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IRS Provides SECURE Act Guidance

IRS Provides SECURE Act Guidance

In Notice 2020-68, the IRS has provided guidance regarding the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act; the Act), including the small employer automatic enrollment credit and the repeal of maximum age for traditional IRA contributions contained in the Act.

Code Section 45T small employer automatic enrollment credit.

Section 105 of the SECURE Act added new Code Sec. 45T, which provides a business credit under Code Sec. 38 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.

Under § 105(d) of the SECURE Act, the new credit applies to tax years beginning after December 31, 2019.

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. For example, if an eligible employer, Employer W, 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), and 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.

As another example, if a different eligible employer, Employer X, first included an EACA in one of its qualified employer plans, Plan C, during Employer X's 2018 tax year (so that the only tax year included in Employer X's 3-year credit period after Code Sec. 45T is applicable is 2020) and also includes an EACA in a second qualified employer plan, Plan D, during the 2020, 2021, and 2022 tax years, Employer X may receive only a $500 credit for the 2020 tax year and no credit for subsequent tax years.

Repeal of maximum age for traditional IRA contributions.

Section 107(a) of the SECURE Act repealed Code Sec. 219(d)(1). Prior to the repeal of Code Sec. 219(d)(1), an individual was not permitted to make contributions to the individual's traditional Individual Retirement Arrangement (IRA) for a tax year if the individual had attained age 70½ by the last day of the year.

The amendment to Code Sec. 408(d)(8)(A) provides that the excludable amount of qualified charitable distributions for a tax year is reduced by the aggregate amount of IRA contributions deducted for the tax year and any earlier tax years in which the individual was age 70½ or older by the last day of the year (post-age 70½ contributions). The amendment further provides that the excludable amount of qualified charitable distributions for a tax year is not reduced by the amount of post-age 70½ contributions that caused a reduction in the excludable amount of qualified charitable distributions for earlier tax years.

Section 107(d) of the SECURE Act provides that these changes apply to contributions and distributions made for tax years beginning after December 31, 2019.

The following example illustrates the rules:

Example: An individual who turned age 70½ before 2020 deducts $5,000 for contributions for each of 2020 and 2021 but makes no contribution for 2022. The individual makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022.

  1. 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 70½ contributions for 2021 and earlier tax years. For this individual, 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)).
  2. 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 70½ 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 70½ 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 70½ 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).
  3. As described above, 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 70½ contributions remains to reduce the excludable amount of qualified charitable distributions for subsequent tax years.

Qualified birth or adoption distributions.

Section 113 of the SECURE Act amended Code Sec. 72(t)(2) to add a new exception to the 10% 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% additional tax if the distribution meets the requirements to be a qualified birth or adoption distribution.

A qualified birth or adoption distribution is includible in gross income, but is not subject to the 10% additional tax under Code Sec. 72(t)(1).

A qualified birth or adoption distribution is defined as any distribution 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.

An individual generally may recontribute a qualified birth or adoption distribution (not to exceed the aggregate amount of all qualified birth and adoption distributions made to the individual from the plan) to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.

Difficulty of care payments and retirement plans.

A difficulty of care payment is a type of qualified foster care payment that is excludable from gross income under Code Sec. 131. Because a difficulty of care payment is excludable from gross income, it was not, prior to the SECURE Act, included in a participant's compensation for purposes of calculating the annual additions limit of Code Sec. 415(c)(1). Accordingly, an employee who received difficulty of care payments from an employer was not permitted to make contributions to, or receive allocations under, the employer's plan based on the difficulty of care payments.

Section 116(b) of the SECURE Act adds Code Sec. 415(c)(8) to the Code 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.