Retirement plan sponsors have deferred letting new parents withdraw money penalty-free for childbirth or adoption expenses because they don’t know how or when the funds would be repaid, benefits advisers said.
Explaining the ins and outs of the family-focused withdrawals woven into the Setting Every Community Up for Retirement Enhancement (SECURE) Act is one of the administration’s regulatory priorities for 2020. A provision of the law allows plan participants to withdraw up to $5,000 from qualified retirement accounts within a year of having a baby or adopting a child without paying the 10% tax applied to premature disbursements.
But in the absence of guidance, the biggest stumbling block relates to returning the money to employer-sponsored 401(k)s or individual retirement accounts without jeopardizing the plan’s tax-favored status, Jennifer Rigterink, an associate at Proskauer Rose LLP in New Orleans, said.
“Many plan sponsors have held off on rolling this out without guidance on whether you have to allow repayment and how repayments would work,” she said.
Concerns range from whether offering the tax break is required to whether participants who have left the company can restore SECURE-related withdrawals to retirement accounts decades from now.
Open questions about the SECURE-sanctioned change predate the pandemic, stemming from uncertainty about the purpose, scope and shelf life of the provision.
IRS officials July 20 told practitioners that SECURE Act guidance is back on track after being derailed by virus-related activity that’s consumed regulators’ attention.
Right to Repay
Employers are wondering about whether they need to allow participants to repay the withdrawals and the time frame for doing so, Jodi Epstein, a partner at Ivins Phillips Barker in Washington, said.
“Is the right to recontribute open forever? Can someone get a withdrawal from one plan and then recontribute it 30 years later to an IRA or another plan?” she wrote in an email.
Syncing up adoption and birth funds with the retirement tax breaks provided in the $2 trillion stimulus law from earlier this year would make the most sense, Epstein said.
“It would be useful to have a 3-year rule, as with coronavirus-related distributions,” she said. The stimulus authorized up to $100,000 in penalty-free emergency withdrawals from retirement accounts, providing for repayment of virus-related distributions within three years.
Clearing up whether plan sponsors even need to offer the adoption/birth benefit would go a long away, according to Sarah Touzalin, benefits counsel at Seyfarth Shaw LLP in Chicago. She said it’s unclear “if this relief, similar to coronavirus-related distributions, is optional.”
Treasury officials didn’t immediately respond to requests for comment about the regulatory agenda. The IRS specified in May that certain virus-related tax relief was optional.
The proposed rules surrounding the half-dozen SECURE Act changes administration officials have chosen to focus on are due by the end of the year.