IRS Guidance on Retirement Plan Qualified Birth or Adoption Distributions

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The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) established a new in-service distribution known as a qualified birth or adoption distribution (“QBOAD”). Generally, a QBOAD is any distribution of up to $5,000 from an “eligible retirement plan” (other than a defined benefit plan), made to an individual during the one-year period beginning on the date a child of the individual is born or the legal adoption of an eligible adoptee is finalized. Eligible retirement plans include 401(k) plans, 403(a) plans, 403(b) plans, 457(b) plans, and IRAs. On September 2, 2020, in Notice 2020-68, the IRS issued guidance on QBOADs.

Among other things, this guidance provided that:

  • Each parent may receive a $5,000 QBOAD for the same child.
  • Parents may receive a separate QBOAD for separate children (including multiple births).
  • An adopted child includes an individual not yet 18 years old and individuals physically or mentally incapable of self-support.
  • A plan is not required to permit QBOADs.
  • A plan that permits QBOADs is treated as satisfying the distribution rules that apply to cash or deferred arrangements (i.e., the rules that limit the circumstances in which in-service distributions are permitted).
  • A plan may permit distributions from elective deferrals, QNECs, QMACs, and even safe harbor contributions.
  • A plan administrator may rely on a reasonable representation from an individual that the individual is eligible for a QBOAD, unless the plan administrator has actual knowledge to the contrary.
  • An eligible individual may recontribute a QBOAD back to the same plan from which the distribution was made (or to an IRA), if the individual is eligible to make a rollover to that plan.
  • To qualify as a QBOAD, an individual must include the name, age, and taxpayer identification number of the child or adoptee on the individual’s tax return for the year in which the distribution is made.
  • QBOADs are includable in an individual’s gross income, but are not subject to the 10% early distribution excise tax under Code Section 72(t).
  • A QBOAD is not treated as an eligible rollover distribution (no mandatory withholding, no rollover rights, no special tax notice, etc.).
  • Even if a plan does not permit QBOADs, an individual may still treat a qualifying distribution as a QBOAD for tax purposes.

If a plan permits QBOADs, the plan must be amended no later than the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans). However, the last adoption date for a qualified governmental plan, a public school, or a collectively bargained plan is the last day of the first plan year beginning on or after January 1, 2024. If a plan implements a QBOAD after these deadlines, the plan must be amended no later than the last day of the plan year of implementation.

Many employers delayed consideration of adding QBOADs to their plans, waiting for IRS guidance. Now that this guidance has been issued, plan sponsors should consider whether they want to add QBOAD provisions to their plans for the 2021 plan year. The QBOAD rules provide a source of previously restricted cash that new parents often need. However, it is also another new (see Coronavirus Related Distributions) rule that could work to decrease the money that individuals will need when they reach retirement age.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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