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October 8, 2020

SECURE Act Updates

The IRS issued Notice 2020-68 addressing several aspects of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).  The SECURE Act was part of a broad sweeping government appropriations bill (Further Consolidated Appropriations Act, 2020, Pub. L. No. 116-94) enacted on December 20, 2019.  The changes made by the SECURE Act were summarized in the January 2020 edition of our CBIZ At Issue.  Of particular note, the IRS guidance makes clarifications to the following provisions:

Participation for Long-term Part-Time Employees

Under the SECURE Act, 401(k) plans must to allow certain long-term part-time employees to participate in the plan.  Eligible individuals are those who work at least 500 hours per year with the employer for at least three consecutive years, and have met the age requirement (generally, age 21) by the end of the three consecutive year period.  This provision applies to plan years beginning after December 31, 2020.  However, the 12-month periods beginning prior to that date are not taken into account for determining eligibility to participate in the plan.  The IRS guidance clarifies that this exception does not extend to the special vesting rules. Thus, unless a long-term, part-time employee’s years of service is disregarded, all years of service with the employer must be taken into account for purposes of determining the individual’s right to employer contributions.  For purposes of determining vesting rights, each 12-month period for which the employee has at least 500 hours of service is treated as a year of service.  For purposes of the break-in-service rules, the special vesting rules continue to apply to these employees even if the individual subsequently completes a 12-month period during which he/she works at least 1,000 hours.

Withdrawals for Birth or Adoption Expenses

The SECURE Act provides for up to $5,000 penalty-free withdrawals from an individual’s retirement account to pay for qualified expenses relating to birth or adoption of a child.  This provision applies to IRAs, 401(k) plans and certain government-sponsored plans, such as 403(b) plans and 457(b) plans, as long as the plan so provides.  Distributions used for this purpose are not subject to the 10% early withdrawal penalty and can be repaid, even to another plan, as long as the other plan provides for the repayment. This provision applies to distributions made after December 31, 2019.

The IRS guidance clarifies that to qualify for the distribution, the individual is required to provide the name, age, and taxpayer ID number (TIN) of the child or eligible adoptee on his/her tax return for the taxable year in which the distribution is made.  An eligible adoptee is one under age 18, or is physically or mentally incapable of self-support.  An eligible adoptee does not include a child of the taxpayer’s spouse.

Each parent can receive a qualified birth or adoption distribution of up to $5,000 for the same child or eligible adoptee.  The $5,000 distribution applies on a per child basis in the event of multiple births, such as twins or triplets, or multiple adoptions of eligible adoptees, for example, an individual could withdraw up to $10,000 for birth of twins.   Distributions for this purpose must be made during the 1-year period following the date on which the child(ren) are born, or the legal adoption for the eligible adoptees is finalized.

A qualified birth or adoption distribution is not treated as an eligible rollover distribution for purposes of the direct rollover rules, the Section 402(f) notice requirement, or the mandatory withholding rules.

Tax Credits for Small Employer Plans

The SECURE Act increases the tax credit for costs associated with establishing small employer pension plans, such as a qualified pension, profit sharing, or stock bonus plan, a qualified annuity plan, a simplified employee pension plan or a simple retirement account plan. Further, the law increases the general business tax credit for small employer plans adopting an automatic enrollment feature.  For this purpose, a small employer is one who employs less than 100 employees who receives at least $5,000 in annual compensation. Both provisions apply to tax years beginning after December 31, 2019.

The IRS guidance makes clarifications to the tax credit provision available under Section 45T.  An eligible employer is only entitled to receive the tax credit for taxable years during a single 3-year credit period that begins when the employer first includes an eligible automatic contribution arrangement (EACA).   If the credit period began prior to the effective date, then the credit would only be available for the remaining years of the credit period. To be eligible for the credit for the second or third taxable years of the employer’s 3-year credit period, the employer must include the same EACA in the same plan in that second or third taxable year.

The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

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