New guidance regarding birth or adoption distributions from retirement plans
You may recall that the SECURE Act was signed into law last December. The SECURE Act made a number of changes to the rules governing qualified retirement plans. One change created a new type of a distribution from certain retirement plans, including 401(k) plans, following qualifying births or adoptions. The SECURE Act allows a plan participant to take a distribution of up to $5,000 following a qualified birth or adoption (“Birth/Adoption Distribution”).
Even though plan sponsors were allowed to add the Birth/Adoption Distribution feature to their plan on or after January 1, 2020, most plan sponsors have not yet added this feature because there were initially too many unanswered questions. Fortunately, the Department of the Treasury and the Internal Revenue Service recently issued additional guidance (Notice 2020-68) that may make plan sponsors more likely to turn on this new feature.
Here is what we now know from the SECURE Act and the recent guidance:
- A Birth/Adoption Distribution must be made during the one-year period beginning on the date when a child is born or the legal adoption is finalized.
- A Birth/Adoption Distribution may be made from 401(k) plans, profit sharing plans, 403(b) plans, governmental 457(b) plans, IRAs, and certain other plans. They do not apply to defined benefit plans.
- An “eligible adoptee” includes any individual who has not attained age 18 or is physically or mentally incapable of self-support. However, an eligible adoptee does not include an individual who is the child of the taxpayer’s spouse.
- A Birth/Adoption Distribution is includible in gross income, but is not subject to the 10% excise tax.
- Even though a Birth/Adoption Distribution is includible in the participant’s gross income, the plan is not required to withhold the normal 20%.
- The individual must include the name, age, and the Taxpayer Identification Number (TIN) of the child or eligible adoptee on the individual’s tax return for the taxable year in which the distribution is made.
- Each parent may receive a Birth/Adoption Distribution up to $5,000 with respect to the same child. This means two parents may each take $5,000 from their qualifying retirement plan following the birth or adoption of the same child.
- An individual may receive a Birth/Adoption Distribution with respect to the birth of more than one child (e.g., twins). For example, Employee A gives birth to twins in October 2020. Employee A may take a $10,000 distribution from her 401(k) plan in January 2021, assuming she includes the TINs of her twins and other required information on her 2021 tax return.
- An individual generally may recontribute a Birth/Adoption Distribution to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.
- Plans are not required to permit Birth/Adoption distributions. It is an optional feature for the plan sponsor.
- If a plan permits a Birth/Adoption Distribution to a participant, the plan is generally required to accept a recontribution of that same amount from that individual.
Now that we have some additional guidance, I suspect many plan sponsors will turn on this feature and that it will be very popular with plan participants. You might consider discussing this with your recordkeeper and/or third-party administrator.