IRS Issues Guidance on Certain SECURE Act Changes

By Ian Berger, JD
IRA Analyst
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In Notice 2020-68, issued September 2, 2020, the IRS gave limited guidance on certain retirement provisions of the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”). The SECURE Act was signed into law on December 20, 2019.

Notice 2020-68 does not address one of the most significant SECURE Act changes: the elimination of the stretch IRA for most non-spouse beneficiaries and its replacement with a 10-year payout period. The Notice also does not provide guidance on the increase in the first RMD (required minimum distribution) year from age 70 ½ to age 72. The IRS promised more substantial SECURE Act guidance in the future.

Notice 2020-68 does address the following SECURE Act provisions:

• Beginning in 2020, individuals who turn age 70 ½ or older are no longer barred from making traditional IRA contributions. Somewhat surprisingly, the IRS said that financial institutions are not required to accept post-age 70 ½ contributions. (It’s not clear why a custodian would want to turn away a new source of funds.) Those institutions that do accept post-70 ½ contributions must amend their IRA contracts and update the disclosure statement they must give IRA owners. However, the deadline for making those amendments and updates is not until at least December 31, 2022. Notice 2020-68 also provides an example of how making a post-70 ½ deductible IRA contribution can result in a QCD (qualified charitable distribution) becoming partially or wholly taxable. That’s why we recommend that, for those of you who make QCDs and also want to fund your IRA, the IRA contribution should be a Roth contribution – not a deductible contribution.

   

• Effective January 1, 2020, there is a new exception to the 10% early distribution penalty for IRA or company plan distributions made within one year of a birth or adoption. These penalty-free withdrawals are limited to $5,000 per individual for each birth or adoption. Notice 2020-68 clarifies that an eligible adoptee must be either under age 18 or disabled under the strict tax code definition of “disability” (unable to work by reason of an impairment that can be expected to result in death or continue for an indefinite period). The IRS also said that company plans are not required to offer birth or adoption withdrawals as a new distributable event. However, an under age 59 ½  participant in a plan that doesn’t offer them can still avoid the 10% penalty by taking a permissible plan distribution (e.g., a hardship withdrawal or a distribution upon termination of employment) that meets the requirements of a birth or adoption distribution.

• Foster care workers who receive “difficulty of care” payments from their employer can use those amounts to make nondeductible IRA contributions and after-tax employee contributions to company plans – even though the payments are non-taxable.

Notice 2020-68 also addresses two retirement plan changes made by the Bipartisan American Miners Act of 2019, a law passed at the same time as the SECURE Act. The first permits defined benefit pension plans to lower the minimum age for in-service withdrawals from age 62 to age 59 ½. The second allows state and local governmental 457(b) plans to offer in-service withdrawals at age 59 ½. Notice 2020-68 clarifies that both of these changes are optional – not required.