The Internal Revenue Service has provided some answers to questions concerning the small employer automatic enrollment credit, part-time vesting rules and other provisions under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act).
IRS Notice 2020-68, issued Sept. 2, provides guidance on some of the outstanding SECURE Act issues in the form of questions and answers, including:
- small employer automatic enrollment credit;
- repeal of maximum age for traditional IRA contributions;
- participation of long-term, part-time employees in 401(k) plans;
- qualified birth or adoption distributions; and
- permitting excluded difficulty-of-care payments to be taken into account as compensation for purposes of determining certain retirement contribution limitations.
The Notice also addresses the reduction in minimum age for in-service distributions under Section 104 of the Miners Act (which was contained in the Further Consolidated Appropriations Act, 2020 that also included the SECURE Act) and provides guidance on deadlines for plan amendments.
Small Employer Automatic Enrollment Credit
Section 105 of the SECURE Act created a new small employer automatic enrollment credit of up to $500 per year to employers to defray startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The new credit applies to taxable years beginning after Dec. 31, 2019.
One key question was whether the credit applies separately to each eligible employer that participates in a multiple employer plan (MEP) under Section 413(c). Here, the IRS confirms that it does, explaining that the Section 45T credit “applies to an eligible employer that participates in a MEP in the same way that the credit would apply if each employer participating in the MEP were the sponsor of a single-employer plan maintained by the eligible employer.”
Thus, the IRS explains, each eligible employer generally would qualify for the credit for the three-year credit period beginning with the first taxable year in which the eligible employer’s participating employees are first covered by an eligible automatic contribution arrangement (EACA) under the MEP.
The IRS also advises that an eligible employer may not receive a credit with respect to taxable years in more than one 3-year credit period. The Notice explains that an eligible employer may receive a credit for taxable years only during a single 3-year credit period that begins when the employer first includes an EACA in any qualified employer plan. The Notice provides two examples of how this interpretation would apply to eligible employers.
The IRS also confirms that, to be eligible for the Section 45T credit for the second or third taxable years of the 3-year credit period that begins when the eligible employer first includes an EACA in a qualified employer plan, the eligible employer must include the same EACA in the same plan in that second or third taxable year.
For example, the IRS explains that if an eligible employer (Employer Y) first includes an EACA in one of its qualified employer plans (Plan E) for its 2021 taxable year, amends Plan E to remove the EACA during its 2022 taxable year and includes an EACA in another qualified employer plan (Plan F) during its 2023 taxable year, Employer Y will not be eligible for the credit for its 2023 taxable year.
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If, however, rather than amending Plan E to remove the EACA during the 2022 taxable year, Employer Y spun-off a portion of Plan E and continued to include the EACA in the spun off portion of Plan E during its 2022 and 2023 taxable years, Employer Y would be treated as continuing to maintain the same EACA in the same plan for those taxable years and would be eligible for the credit for those taxable years.
Long-Term, Part-Time Employees in 401(k) Plans
Under the SECURE Act, employers maintaining a 401(k) plan will be required to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes more than 500 hours of service.
Special Vesting Rules
Regarding whether the exception in the SECURE Act that excludes 12-month periods beginning before Jan. 1, 2021, from being taken into account for purposes of the special eligibility rule also apply for purposes of the special vesting rules, the IRS advises that it does not.
Thus, all years of service with the employer or employers maintaining the plan must be taken into account for purposes of determining a long-term, part-time employee’s nonforfeitable right to employer contributions under the special vesting rules under Section 401(k)(15)(B)(iii). As such, unless a long-term, part-time employee’s years of service may be disregarded under Section 411(a)(4), all years of service with the employer or employers maintaining the plan must be taken into account, including 12-month periods beginning before Jan. 1, 2021, the IRS advises.
Qualified Birth or Adoption Distributions
The IRS Notice includes 18 question and answers addressing a laundry list of questions involving the SECURE Act’s new waiver from the Code Section 72(t) early withdrawal penalty for plan distributions used for childbirth or adoption expenses up to $5,000.
Among the questions addressed:
- Is an applicable eligible retirement plan required to permit in-service distributions for qualified birth or adoption distributions under Section 72(t)(2)(H)?
- May a plan sponsor or plan administrator rely on a reasonable representation from an individual that the individual is eligible for a qualified birth or adoption distribution?
- If an applicable eligible retirement plan permits qualified birth or adoption distributions, is the plan required to accept a recontribution of that distribution to the plan?
- May an individual receive qualified birth or adoption distributions with respect to multiple births of children or adoptions of eligible adoptees (for example, twins or triplets)?
Notice 2020-68 also reiterates the deadlines to amend a retirement plan for provisions of the SECURE Act or Miners Act. For example, the IRS advises the deadline to amend a qualified plan that is not a governmental plan or collectively bargained plan is the last day of the first plan year beginning on or after Jan. 1, 2022.
For Section 403(b) plans, the general deadline for a plan that is not maintained by a public school is the last day of the first plan year beginning on or after Jan. 1, 2022. For a 403(b) plan that is maintained by a public school, the deadline is the last day of the first plan year beginning on or after Jan. 1, 2024. A 403(b)-plan sponsor may be entitled to amend its plan after these dates under previously issued guidance, but practitioners should carefully review the Notice, as anti-cutback relief may not apply.