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IRS Issues Q&A Guidance for the SECURE Act and Miners Act IRS Issues Q&A Guidance for the SECURE Act and Miners Act

IRS Issues Q&A Guidance for the SECURE Act and Miners Act

The Internal Revenue Service ("IRS") recently issued Notice 2020-68 ("Notice") to provide additional guidance on the SECURE Act and the Miners Act for sponsors and administrators of retirement plans. The Notice addresses the following issues:
  • Automatic enrollment tax credits for small employers
  • Repeal of the maximum age to make traditional IRA contributions
  • Participation of long-term part-time employees in 401(k) plans
  • Distributions for expenses related to the birth or adoption of a child
  • Difficulty of care payments included in eligible compensation
  • Reduction in minimum age for in-service distributions
  • Deadlines for plan amendments related to the SECURE Act and Miners Act
Highlighted below are the main provisions of the Notice that are most relevant to qualified retirement plans. 

Notice 2020-68: SECURE Act Guidance
  1. Small employer automatic enrollment tax credits
To encourage automatic enrollment, the SECURE Act created a new tax credit for small employers of $500 per year for up to a maximum of three years if they amend a new or existing retirement plan to include an eligible automatic contribution arrangement ("EACA") for taxable years beginning in 2020. An EACA is a type of automatic contribution arrangement that provides a grace period during which employees may withdraw their automatic contributions without penalty if they decide not to participate.

To be eligible for the credit, an "eligible employer" must have had no more than 100 employees who received at least $5,000 in compensation for the prior calendar year. A “qualified employer plan” includes 401(a) plans, 403(a) annuity plans, simplified employee pensions, and SIMPLE retirement accounts, but excludes governmental plans and plans maintained by tax-exempt employers. 

The Notice clarifies that:
  • An employer may receive a credit only during the initial 3-year credit period that begins when the employer first includes an EACA in any retirement plan. The credit applies only to the employer and not the plan, which means sponsors of more than one plan providing an EACA will not increase their benefit.
  • To be eligible for the credit in the second and third years, the EACA must be included in the same plan as it was during the first year.
  • The credit applies separately to each eligible employer that participates in a multiple-employer plan.
  1. Repeal of maximum age for Traditional IRA contributions
Effective for 2020 and later taxable years, taxpayers with eligible compensation can make Traditional IRA contributions at any age, not just for years before reaching age 70½. 

The Notice clarifies that:
  • A financial institution serving as trustee, issuer, or custodian for an IRA is not required to accept post-age 70½ contributions.
  • A financial institution that chooses to accept post-age 70½ contributions must amend its IRA contracts and disclosure documents and provide copies to IRA owners.
  • Since IRA contributions and required minimum distributions (“RMDs”) are reported as two separate transactions, IRA owners may not offset RMDs by the amount of contributions for the same year. In other words, traditional IRA owners may contribute past age 70½, but they may also have to take an RMD for the same taxable year. 
Since individuals 70½ and older may now continue to make deductible contributions to an IRA, the SECURE Act also reduced the amount of qualified charitable distributions (“QCDs”) that can be excluded from tax (historically, up to $100,000 could be excluded). The Notice provides additional details on the formula that IRA owners should use to determine this excludable amount. 
  1. Participation of long-term, part-time employees in 401(k) plans (optional provision)
Prior to the SECURE Act, many retirement plans excluded part-time workers who worked less than 1,000 hours in a year from plan participation. Beginning in 2021, part-time employees who perform at least 500 hours of service each year over three consecutive years (and satisfy the plan’s minimum age requirement) must be allowed to make salary deferrals in an employer-sponsored 401(k) plan. However, the eligibility rules for employer contributions did not change, and employers are not required to make employer contributions for these long-term part-time employees. 

