IRS Publishes SECURE Act Guidance:

On September 2, 2020, the IRS issued Notice 2020-68 (the “Notice”) to provide additional guidance under the SECURE Act.  (Please see the January 2020 edition of The Speed Reader for a summary of the SECURE Act’s provisions that affect defined contribution plans, such as 401(k) plans and 403(b) plans.)   

Here is a summary of the Notice’s main provisions that might affect certain defined contribution plans, depending on each plan’s specific provisions:

  • Small employer automatic enrollment credit:  The SECURE Act provides a business credit for an eligible employer that establishes an eligible automatic contribution arrangement (“EACA”) under its plan. The credit is equal to $500 for any tax year of an eligible employer that occurs during a credit period. (An “eligible employer” is one that had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding year. A “credit period” is the period of 3 tax years beginning with the first tax year for which an eligible employer includes an EACA in its plan.) The Notice clarifies that an eligible employer cannot receive a credit with respect to taxable years in more than one 3-year credit period. Also, to be eligible for the credit for the second or third tax years of an eligible employer’s 3-year credit period, the eligible employer must include the same EACA in the same plan in that second or third tax year.       
  • Participation of long-term, part-time employees in 401(k) plans:  The SECURE Act provides that employees who are not full-time employees but have attained at least age 21 must be allowed to participate in their employer’s 401(k) plan no later than the end of 3 consecutive 12-month periods during each of which the employee has completed at least 500 hours of service. (12-month periods beginning before January 1, 2021, are not taken into account under the SECURE Act.) Also under the SECURE Act, such employees must be credited with a year of vesting service for each 12-month period during which the employee completes at least 500 hours of service. The Notice clarifies that the exclusion of 12-month periods beginning before January 1, 2021 applies for eligibility purposes but not for vesting purposes. Thus, all years of service with the employer or employers maintaining the plan must generally be taken into account when determining long-term, part-time employees’ vesting status under the plan, including 12-month periods beginning before January 1, 2021.
  • Qualified birth or adoption distributions:  The SECURE Act allows individuals to receive a distribution of up to $5,000 if it relates to the qualified birth or adoption of a child, without having to pay the 10% penalty tax that typically applies to early distributions from certain retirement plans. (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.) Under the Notice, the recipient must include the name, age, and the Taxpayer Identification Number of the child or eligible adoptee on the recipient’s tax return for the tax year in which the distribution is received. Also, the following plans can include this distribution provision: a qualified defined contribution plan, a 403(a) annuity plan, a 403(b) plan, a governmental 457(b) plan, or an IRA. Further, each parent can receive this type of a distribution of up to $5,000 with respect to the same child or eligible adoptee.
  • Difficulty of care payments:  A difficulty of care payment (“DOCP”) is a type of qualified foster care payment that is excludable from gross income. Before the SECURE Act, because such payments were not included in a participant’s compensation for plan purposes, an employee who received a DOCP from an employer was not allowed to make contributions to, or receive allocations under, the employer’s plan with respect to such payment. Under the SECURE Act, a participant can make contributions to, or receive allocations under, a plan with respect to such payments, even if he or she has no other compensation. The Notice provides that: (1) DOCPs 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; and (2) if an employer does not make DOCPs to its employees who are eligible to participate in the employer’s plan, the plan does not have to be amended to include DOCPs in the plan’s definition of compensation.