's plan. Another question involved the excise tax on excess IRA contributions under Code Sec. 4973 and whether that tax applies to nondeductible IRA contributions that are based on difficulty of care payments. According to the IRS, 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.
Miners Act
Under Code Sec. 401(a)(36), a pension plan does not fail to be qualified solely because the plan provides that a distribution may be made from the plan to an employee who has attained a minimum age and who is not separated from employment at the time of the distribution (generally referred to as an in-service distribution). Prior to the effective date of the Miners Act, the minimum age for allowable in-service distributions under Code Sec. 401(a)(36) was age 62. Section 104(a) of the Miners Act lowers the minimum age from age 62 to age 59 1/2.
A question arose as to whether, if a pension plan is amended to lower its minimum age for an in-service distribution from age 62 to age 59 1/2 pursuant to Code Sec. 401(a)(36), the plan may also change its definition of normal retirement age to age 59 1/2 or later without violating other qualification requirements, such as the definitely determinable benefit requirement in Reg. Sec. 1.401(a)-1(b)(1)(i). The IRS responded that the in-service distribution rule in Code Sec. 401(a)(36) is separate from the definitely determinable benefit requirement in Reg. Sec. 1.401(a)-1(b)(1)(i). A plan does not fail to satisfy the requirements in Reg. Sec. 1.401(a)-1(b)(1)(i), the IRS said, merely because the plan provides for in-service distributions in accordance with Code Sec. 401(a)(36). In addition to satisfying other applicable qualification requirements (such as Code Sec. 411(d)(6)), the IRS noted that any change to a pension plan's definition of normal retirement age must satisfy the requirements in Reg. Sec. 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.
For a discussion of the small employer automatic enrollment credit, see Parker Tax ¶105,800. For a discussion of individuals eligible to make IRA contributions, see Parker Tax ¶134,510. For a discussion of CODA requirements for completion of service, see ¶131,130. For a discussion of qualified birth or adoption distributions, see Parker Tax ¶131,560. For a discussion of the tax treatment of difficulty of care payments, see Parker Tax ¶78,505.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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