SECURE Act - Withdrawals for Birth or Adoption

[Gilmore]

Had a quick question on the withdrawals for birth or adoption section of the Secure Act.

Is this intended to be another in-service withdrawal option, or does the participant need to have a distributable event available? 

Also, in reading the section of the Act it does not appear to say anything similar to "If the Plan permits", or something to the effect so I'm wondering if this is available even if the Plan does not otherwise allow for withdrawals until, say normal retirement age, for example.

Thanks very much.

[Appleby]

Great question.

The language does not appear to make any changes to the triggering event requirements. It appears therefore, that one must first be eligible to make withdrawal form the plan.

Let's hope the IRS addresses your question.

 

[Bird]

I think the point of the Act is to make such distributions penalty-free, not to permit them if not otherwise permitted.

[RatherBeGolfing]

6 minutes ago, Bird said:

I think the point of the Act is to make such distributions penalty-free, not to permit them if not otherwise permitted.

Also the ability to repay the distribution.

I have heard that it would be added as a new hardship, but I haven't seen anything concrete on that.  

[Larry Starr]

17 hours ago, Gilmore said:

Had a quick question on the withdrawals for birth or adoption section of the Secure Act.

Is this intended to be another in-service withdrawal option, or does the participant need to have a distributable event available? 

Also, in reading the section of the Act it does not appear to say anything similar to "If the Plan permits", or something to the effect so I'm wondering if this is available even if the Plan does not otherwise allow for withdrawals until, say normal retirement age, for example.

Thanks very much.

Section 113 of the Act simply adds another exclusion from the 10% early distribution penalty found in Sec 72(t) of the code. The individual will still have to meet whatever requirements of the plan that apply, including the possibility of NO allowance for early distribution for this purpose.  Unless the plan provides for this benefit, it is not available.  It is NOT added under the hardship rules, which are under 401(K)(2)(B).

[RatherBeGolfing]

Thanks Larry!

[rocknrolls2]

However, Code Section 72(t)(2)(H)(vi)(IV) provides,"Any qualified birth or adoption shall be treated as meeting the requirements of Sections 401(k)(2)(B)(i)..." The cross-referenced section lists the permissible distribution events under 401(k) plans.

[Mike Preston]

And since amendments won't be mandatory for a while, a plan sponsor can just go ahead and implement what they want and then follow up with language that describes what they have opted to do.  This is one of those circumstances where a plan sponsor might want to publicize the availability through the equivalent of an SMM before the actual due date, which would typically be a much later date that tracks to the actual amendment.

[Larry Starr]

25 minutes ago, rocknrolls2 said:

However, Code Sextion 72(t)(2)(H)(vi)(IV) provides,"Any qualified birth or adoption shall be treated as meeting the requirements of Sections 401(k)(2)(B)(i)..." The cross-referenced section lists the permissible distribution events under 401(k) plans.

Not sure why you are making this statement.  I said (in my earlier posting) that "Unless the plan provides for this benefit, it is not available."  The truth of that has not changed. The birth or adoption exemption is NOT added under the hardship rules.  401(k)(2)(B)(i) is NOT the hardship distribution list. You will find that list under 401(k)(14)!

[Peter Gulia]

Although what Congress wrote is awkward (in many ways), it seems a qualified birth or adoption distribution, if the plan provides it, can be an exception from a distribution restriction that is a condition for a plan’s Federal income tax treatment.

 

While rocknrolls2 fairly quoted the portion for a 401(k) arrangement, the whole sentence is:

 

Any qualified birth or adoption distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11), and 457(d)(1)(A).

 

Also, the statute includes:

 

If a distribution to an individual would (without regard to clause (ii) [limiting an individual’s aggregate amount to $5,000]) be a qualified birth or adoption distribution, a plan shall not be treated as failing to meet any requirement of this title [title 26 of the United States Code, which is the unofficial compilation of the Internal Revenue Code of 1986] merely because the plan treats the distribution as a qualified birth or adoption distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $5,000.

 

Many practitioners interpret those sentences and related text to permit a plan to provide a qualified birth or adoption distribution as a kind of distribution that does not tax-disqualify a plan for allowing a too-early distribution.

 

As Larry Starr said, a birth-or-adoption distribution is not a plan’s benefit until the plan (somehow) provides such a distribution.

 

As Mike Preston suggests, some administrators might write a summary of material modifications (or a revised summary plan description) to describe a plan provision that—even if not yet in a document to be amended later under a remedial-amendment period (including one provided by § 601 of the SECURE division of the appropriations Act)—is somehow a provision the plan’s sponsor sufficiently adopted that the plan’s administrator may communicate the provision.

 

At least for an ERISA-governed plan, an administrator might want the plan’s sponsor to make some writing—even if not one people call a plan document—to help comply with ERISA’s

 

§ 402(a)(1), which requires that a plan “be established and maintained pursuant to a written instrument.”;

 

§ 402(b)(4), which requires that a plan “specify the basis on which payments are made . . . from the plan.”; and

 

§ 404(a)(1), which commands a fiduciary, including an administrator, to “discharge [the fiduciary’s] duties with respect to a plan . . . in accordance with the documents and instruments governing the plan[.]”

 

(I recognize that for many plans the sponsor and the administrator are closely related or even the same person.  Yet, recognizing the distinct roles can be helpful in thinking through the steps.)

 

An ERISA-governed plan’s fiduciary must administer a retirement plan according to the documents that govern the plan, not a document that might be made later.  Even if a sponsor’s writing lacks the style and formalities of what some might think of as the “official” plan documents, the sponsor’s writing might be a document that governs the plan (until a plan amendment supersedes it).

 

[rocknrolls2]

Very well put, Peter! I was basically trying to say the same thing in much fewer words (perhaps too few. In response to Larry, I agree that a qualified birth or adoption distribution would have to be specifically added to the plan document (subject to the timing rules referenced above) but I never intended what I said to in any way suggest that this change amended the providsions regarding permissible hardship events. The reference to 401(k)(2)(B)(i) was intended to refer to the listing of permissible 401(k) distribution events. 

[Dobber]

Can you confirm this new provision applies to IRAs too?  I think it does however it was not mentioned in any of the replies

Also, I am hoping someone can add some clarification to the "repay" provision - 

1. What is the timing to repay the distribution? 60 days?  

2. Does the distribution have to repaid to the same plan/account it was distributed from?

3. does the "repayment" get deposited as after-tax dollars?

Or do we need to wait for the IRS to issue regulations?

 

Thank you