Let participants know about birth and adoption expenses withdrawals

When it comes to changes to your retirement plan, make sure your employees know changes in the law that affect them.


Section 72(t) of the Internal Revenue Code provides that withdrawals from a qualified retirement plan are subject to a 10% tax on early distributions, with certain exceptions. Included in the list of exceptions are distributions made after attainment of age 59 ½; disability; early retirement after age 55; distributions for certain medical expenses; and distributions made to an individual called to active military duty.


The SECURE Act amends the tax code to add exception from the 10% early distribution tax:  any qualified birth or adoption distribution up to $5,000.  This $5,000 limit applies to all plans maintained by you. If you have multiple plans will need to make sure that an employee is not allowed to exceed the $5,000 limit by withdrawing from more than one plan. This limit is for each individual, so it would be possible for each spouse to request a $5,000 distribution. The distribution may be taken from an IRA or a qualified employer plan, including a 401(k), 403(b) or governmental 457(b) plan, but not a defined benefit plan. The distribution must be made during the 1 year beginning on the date the child is born or the date the adoption is finalized.


The adoption may be for any individual who is under the age of 18 or is incapable of self-support due to physical or mental limitations. An “eligible adoptee” does NOT include the child of the taxpayer’s spouse (so legally adopting a step-child would not qualify). The distribution amount may be repaid to an eligible retirement plan or IRA to which the individual is eligible to contribute a rollover contribution. The repayment can be accomplished via one payment or multiple payments, not to exceed the amount of the distribution. The taxpayer is treated as having received the distribution as an eligible rollover distribution and if it is repaid, the repayment is treated as a direct rollover made within 60 days of distribution. No time limit is prescribed for making the repayment, so the taxpayer could repay the distribution at any time in the future. The Act is not specific about how the repayment will be handled on the tax return for the year(s) in which it is repaid.


This distribution under this provision may be allowed regardless of whether other in-service distributions are allowed under your plan. The automatic 20% withholding doesn’t apply, instead, the 10% optional tax withholding will apply, meaning the employee will have 10% federal tax withholding taken unless he opts out or elects a different percentage. The distribution is not tax-free, there is just no early distribution penalty. The taxpayer will be required to report information about the child on the tax return filed for the year of the distribution.

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