Should a plan’s administrator require a document to prove a birth or adoption?

Imagine an employment-based § 401(k) plan allows—without waiting for age 59½, severance from employment, hardship, or some other distribution-permitting event—a qualified birth or adoption distribution (up to $5,000) within what Internal Revenue Code § 72(t)(2), as added by SECURE § 113, permits.

The statute defines such a distribution as one “made during the 1-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.”  The statute does not require (and assume the plan does not require) showing an expense attributable to the birth or adoption.  The only fact needed to support a participant’s claim is the fact of the birth of the participant’s child, or the participant’s adoption of an eligible adoptee.

Assume the plan’s administrator adopts a new claim form, which has check-off boxes for a birth or an adoption, and for an adoption includes the participant’s statement that the adoptee is younger than 18 (or is physically or mentally incapable of self-support) and is not the participant’s spouse’s child.  Assume the form includes a strong statement about how a false statement can result in fines, imprisonment, liability for the plan’s expenses, and other legal consequences.

If you’re advising the plan’s administrator:

Is it enough that a participant states the necessary facts on the plan’s claim form, and signs it?

Or do you require a claimant to submit a copy of the birth certificate?

(Even if that aberration would frustrate normal processing for a plan that has electronic claims for all kinds of distributions?)

Do you require a claimant to attach a copy of the court order or other document that grants the adoption?

If a participant’s claim attaches instead a notarized affidavit stating a common-law adoption, would you advise the plan’s administrator to approve or deny the claim?

1 hour ago, Peter Gulia said:

 

Imagine an employment-based § 401(k) plan allows—without waiting for age 59½, severance from employment, hardship, or some other distribution-permitting event—a qualified birth or adoption distribution (up to $5,000) within what Internal Revenue Code § 72(t)(2), as added by SECURE § 113, permits.

 

The statute defines such a distribution as one “made during the 1-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.”  The statute does not require (and assume the plan does not require) showing an expense attributable to the birth or adoption.  The only fact needed to support a participant’s claim is the fact of the birth of the participant’s child, or the participant’s adoption of an eligible adoptee.

 

Assume the plan’s administrator adopts a new claim form, which has check-off boxes for a birth or an adoption, and for an adoption includes the participant’s statement that the adoptee is younger than 18 (or is physically or mentally incapable of self-support) and is not the participant’s spouse’s child.  Assume the form includes a strong statement about how a false statement can result in fines, imprisonment, liability for the plan’s expenses, and other legal consequences.

 

If you’re advising the plan’s administrator:

 

Is it enough that a participant states the necessary facts on the plan’s claim form, and signs it?

 

Or do you require a claimant to submit a copy of the birth certificate?

 

(Even if that aberration would frustrate normal processing for a plan that has electronic claims for all kinds of distributions?)

 

Do you require a claimant to attach a copy of the court order or other document that grants the adoption?

 

If a participant’s claim attaches instead a notarized affidavit stating a common-law adoption, would you advise the plan’s administrator to approve or deny the claim?

We are still very early in the process, and this is one area where additional guidance is needed on a bunch of things. The attached article (just saw today) is a pretty good discussion of what some of the issues are.  Enjoy!

SECURE Act leaves questions about distributions for birth, adoption _ Mercer.pdf

Thank you for the observations, and pointing us to an article.

Some of us can’t wait for IRS guidance and instead must invent our own guidance.  I have clients that provide a qualified birth or adoption distribution, beginning January 1, 2020.

I’m evaluating a proposed regime analogized from the IRS’s memo about deciding 401(k) hardship claims without receiving supporting documents. 

For a birth, a claim would require the claimant to state the child’s name, date of birth, and that the child is the participant’s child.  For an adoption, a claim would state how the adoptee is an eligible adoptee and the adoptee’s name, date of birth, and date of adoption.

Text that precedes the claim would inform a claimant that she “agrees to preserve source documents [including the birth certificate or adoption order] and to make them available” on the administrator’s request.

While I’m responsible for my advice, I value learning what BenefitsLink mavens think.  Is a no-substantiation claim good enough?

Obviously I agree with Larry that guidance is needed, but if you are desperate to implement it now, you should be ok as long as you can show that the steps you took were in good faith.

I would probably go with requiring documentation during the good faith period and then possibly changing it after guidance comes out if it is more lenient.  

I think the repayment is the trickier part, the limits and events are fairly straight forward, and even where there is a question you can argue reasonable interpretation while we wait for guidance.

RatherBeGolfing, thank you contributing a useful idea.

Hi.  Peter, LG, RBG and other esteemed contributors:

Which provision of the SECURE Act created a new in-service distribution right under the plan?

Imagine an employment-based § 401(k) plan allows—without waiting for age 59½, severance from employment, hardship, or some other distribution-permitting event—a qualified birth or adoption ("QBOA") distribution (up to $5,000) within what Internal Revenue Code § 72(t)(2), as added by SECURE § 113, permits.

