As nearly every advisor already knows, the Secure Act made important changes to a number of retirement-related provisions. From limitations on the value of the stretch IRA to an increased RMD age and new exceptions to the penalty on early retirement withdrawals, the Secure Act changes will impact nearly every plan participant, sponsor and employer in some way.
However, like many other important pieces of legislation, the Secure Act was passed with little notice—becoming effective only a few days after it was passed just before the 2019 holidays.
Now, we are beginning to see some guidance from the IRS and Treasury to help with implementation of these important changes—and we’re also becoming more aware of the guidance that we can expect to see in the weeks and months ahead. While much of the new guidance is technical in nature, understanding what we don’t yet know can be important to advising clients on current important questions.
New Required Minimum Distribution Rules
Generally, the Secure Act raised the required beginning date (the date when taxpayers must begin taking required minimum distributions, or RMDs) from 70 ½ to 72. However, financial institutions were required to notify account owners who turned 70 ½ in 2020 of their RMD obligations by January 31—and many institutions sent their required notices before the Secure Act passed.
Therefore, taxpayers who will reach age 70 ½ in 2020 may have already received a notice of their 2020 RMD obligations–which would now be incorrect. Under relief provided in Notice 2020-06, the IRS has provided that it will not consider statements that have already been mailed incorrect as long as corrected forms are sent by April 15, 2020 (corrected forms would notify these taxpayers that no RMD Is due for 2020 under the new law). The IRS release also encourages financial institutions to clarify that taxpayers who turned 70 ½ in 2019 will continue to have RMD obligations beginning in 2020.
Additionally, to avoid penalties, Box 11 of 2019 Form 5498 cannot be checked (this box reports 2020 RMD obligations for these taxpayers), which must be received by the IRS by June 1, 2020. Both Box 12a, containing RMD date information, and Box 12b, containing RMD amount information, must also be blank.
Although this is important relief for financial institutions, the IRS has yet to release guidance for taxpayers who may have already taken RMDs in reliance on incorrect information or old laws. It is expected that future guidance might provide relief from the “one rollover per-12 month rule” for clients who wish to put the erroneous RMD back and retain the ability to exercise a planned rollover during the 12-month period.
Qualified Birth and Adoption Distributions
The Secure Act also creates a new exception to the early withdrawal penalty for qualified births and adoptions. Retirement plan participants are now able to withdraw up to $5,000 for a birth of a child or qualified adoption without becoming subject to the 10% early withdrawal penalty.
IRS draft instructions for 2020 Form 1099-R and Form 5498 provide that qualified birth and adoption distributions should be reported by checking Box 7. Assuming the recipient is under age 59 ½ (so subject to penalty unless an exception applies), Code 1 for early distributions with no known exception should be used. Further, if the distribution is later re-contributed to the account, Boxes 14a and 14b (Rollover Contributions) should be checked using newly added Code BA.
These rules reflect the fact that it is the recipient’s responsibility to confirm that they are eligible for the penalty-free distribution. The reporting entity itself has no duty to confirm whether all criteria are satisfied. Significantly, guidance on substantiation requirements has yet to be released—and it is also uncertain whether plans are required to provide the option to allow penalty-free withdrawals for qualified births and adoptions.
We also await guidance on how a plan participant who wishes to re-contribute the amount withdrawn can make the re-contribution (and within what time frame).
Notably, the IRS, Treasury and other agencies continue to release interpretive guidance on the 2017 tax reform provisions. Because it may take several months to receive definitive guidance on many of the newer Secure Act issues, flexibility will be key in advising clients impacted by these particular Secure Act provisions and others.