The Notice clarifies that:
  • If the employer does make employer contributions that are subject to a vesting schedule, the long-term part-time employee must be credited with a year of service for ALL of the 12-month periods where he or she had at least 500 hours of service (as compared to the 1,000 hours of service used in many plans with a vesting schedule for employer contributions). 
  • When determining the three-years of service for eligibility, any 12-month period with at least 500 hours of service prior to January 1, 2021 is disregarded. However, all periods, including those prior to January 1, 2021 are counted for determining vesting (except not those years where the employee was not yet 18 years old). This special vesting rule only applies to those part-time employees who become eligible to participate due to this rule and not all current employees. 
Due to anticipated data challenges with counting years of vesting service beginning before January 1, 2021, the IRS is requesting comments on how to reduce any potential administrative burdens for employers.  
  1. Qualified birth or adoption distributions (optional provision)
As of January 1, 2020, distributions taken within 12 months of the birth of a child or adoption of an “eligible adoptee” are exempt from the 10 percent early distribution penalty tax. The exception applies to qualified birth or adoption distributions ("QBADs") of up to $5,000.
The Notice clarifies that:
  • An "eligible adoptee" is any individual who is under age 18 or physically or mentally incapable of self-support, excluding the taxpayer's spouse's child.
  • A person is physically or mentally incapable of self-support if he/she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration.
  • Each parent may distribute up to $5,000 in the aggregate, per birth or adoption event, from an IRA, a 401(a) defined contribution plan, 403(a) annuity plans, 403(b) annuity contracts, and governmental 457(b) plans (but not defined benefit plans).
  • A QBAD may be received for each child of multiple births or adoptions.
  • An individual may repay these amounts to an IRA or eligible retirement plan. 
  • A QBAD is not treated as an eligible rollover distribution for purposes of the direct rollover rules, which means that the 20 percent mandatory withholding requirement and the Code Section 402(f) notice requirement do not apply. 
  • Sponsors and administrators may rely on reasonable representations that an individual is eligible for a QBAD, unless they have knowledge to the contrary.
  • A plan must accept the recontribution of a QBAD if the plan permits these distributions, the individual received the distribution from that plan and is also eligible to make a rollover to that plan at the time of the desired recontribution.
  • A participant who receives an in-service distribution from a plan that does not provide for QBADs may still claim the distribution as a QBAD on their income tax return and recontribute the amount to a personal IRA.
  1. Difficulty of care payments included in compensation (optional provision)
The SECURE Act amends the Internal Revenue Code to provide that “difficulty of care” payments that are excluded from taxable compensation are now included in compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs. A “difficulty of care” payment is received by an individual under a foster care program of a state or political subdivision of the state.

The Notice clarifies that:
  • The employer must make the difficulty of care payments to its employees to be included in the definition of compensation when calculating the contribution limits. 
  • Difficulty of care payments not paid by the individual's employer are not includible in compensation under that employer's plan.
  • If an employer does not make difficulty of care payments to employees, the employer's plan is not required to be amended.
  1. Reduction in minimum age for in-service distributions (optional provision)
Beginning in 2020, the Bipartisan American Miners Act Guidance (“Miners Act”) lowered the minimum age for in-service distributions from a qualified defined benefit pension plan from age 62 to age 59½ and from 70½ to 59½ for a governmental 457(b) plan.
The Notice clarifies that the change to age 59½ for in-service distributions does not affect the “normal retirement age” rules. Specifically, 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. A normal retirement age that is age 62 or later is deemed to satisfy this requirement.
  1. Deadlines for Amendments
The deadlines for amending plans to reflect the changes made by the SECURE Act and Miners Act are generally December 31, 2022 for calendar year plans (or by December 31, 2024 for governmental plans and collectively bargained plans). Despite the delayed amendment dates, sponsors must still administer the plan in compliance once the changes become effective.
The Treasury Department and IRS have requested comments on the Notice. Comments should be submitted by November 2, 2020.

Next Steps

Plan sponsors of all types do have some time to amend their plans to comply with the changes described above from the SECURE Act and Miners Act. Certain changes will require advance planning and operational changes. Plan sponsors should consider which of the optional changes they will implement and then prepare to modify their current administration and amend their plans accordingly.

For more information, please contact Gary Blachman, Kathleen Sheil Scheidt, Melissa Proffitt, Sarah Funke, Ian Minkin, Austin Anderson, or the Ice Miller LLP Employee Benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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