SECURE Act tax recommendation for retirement plans

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Thursday 3rd December 2020

The Internal Revenue Service (IRS) recently released practical and helpful guidance in a question-and-answer format for tax-qualified retirement plans and for an individual retirement plan (IRA) regarding the legislative changes being made to set up each community for the improvement of retirement issued Act of 2019 (the “SECURE Act”) and the Bipartisan American Miners Act of 2019 (the “Miners Act”). The following are the main lessons learned from these latest guidelines.

In detail

Part-time workers

In general, in order to participate in their tax qualifying pension plan, an employer can require an employee to work 1,000 hours over a period of 12 consecutive months. Under this rule, a long-term part-time worker can be excluded from participating in the plan. Starting with plan years beginning on or after December 31, 2020, the SECURE Act stipulates that employers permit a long-term part-time employee who works at least 500 hours in three consecutive 12-month periods to participate in a defined contribution contribution must plan that allows contributions to defer the pre-tax salary (excluding tariff plans). The SECURE Act also added a special exercise rule that stipulates that a long-term part-time employee must be credited with one year of exercise for every 12 month period in which the employee has completed at least 500 hours of service. However, an employer is not obliged to make appropriate or non-selective contributions on behalf of such an employee and may still impose an admission requirement for the age of 21.

If the long-term part-time employee has at least 500 hours of service under the special exercise rule under the SECURE Act, each period of 12 months must be counted as one year of the exercise period. In contrast to the extended admission rule, periods before January 1, 2021 are counted for the determination of the vesting service (unless excluded by another exception). For example, if a part-time employee works 500 or more hours in 2019 and 2020 and that employee becomes full-time in 2021 and is eligible for employer matching or non-selective contributions, the employee’s service in 2019 and 2020 will count towards determining the vesting service. Due to the potentially burdensome nature of this requirement for employers who may not have counted hours before 2021, the IRS has requested additional public comments on how to reduce the administrative burden of calculating and crediting previous years of service.

Withdrawals for birth or adoption

Beginning for plan years beginning on or after December 31, 2019, the SECURE Act allows for penalty-free withdrawals of up to $ 5,000 from certain defined contribution plans if the subscriber receives the withdrawal within 12 months of having a child or being adopted a legitimate adoptee. However, such withdrawals are subject to normal income taxes. Under certain conditions, the participant can repay this disbursement or repay the withdrawn amount into another tax qualifying pension plan.

The new guidelines answered frequently asked questions about qualified birth or adoption distributions (QBADs):

  • A QBAD can be created from eligible retirement plans, including 401 (k), 403 (b), and 457 (b) government plans or an IRA.

  • A eligible adoptee is a person who has not yet reached the age of 18 or is physically or mentally incapable of supporting themselves without children of a taxpayer’s spouse.

  • Each parent can receive a QBAD of up to $ 5,000 in relation to the same child or adoptee. An individual may also receive a QBAD for the birth of more than one child or the adoption of more than one adoptee in the same one-year period (e.g. the birth of twins would allow $ 10,000 to be distributed to each parent).

  • Plan Sponsors and Administrators can rely on a participant’s reasonable assurance that the individual is eligible for a QBAD, unless there is actual knowledge to the contrary.

  • If an employer allows a QBAD, they must also accept a renewed contribution from the QBAD (provided the individual is otherwise eligible to make a rollover contribution to that plan). If the re-grant is made within 60 days, it will be treated as a direct transfer of an eligible rollover grant.

  • A QBAD is not treated as a permitted rollover distribution for the purposes of the direct rollover rules, and the mandatory 20 percent withholding tax does not apply.

Small employer tax credit

The SECURE Act added a new $ 500 business tax credit for eligible small employers (generally those with fewer than 100 employees) who change an existing plan or add an eligible Automatic Registration Agreement (EACA) to a new plan. The credit is available for a single three-year loan term starting in 2020 for each tax year in which the EACA is added to the pension plan.

The notice clarified that the three-year loan term begins when the employer first includes an EACA in a retirement plan. The EACA must then be included in the same plan for the second and third years for the loan to be available. An employer who sponsors more than one plan with an EACA will not receive more than one credit (the credit applies only to the employer and not to the plan itself).

The notice also confirmed that the credit applies to an Eligible Employer participating in a Multi-Employer Plan (MEP) in the same way as if the employer had sponsored a single employer plan. Every employer is entitled to a credit for the three-year period, starting with the first tax year in which the employer’s participating employees were covered for the first time by an EACA under the MEP. A single employer plan that has been outsourced by an MEP (and which continues to include an EACA in subsequent years) could also receive credit.

IRA contributions after 70½ years

The SECURE Act repealed Code Section 219 (d) (1) that previously prevented individuals from contributing to their traditional IRA for a tax year if the individual was 70½ years old on the last day of that tax year. The new guidelines make it clear that as of December 31, 2019, a financial institution will not have to accept 70½ contributions based on age. If the financial institution accepts such contributions, it must amend its IRA contracts and distribute a copy of the amendment and a New Disclosure Statement for each IRA person no later than the 30th day after the date the amendment is accepted or the date which the change takes effect, whichever is later.

Minimum age for in-service distributions

For plan years beginning after December 31, 2019, the Miners Act lowered the minimum age for service payouts from 62 to 59½ years for defined benefit plans and from 70½ to 59½ years for plans under Code Section 457 (b). Neither of these plans is required to deploy in-service distributions. Even if in-service distributions are allowed, employers do not need to change their plans to allow in-service distributions by the age of 59½. In addition, any change in the distributions during ongoing operations is separate from the definitive performance requirement. Plans are free to change the definition of normal retirement age as long as the plan continues to meet all other legal requirements.

Conclusion

The deadline for amending a tax-qualified pension plan for changes to the SECURE Act and the Miners Act is the last day of the plan year beginning on or after January 1, 2022 (or on or after January 1, 2024 for qualifying government plans, or together ) negotiated plans). In the meantime, plan sponsors and administrators must operate their retirement plans in accordance with the requirements of the SECURE Act and the Minor Act based on the entry into force of any applicable provision and these new guidelines.

Teal Trujillo, a clerk in our Chicago office, also contributed to the issue.

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