Qualified Birth or Adoption Distributions Q&As

The Setting Every Community Up for Retirement Enhancement (SECURE) Act includes a provision permitting qualified childbirth and adoption expenses to be distributable events. And for its part, the IRS has issued guidance to provide some clarity on the new distributable event and how it works. 

Bob Kaplan and Robert M. Richter in an Oct. 7, 2020 webcast examined selected provisions of the SECURE Act in Q&A format. Kaplan and Richter are the American Retirement Association’s Director of Technical Education and Retirement Education Counsel, respectively.

Kaplan indicated that there was a need for guidance regarding the SECURE Act’s qualified childbirth and adoption expenses distribution provision. The IRS obliged on Sept. 2, 2020 in Notice 2020-68. 

“There is a lot of interest in this provision, and understandably so,” said Richter, adding that “This is a brand-new distributable event.” He reminded attendees that it is not based on need, and that each parent can take up to $5,000, so a couple can take up to $10,000; in addition, in the event of multiple births, there can be a distribution of up to $5,000 for each child. And there is added flexibility in that a plan may rely on reasonable representation from an individual in order to be eligible for such a distribution (unless they have knowledge to the contrary).

But there also are limitations. The provision does not apply to one spouse’s adoption of the other spouse’s child, Richter noted; Kaplan added that the provision is optional—it is not mandatory that a plan offer such distributions. 

Following are Q&As from the Oct. webinar relevant to qualified childbirth and adoption expenses as distributable events. 

Distribution Defined

Q: What is a qualified birth or adoption distribution? 

A: It is a distribution:

• of up to $5,000 from an applicable eligible retirement plan (separate limit for each parent); and 
• made during the one-year period beginning on the date on which the child of the individual is born or the legal adoption by the individual of an eligible adoptee is finalized 

The distribution must include the name, age and Taxpayer Identification Number (TIN) on the tax return for the year the distribution is made.

Plans that May Offer Qualified Birth or Adoption Distributions

Q: Which types of plans are eligible to permit a qualified birth or adoption distribution? 

A: The following plans may do so: 

• 401(a) qualified defined contribution plans; 
• 403(a) annuity plans;
• 403(b) annuity contracts;
• governmental 457(b) plans; and 
• IRAs.

Tax Consequences

Q: What are the tax consequences of taking a qualified birth or adoption distribution? 

A: The distribution is included in gross income but there is 10% additional tax imposed on it. And it may not increase above $5,000 for anticipated taxes.

Q: Is a qualified birth or adoption distribution treated by an applicable eligible retirement plan as an eligible rollover distribution for purposes of the direct rollover rules, Internal Revenue Code Section 402(f) notice requirements and the mandatory withholding rules? 

A: No. No 402(f) notice is required, and there is no 20% automatic withholding.

Eligible Adoptees

Q: Who is an eligible adoptee? 

A: An eligible adoptee is someone who: 

• has not reached age of 18;
• is physically or mentally incapable of self-support; or 
• is not the child of the taxpayer’s spouse. 

Recontributions

Q: May an individual recontribute a qualified birth or adoption distribution to an applicable eligible retirement plan? 

A: Yes. It:

• may be recontributed all or in part;
• is not adjusted for earnings or taxes;
• may be made to any plan in which the parent is a beneficiary and to which a rollover can be made; and
• has no time limit.

Q: 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? 

A: Yes, if the following apply: 

• the plan permits qualified birth or adoption distributions; 
• the individual received a qualified birth or adoption distribution from that plan; and 
• the individual is eligible to make a rollover contribution to that plan at the time of the recontribution 

Note: The recontribution is treated like a direct rollover by the receiving plan.

Restricted Sources

Q: May a participant take a qualified birth or adoption distribution from restricted sources such as elective deferrals or QNECs? 

A: Yes.