Bottom Line: The Internal Revenue Service (IRS) issued new guidance about the new in-service distribution opportunity for qualified birth and adoption distributions (QBADs) for tax-qualified retirement plans, which became an available distribution for retirement plans under the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act.
Retirement plan sponsors who are considering adding QBADs to their 401(k) or 403(b) retirement plans should take the time now to review the applicable guidance and work with their advisors and third-party administrators on how to implement this new distribution option and prepare required plan amendments.
Background: As most retirement plan sponsors are aware, the SECURE Act made several changes to the rules for tax-qualified retirement plans. We described some of the key SECURE Act provisions in an earlier article (available here). One of the more significant changes under the SECURE Act added a new optional in-service withdrawal opportunity for plan participants for QBADs. A QBAD is an in-service distribution from an eligible retirement plan that is made to a plan participant any time during the one-year period after the birth or legal adoption of a child.
The SECURE Act made it clear that QBADs (1) are not subject to the 10% early withdrawal penalty, (2) are not treated as an eligible rollover distribution, (3) are limited to $5,000 per qualifying event, and (4) can be recontributed to the qualified retirement plan or an IRA (and such repayment will be treated as nontaxable). However, many retirement plan sponsors and service providers felt that the SECURE Act provisions alone did not give sufficient guidance for retirement plans to begin implementing QBADs.
QBAD Guidance Issued: On September 2, 2020, the IRS issued Notice 2020-68 (available here), which provided much-needed guidance on the implementation of several sections of the SECURE Act, including the provisions regarding QBADs. While this guidance addresses many of the open questions relating to QBADs, the IRS also indicated that it plans to issue additional guidance in the future to address the QBAD recontribution rules.
For now, Notice 2020-68 clarified the following key issues for retirement plan sponsors who wish to implement QBADs:
Stay-Tuned: As explained above, while Notice 2020-68 provides answers to many of the open questions that retirement plan sponsors, service providers, and legal advisors had regarding the implementation of QBADs, the IRS has indicated that it plans to issue additional guidance on the QBAD recontribution rules. Until then, retirement plan sponsors who wish to amend their plans to permit QBADs should consult with their legal advisors and service providers to identify appropriate implementation procedures and any required plan amendments.
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