Agencies release guidance on SECURE Act changes

On September 2, 2020, IRS released Notice 2020-68, providing Q&A guidance on (among other things) issues for qualified retirement plans under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). On August 20, 2020, DOL released a proposed rule establishing requirements for (required) registration of “pooled employer plans” (PEPs, also known as open multiple employer plans or Open MEPs) under the SECURE Act, providing a new Form PR for that purpose.

In this article we (very) briefly review IRS’s guidance and DOL’s proposed rule.

Notice 2020-68

Of general significance to plan sponsors, IRS Notice 2020-68 includes guidance with respect to new rules under SECURE for qualified birth or adoption distributions and participation of long-term, part-time employees in 401(k) plans.

Qualified birth or adoption distributions

A qualified birth or adoption distribution is a distribution of up to $5,000 from any plan other than a defined benefit plan made during the 1-year period beginning with the child’s date of birth or legal adoption. The child’s name, age, and the Taxpayer Identification Number must be included on the taxpayer’s tax return.

Generally, under SECURE, a qualified birth or adoption distribution is not subject to the 10% early distribution tax but is subject to income tax and does not violate 401(k) distribution restrictions. Eligible adoptees include individuals under age 18 and those not physically or mentally capable of self-support but does not include the child of the taxpayer’s spouse.

In a two-parent family, each parent may receive up to $5,000 with respect to a single child and may receive with up to $5,000 for each child in multiple births, e.g., $5,000 for each of two twins (for a total of $10,000).

A plan is not required to permit qualified birth or adoption distributions, but a taxpayer taking a “non-birth or adoption distribution” from such a plan may, if the distribution qualifies, receive qualified birth or adoption distribution treatment.

A qualified birth or adoption distribution may be rolled over, but it is not subject, e.g., to the notice requirements under Internal Revenue Code section 402(f).

A plan that permits qualified birth or adoption distributions must also permit the rollover/recontribution (in certain circumstances) of that distribution. IRS stated in the Notice that it intends to issue regulations addressing recontribution rules (including rules as to timing).

A plan sponsor may rely on a reasonable representation that an individual is eligible for a qualified birth or adoption distribution, unless it has actual knowledge to the contrary.

Long-term, part-time employees 

SECURE generally provides that, after an employee completes three consecutive 12-month periods in which he has at least 500 hours of service and has attained the age of 21, he must be permitted to participate in the employer’s 401(k) plan.

This new rule applies beginning after December 31, 2020, except that service before January 1, 2021 is not taken into account for purposes of determining participation/eligibility. So, for participation purposes it will generally be 2024 before these individuals have to be included in the plan.

Notice 2020-68 clarifies that pre-2021 service is, however, taken into account in determining vesting for a part-time employee participant.

DOL proposes regulations for registration of PEPs (aka Open MEPs)

For background on PEPs, please see our article on the SECURE Act. New rules for PEPs are, at this stage, of primary interest to providers. In that regard, under SECURE, providers may begin offering PEPs beginning January 1, 2021, but are required to register with DOL before beginning operations.

The new rule/form requires PEP providers to file an initial registration that includes basic identification information and “flags” issues of concern, e.g., “ongoing criminal, civil, or administrative proceedings in any court or administrative tribunal by the federal or state government or other regulatory authority.”

In addition to the initial registration, PEP providers are required to make supplemental filings reporting changes in the information in the initial filing, information about specific pooled employer plans (before initiation of operations), and information on specified “reportable events,” e.g., changes in corporate structure, initiation of bankruptcy proceedings, or certain court proceedings.

As the PEP plan model, and related regulations/rules, develop, the opportunities and challenges that PEPs present for sponsors will begin to emerge.

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We will continue to follow these issues.