The Internal Revenue Service (IRS) recently released new guidance in IRS Notice 2020-68 to assist owners of individual retirement accounts and annuities (IRAs) and IRA providers implement certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act).
We previously covered SECURE Act changes affecting IRA providers and IRA owners. Please see this earlier LawFlash for more on the SECURE Act and its impact on IRAs.
Beginning with the 2020 tax year, the SECURE Act eliminated the age 70½ restriction on IRA owners making annual contributions to Traditional IRAs and reduced IRA qualified charitable distributions to coordinate with the deduction for new post-age 70½ annual contributions.
IRS Notice 2020-68 provides the following guidance for IRA providers on elimination of the age 70½ restriction to make annual Traditional IRA contributions:
IRA Provider’s Acceptance of Post-Age 70½ Annual Contributions Optional. IRA providers are not required to accept post-age 70½ contributions to Traditional IRAs, but may choose to accept the contributions beginning on any date after December 31, 2019.
Amendment Deadline for IRA Providers Choosing to Accept Post-Age 70½ Annual Contributions. An IRA provider who chooses to accept post-age 70½ contributions to Traditional IRAs must amend its IRA trust agreement, custodial agreement or annuity contract endorsement, as applicable, by December 31, 2022 or such later date as the Secretary may prescribe. The December 31, 2022 amendment deadline is the same legislative deadline for SECURE Act amendments for qualified retirement plans with calendar year plan years. The Notice states that the IRS expects to issue revised IRS model IRA forms and prototype language to address SECURE Act changes.
Delivery Deadline for IRA Providers Choosing to Accept Post-Age 70½ Annual Contributions. IRA providers are required to deliver or mail copies of the SECURE Act amendment and an updated disclosure statement to reflect the amendment to the last known address of each IRA owner no later than 30 days after the later of the date the amendment is adopted or becomes effective.
Note: In the past, the IRS consistently has not applied legislative qualified retirement plan amendment deadline requirements to IRA custodial/trust agreements or annuity contract IRA endorsements. The IRS has typically issued guidance at some point specifying whether IRA amendments are needed at all and, if so, the deadline for making the IRA amendments. At this point, we do not know whether the IRS will require SECURE Act amendments in addition to the post-age 70½ annual contribution amendment, such as amendments to reflect the more complex SECURE Act changes to the required minimum distribution rules for IRA beneficiaries, which are not addressed in the Notice. However, we note that the Notice broadly states that the amendment deadline is “for provisions of the SECURE Act or the regulations thereunder” and, as stated above, the IRS expects to issue revised IRS model forms and prototype language “addressing changes made to the relevant Code provisions under the SECURE Act.” For now, it would appear that the only amendment required is to reflect the acceptance of the post-age 70½ annual contributions to Traditional IRAs. As a practical matter, though, even if the IRS does not require additional SECURE Act amendments, many IRA providers using prototype documents may decide to update their documents for all relevant SECURE Act changes, as well as other changes. More guidance from the IRS on whether amendments for other SECURE Act changes will be required would be helpful for IRA providers making decisions about updating their IRA prototype documents.
To obtain IRS approval of changes to prototype custodial agreements, trust agreements and annuity contract endorsements, IRA providers will need to submit the proposed changes to the IRS for a new favorable opinion letter, unless the IRS waives the submission requirement as it has done in the past from time to time. In addition, once approved by the IRS, IRA providers using annuity contract endorsements will need to submit the approved changes to the applicable individual states for approval. Since this whole process can take some time, especially if other updates and changes are made to the IRA documents, we would suggest that IRA providers start the SECURE Act amendment process sooner rather than later to ensure that they meet the SECURE Act amendment deadline.
No Offset of Required Minimum Distributions by Post-Age 70½ Contributions. Notice 2020-68 provides that because distributions and contributions to an IRA are separate transactions and are reported separately to the IRS, an IRA owner may not offset the amount of required minimum distributions from his or her IRA by the amount of post-age 70½ contributions for the same taxable year.
IRA Qualified Charitable Distribution Reduction Example. The Notice includes an example of how the IRA qualified charitable distribution reduction is calculated for IRA owners taking a post-age 70½ annual contribution deduction. We recommend that IRA owners review this example carefully to avoid miscalculations.
The SECURE Act added a new exception to the 10% early distribution tax penalty for IRAs and other eligible retirement plans for a “qualified birth or adoption distribution” of up to $5,000 made in 2020 and later. For IRAs, a qualified birth or adoption distribution is any withdrawal made from the IRA during the one-year period beginning on the date the IRA owner’s child is born or eligible adoptee’s legal adoption is finalized. An “eligible adoptee” is any individual who has reached age 18 or is “physically or mentally incapable of self-support,” other than a child of the IRA owner’s spouse.
IRS Notice 2020-68 provides the following guidance for IRA owners taking a qualified birth or adoption distribution:
Each Parent May Take Separate Withdrawal for Same Child. Each parent may receive a qualified birth or adoption distribution of up at $5,000 for the same child or eligible adoptee.
Separate Withdrawals for Multiple Births/Adoptees. An individual may receive a qualified birth or adoption distribution for the birth of more than one child or the adoption of multiple eligible adoptees. For example, an individual who gives birth to triplets or adopts three eligible adoptees during a taxable year may receive a qualified birth or adoption distribution of up to $15,000.
Physically or Mentally Incapable of Self-Support Definition. The determination of whether an individual is “physically or mentally incapable of self-support” is made in the same manner as the determination of whether an individual is “disabled” under Section 72(m)(7) of the Internal Revenue Code of 1986, as amended (the Code).
In Notice 2020-68, the Department of the Treasury and the IRS request written comments and suggestions regarding the Notice by November 2, 2020. If an IRA provider has a specific issue that it would like to see clarified or addressed in future guidance, the IRA provider should consider submitting a comment.
Notice 2020-68 also provides that the Department of the Treasury and the IRS anticipate issuing additional SECURE Act guidance, including regulations. Because the deadline to amend IRA documents for SECURE Act changes is not until the end of 2022, IRA providers may want to hold off on making any updates to their governing documents until after the IRS has provided such guidance. However, as discussed above, for IRA providers using prototype documents we caution against waiting too long to start the IRA amendment process given the lengthy process involved in amending documents and receiving IRS approval (and state insurance department approvals for annuity contract endorsements) of the amendments.
Morgan Lewis continues to monitor developments on the SECURE Act changes. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Marla J. Kreindler
Julie K. Stapel
Craig A. Bitman