Under the SECURE Act, a QBOA distribution will simply be exempt from the 10% excise tax under new section 72(t)(2)(H).  The SECURE Act does not appear to me to create a new withdrawal right under code section 401(k), 403(b), or 457... unlike when Congress added the exemption under section 72(t)(2)(G) for distributions from retirement plans to individuals called to active duty and simultaneously created new distribution rights under those sections of the Code. Section 113(a)(vi)(IV) of the Secure Act  does not create a new distribution right, it simply states that QBOA distributions will be treated as meeting the [existing] distribution restrictions/requirements of sections 401(k), 403(b) and 457(b).  

This seems to be a significant issue to resolve before advising clients to add what could be a disqualifying provision to their plan document and creating an operational violation for the plan administrator. Has anyone heard from Treasury or the IRS on this point?  Please share.

Thank you.

3 hours ago, AMDG said:

Hi.  Peter, LG, RBG and other esteemed contributors:

Which provision of the SECURE Act created a new in-service distribution right under the plan?

Imagine an employment-based § 401(k) plan allows—without waiting for age 59½, severance from employment, hardship, or some other distribution-permitting event—a qualified birth or adoption ("QBOA") distribution (up to $5,000) within what Internal Revenue Code § 72(t)(2), as added by SECURE § 113, permits.

Under the SECURE Act, a QBOA distribution will simply be exempt from the 10% excise tax under new section 72(t)(2)(H).  The SECURE Act does not appear to me to create a new withdrawal right under code section 401(k), 403(b), or 457... unlike when Congress added the exemption under section 72(t)(2)(G) for distributions from retirement plans to individuals called to active duty and simultaneously created new distribution rights under those sections of the Code. Section 113(a)(vi)(IV) of the Secure Act  does not create a new distribution right, it simply states that QBOA distributions will be treated as meeting the [existing] distribution restrictions/requirements of sections 401(k), 403(b) and 457(b).  

This seems to be a significant issue to resolve before advising clients to add what could be a disqualifying provision to their plan document and creating an operational violation for the plan administrator. Has anyone heard from Treasury or the IRS on this point?  Please share.

Thank you.

SECURE did NOT create a new in service distribution RIGHT; it created a new OPTION to allow distributions for this purpose, which you seem to understand above but then I don't understand your "significant issue to resolve". What is the issue you are concerned with?  If you add it to a plan, it is NOT a disqualifying provision (since it is legally permitted as of 1/1/20).  So what exactly is the problem you have?  We definitely need guidance as there are a bunch of unknown issues (the repayment issue is problematic in my mind, as there is apparently no time limit on the repayment, which means it could be YEARS later). We definitely will need IRS guidance on a bunch of issues with this type of benefit.  I think it is unlikely we will be adding it to many plans.

Internal Revenue Code of 1986 § 72(t)(2)(H)(vi)(IV) [added by SECURE § 113(a)] provides:

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).

While that sentence (and the absence of other revisions of the tax Code) is not a model of legislative drafting, many practitioners interpret the sentence as allowing what otherwise would be a too-early distribution without tax-disqualifying the plan, contract, or arrangement.

Some plan sponsors might never choose a birth-or-adoption distribution (even if all uncertainties and complexities were solved); some might wait; and some want it now.

My query assumed a sponsor had amended its plan to add a birth-or-adoption distribution.

The law as written references the need for the participant to be claiming the child as a dependent on his tax return.  You will have no proof of this until April 15 of the following year.  So, you need not only a representation that the child is the participant's but that the child will be claimed on the tax return.  Perhaps require a copy of last year's 1040 showing the mother as a joint filer?

IRS guidance cannot come too soon.

16 hours ago, Larry Starr said:

SECURE did NOT create a new in service distribution RIGHT; it created a new OPTION to allow distributions for this purpose, which you seem to understand above but then I don't understand your "significant issue to resolve". What is the issue you are concerned with?  If you add it to a plan, it is NOT a disqualifying provision (since it is legally permitted as of 1/1/20).  So what exactly is the problem you have?  We definitely need guidance as there are a bunch of unknown issues (the repayment issue is problematic in my mind, as there is apparently no time limit on the repayment, which means it could be YEARS later). We definitely will need IRS guidance on a bunch of issues with this type of benefit.  I think it is unlikely we will be adding it to many plans.

Okay, fair enough.  It's not a new right.  Poor word choice.

But where exactly is the "option" - the distributable event - in the Code? I don't see where the birth or adoption of a child is defined as a distributable event, unlike the other clearly defined distributable events. 

I am concerned that what some practitioners find reasonable will differ from what the regulators permit. We'll have to wait and see.

Why would the IRS make this harder to get than a hardship distribution, which can be done based on self-certification, as long as the employer does not have contrary knowledge?

26 minutes ago, Luke Bailey said:

Why would the IRS make this harder to get than a hardship distribution, which can be done based on self-certification, as long as the employer does not have contrary knowledge?

The ability to pay it back is pretty significant.  Not only are you allowing assets to leave the plan, you are also allowing them to flow back in, either as pre-tax or post-tax dollars .  

FormsRstillmylife, thank you for pointing out Internal Revenue Code § 72(t)(2)(H)(vi)(III).

It isn’t practical for a retirement plan’s administrator to inspect a participant’s tax return.

But the idea of putting another statement on a claim form makes sense.