Open Tax Questions under the SECURE Act

The SECURE Act made some major changes in retirement plans and IRAs. It also has left many unanswered tax questions. There continues to be many that still lack clarity because the IRS has not addressed them. This presents challenges to taxpayers filing returns and businesses engaging in certain activities. Everyone must do the best under the circumstances. Here are some of the major open questions from recent legislation, as well as ongoing questions.

Distributions from retirement plans for birth or adoption costs

The SECURE Act allows qualified retirement plans to permit penalty-free distributions before age 59½ of up to $5,000 for the birth or adoption of a child. Participants receiving such distributions may repay them. This change applies in 2020 and beyond.

What we know. The qualified birth or adoption distribution (QBOAD) applies for both IRAs and qualified retirement plans. Plans are not required to offer this option, but can choose to do so. An eligible adoptee is a child younger than age 18 or a person of any age who is physically or mentally incapable of self-support. But the distribution cannot be taken for costs to adopt a spouse’s child (this is not an eligible adoptee).

What we don’t know. The law was not specific about whether employers must accept repayment. The Joint Committee has made it clear that if an employer offers this distribution option, it must accept repayment.

It is unclear whether the $5,000 cap on distributions is per participant or per child. What happens in multiple births? It is also unclear whether there is any time limit on making the repayment.

It is unclear whether distributions must be restricted to pay specific expenses and whether participants must substantiate their use of the distributions.

Non-spouse beneficiaries of IRAs

The SECURE Act also changed the rules on required minimum distributions (RMDs) to beneficiaries who are not spouses. In general, for non-spouse beneficiaries of account owners dying in 2020 and later years, the new law requires such beneficiaries to cash out the account in full by the end of 10 years, ending their ability to spread distributions out over their life expectancy. However, there is a class of “eligible designated beneficiaries” who are exempt from the law change; they have special rules.

What we know. The new law dramatically changes planning strategies for inherited IRAs—who to name as beneficiary and more.

What we don’t know. It’s unclear what happens if the account owner dies after required minimum distributions have begun. Can a non-spouse beneficiary who was older than the account owner in the year of death take distributions over the deceased-owner’s remaining life expectancy (“ghost life expectancy”) if that is longer than 10 years?

It’s also unclear how to handle payouts to a minor child, who is one of the class of eligible designated beneficiaries. A minor child is defined as a child who has not reached the age of majority, but it is not clear if the IRS will follow a regulation for defined benefit pension plans that treats those who have not completed a specified course of education and are under age 26 as not having reached the age of majority. Also unclear is the meaning of “a specified course of education.” Does it have to be a post-graduate degree program? The answer is important because the potential spread of the distributions could run through age 36.

It’s also unclear about the existence of a disability for purposes of determining if a beneficiary is an “eligible designated beneficiary”. The law says the disability must exist at the time of the death of the account owner. But it is unclear whether this rule applies to a minor child?

Annuities in retirement plans

In an effort to ensure that participants have a lifetime income stream, the law has changed to allow qualified retirement plans to offer annuities as an investment option. (IRAs have always permitted annuities.)

What we know. It’s still up to the plan fiduciary to select annuities as an investment option and which one(s) to use for this purpose.

What we don’t know. It’s unclear whether the IRS will provide guidelines for fiduciaries on choosing annuities. They can be costly insurance products and may not be suitable for all participants.

Conclusion

Continue to monitor JKLasser.com for any answers that are forthcoming.