Maximum Tax Credits
The new notice clarifies that the maximum tax credit available to eligible retirement plans with an eligible automatic contribution arrangement (EACA) is $1,500. Specifically, there is a $1,500 limit on the total tax credit that any one employer can receive at a rate of $500 per year during a three-year credit period, beginning with the first taxable year in which the EACA is established. An eligible employer is one that has no more than 100 employees who received at least $5,000 in compensation in the preceding year.
Post-age 70½ IRA Contributions
This notice clarifies that although the SECURE Act repealed the provision in the tax code that prohibited individuals from making contributions to an IRA after age 70½, financial institutions issuing IRAs are not required to accept such contributions. If an IRA issuer does accept post-age 70½ contributions, and its IRA contracts must be amended to reflect this, they have until December 31, 2022, to do so.
Qualified Birth or Adoption Distributions (QBADs)
While distributions from plans and IRAs before age 59½ are generally subject to a 10 percent excise tax, the SECURE Act created a new exemption from that tax for qualified birth or adoption distributions. A QBAD is a distribution of up to $5,000 made during the one-year period beginning on the date on which a child of a participant or IRA owner is born, or on which the legal adoption by the individual of an eligible adoptee is finalized. An eligible adoptee is any individual (other than a child of the taxpayer's spouse) who has not reached age 18 or is physically or mentally incapable of self-support.
With respect to plan sponsors, the notice confirmed that the QBAD provision is not mandatory. However, if a plan decides to permit QBADs, plan sponsors are permitted to rely on a participant's self-certification for eligibility. Plan sponsors must also ensure that QBADs are allowed in a non-discriminatory manner and that the plan be amended by the end of the 2022 plan year. In addition, the plan must permit the participant to recontribute the QBAD later.
With respect to individual taxpayers, the notice clarified that taxpayers are required to include the child or adoptee's name, age and TIN on his or her tax returns for the taxable year in which the distributions are made in order to have the distributions deemed as QBADs. In addition, the notice confirmed that individuals taking a QBAD must include the amount of the distribution in income for the taxable year of the distribution. The notice also clarified that each parent may receive a separate $5,000 QBAD from his or her own respective account or IRA for the same child or adoptee, and individuals may take more than one $5,000 distribution for multiple births or adoptions in a year.
Long-time Part-time Workers
For plan years beginning on or after January 1, 2021, the SECURE Act requires 401(k) plans to permit elective deferrals for employees who have worked at least 500 hours in each of the preceding, consecutive three 12-month periods. The notice states that even though plans can disregard years of part-time service prior to January 1, 2021, for purposes of elective deferral eligibility, all service with the employer (even part-time service prior to January 1, 2021) must be considered when determining a participant's vesting service.
In-service Distributions from Pension Plans
The Bipartisan Miners Act, also enacted with the SECURE Act as part of the year-end government funding package, included a provision that reduced the age for in-service distributions from certain plans from age 62 to 59½. The notice states that permitted in-service distributions are not a required provision for plans. In addition, the notice clarifies that a reduction of the in-service distribution age to 59½ is not equivalent to reducing the plan's normal retirement age to age 59½. The IRS cautions that, as a general rule, plans should still refrain from having a normal retirement age lower than 62.