SECURE Act Withdrawal for Birth/Adoption Q&As

The SECURE Act creates a new waiver from the IRC Section 72(t) additional income tax on retirement plan distributions used for childbirth or adoption expenses up to $5,000.

 

Q1: How about birth of twins, can you double it?

A1:  We believe this is considered two births, but hopefully the IRS will confirm this.

Q2: Does the penalty-free withdrawal for birth or adoption require a plan document amendment for 401(k)?

A2: We believe it’s an optional provision. If you want to add it to a plan, then it will require a plan amendment (but no sooner than the last day of the 2022 plan year).

Q3: For the birth or adoption of child provisions, can two parents which participate in the same plan or separate employer plans apply for two $5,000 distributions or is the limit $5,000 per child and the parents would have to decide how much of the $5,000 total they would take from each account?

A3: Each individual could withdraw up to $5,000 for the birth/adoption of a child.

Q4: So, this is not a hardship where only the medical costs for childbirth are not subject to premature withdrawal penalty... am I not limited to the sources available in hardship?   

A4: It is not a hardship. This is a new distributable event and the distribution can be made from all sources the employer wants to make available. It’s also not limited to birth or adoption expenses. If you have a child or adopt a child, you can withdraw up $5,000 without the penalty.

Q5: Does the participant need to show $5,000 in birth-related expenses to take the full $5,000 withdrawal... or can they just provide a copy of the birth certificate and request a $5,000 withdrawal?   

A5: It’s not limited to birth or adoption expenses. If you have a child or adopt a child, you can withdraw up $5,000 without the penalty. Showing a birth certificate or adoption papers is all the plan would need to authorize the distribution.

Q6: Does a participant have to submit proof of birth or adoption?

Yes. But we don’t know what a plan would be required to obtain. The participant is required to report the TIN of the child when filing his or her tax return. It would seem getting that TIN would be sufficient for the plan, although for privacy and security issues, a plan might not want that and perhaps a birth certificate or adoption papers is sufficient.

Q7: For an adoption-related distribution, it must occur after the adoption is complete? So, in a case where the adoption expenses of say $30,000 is known and provable, the distribution must be after—not during—to aid with costs?  

A7: Correct. You must have the birth or adoption. Once that happens, up to $5,000 may be distributed. The participant doesn't have to show how the money will be used—all you need is evidence of the birth or adoption.

Q8: Is the adoption/birth distribution option something that will be required to be documented in the plan document like other allowable distribution types?

A8: Yes. There is some confusion on whether the distribution option is optional or mandatory (we think it’s optional). If an employer permits (or is required to permit) the distribution, then language would be needed in the plan because plans currently don’t permit this early distribution.

Q9: On the birth or adoption withdrawal, what distribution code in Box 7 on the Form 1099-R would you use?

A9: Unless we get guidance telling us otherwise, it would be reasonable to use: Code 2—Early distribution, exception applies.

Q10: Regarding the childbirth/adoption distributions, in H.R. 1994 there was reference to “eligible retirement plan”—meaning plans defined in Section 402(c)(8)(B) other than a DB plan. Does this mean that 401(a) plans are not allowed to provide this benefit? Was a later change made to include 401(a) plans?            

A10: Section 401(a) plans are included. Section 402(8)(A) states that a “qualified trust” is a plan described in Section 401(a). Then, at Section 402(8)(B) it lists “qualified trusts” as being an eligible retirement plan. And, as pointed out, the provision doesn’t apply to DB plans.

 

The topics addressed on this page are for information purposes only and should not be construed as specific tax or retirement plan advice. Individuals should consult a tax advisor or attorney for questions regarding specific tax or legal needs.