June 2021

IRA Contribution Limits for 2021 - Unchanged

October 2020

IRA Contribution Limits for 2021 – Unchanged $6,000 and $7,000

The 2021 maximum limits for annual traditional IRA and Roth IRA contributions remain

the same at $6,000 (if under age 50) and $7,000 (if age 50 or older). For 2020 the limits are also $6,000 and $7,000. Federal tax law provides for a change in the contribution limit once the cost of living adjustment equals or exceeds $500. The annual contribution catchup for individuals age 50 or older remains at $1,000 as it is not indexed. Note on page 2 that the compensation limits used to determine the amount an IRA owner who is an active participant is able to claim as a tax deduction for their traditional IRA contribution have increased.

The 2021 maximum contribution limit for SEP-IRAs is increased to $58,000 (or, 25% of compensation, if lesser) up from $57,000. The minimum SEP compensation limit used to determine if an employer must make a contribution for a part-time employee has increased to $650 from $600.

The 2021 maximum contribution limits for SIMPLE-IRAs have not changed. It is $13,500 if the individual is under age 50 and $16,500 if age 50 or older. The catch-up amount of $3,000 has not changed.

The 2021 maximum elective deferral limit for 401(k) participants also has not changed. It is $19,500 for participants under age 50 and $26,000 for participants age 50 and older. The catch-up amount of $6,500 has not changed.

Contribution limits for a person who is notage 50 or older.

Tax Year Amount

2008-12 $5,000

2013-18 $5,500

2019-21 $6,000

Contribution Limits for a person who is age 50 or older.

Tax Year Amount

2008-12 $6,000

2013-18 $6,500

2019-21 $7,000

IRS Guidance on Tax Treatment of Expenses Related to a Qualified Birth or Adoption Distribution

October 2020

IRS Guidance on Tax Treatment of Expenses Related to a Qualified Birth or Adoption Distribution

The SECURE Act created another exception to the 10% additional tax of Code section 72(t). There is now an exception for expenses on account of a birth or an adoption of an individual. Code section 72(t)(2) sets forth the exceptions to the 10% tax. Sometimes an exception applies only to a distribution from an IRA or from an employer retirement plan and sometimes to both. A distribution from either an IRA or a 401(k) plan may qualify for this new exception.

A person is required to include a qualified birth or adoption distribution in their gross income, but the person does not owe the 10% additional tax. A qualified birth or adoption distribution is any distribution of up to $5,000 from an eligible IRA or other applicable retirement plan to a person as long as the distribution is made during the 1-year period beginning on the date of birth of the individual’s child or the date the legal adoption of an eligible adoptee by the individual is finalized.

This section of the article focuses on a qualified birth or adoption distribution from an IRA.

A person who has received a qualified birth or adoptiondistribution is authorized to recontribute the distribution to an eligible plan to which a rollover may be made. A recontribution is another type of rollover. The IRS will in future guidance discuss the recontribution rules, including the rules related to the timing of the recontributions. The statute failed to discuss the deadline for making a recontribution of a qualified birth or adoption distribution and so the IRS will need to furnish guidance. This should be defined in a technical correction tax bill.

The IRS has clarified the following. An individual may receive a qualified birth or adoption distribution of up to $5,000 with respect to the same child or eligible adoptee. If a person is related to multiple births or adoptions, the person may have a qualified birth or adoption distribution with respect to each child or eligible adoptee. If a person is married, each parent may receive a qualified birth or adoption distribution of up to $5,000 with respect to the same child or eligible adoptee.

An eligible adoptee is any individual who has not attained age 18 or is physically or mentally incapable of self-support. A person is considered to be physically or mentally incapable of self-support if the person is disabled as defined in Code section 72(m)(7). That is, the individual is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration. However, an eligible adoptee cannot include an individual who is the child of the taxpayer’s spouse.

How does an IRA custodian report these transactions? Code “1” will be used in box 7 of the Form 1099-R. The recontribution (i.e rollover) is to be reported in boxes 14a and b as a repayment. The repayment amount is reported in box 14a and enter “BA” in box 14b for repayment of a qualified birth or adoption distribution. It is not to be reported in box 2 as a rollover or in box 13a as a late certified rollover.

The individual will need to complete their tax return to show their was a qualified birth or adoption distribution. Presumably, the individual will do this by completing the applicable section of Form 5329 and claim exception to the 10% additional tax and attach it to his or her tax return. The individual must include the name, age, and the taxpayer identification number of the child or the eligible adoptee on their tax return for the tax year in which the distribution is made.

If the individual makes a rollover or repayment contribution, then the individual will need to show such rollover contribution on their Form 1040.

This section of the article focuses on a qualified birth or adoption distribution from a 401(k) plans or other defined contribution plan.

An employer is not required to amend its plan to permit an in service distribution which qualify as a qualified birth or adoption distribution. Such an amendment is a discretionary amendment. It is not a mandatory amendment.

If a plan sponsor chooses to amend its plan to provide or a qualified birth or adoption distribution, it must do so by the last day of the first plan year beginning on or after January 1, 2022.

A plan sponsor may rely on a participant’s certification that he or she is eligible for a qualified birth or adoption distribution. If a plan permits a participant to take a qualified birth or adoption distribution, then such plan is required to permit that participant to make a recontribution if such participant is otherwise eligible to make a rollover contribution.

The 401(k) rules restrict the in-service distributions which may be made to a participant. However, there are exceptions, including an exception for certain hardship distributions. A qualified birth or adoption distribution is treated as meeting such an exception. Thus, if the applicable rules are met a participant may withdraw their elective deferrals. qualified non-elective contributions, qualified matching contributions or a safe harbor contribution.

With respect to a participant who is taking a qualified birth or adoption distribution, the plan sponsor is not required to offer a direct rollover or to provide a section 402(f) notice. Because there is no duty to offer a direct rollover the 20% mandatory withholding rule does not apply. The standard withholding rules will apply.

Even though a participant is ineligible under the plan for an in service distribution qualified birth or adoption distribution, such participant may treat on their tax return an otherwise permissible in-service distribution as a qualified birth or adoption distribution.

The IRS will need to issue guidance on the subject, if a participant takes a qualified birth or adoption distribution from their 401(k) account, then is the participant able to make a rollover contribution into the plan or may the person make a rollover into their IRA. At this time we believe the participant may rollover their qualified birth or adoption distribution from their 401(k) plan into their IRA and not into the distributing 401(k) plan.

In summary, there is a new exception to the 10% additional tax which generally applies when a person under age 591/2 takes a distribution from an IRA or pension plan. The new exception is for a qualified birth or adoption distribution.

IRS Guidance on Difficulty of Care Payments Affect on IRAs and Retirement Plans

October 2020

IRS Guidance on Difficulty of Care Payments Affect on IRAs and Retirement Plans

Some individuals in the past who were not eligible to make an IRA contribution may now do so, These individuals are workers who receive difficulty of care payments related to their foster care services.

Internal Revenue Code section 131 provides that a difficulty of care payment, which is a type of foster care payment, is excludable from the taxpayer’s gross income. Under pre-2020 law, such payments were not considered to be qualifying compensation for purposes of making an IRA contribution. The general rule is, in order to make an IRA contribution, regardless if deductible or non-deductible, a person must have taxable income to support the contribution.

In Notice 2020-68 the IRS provides additional guidance.

A new exception to this rule is made for difficulty of care payments. Code section 408(o)(5) was added by the SECURE Act. It provides that an individual with difficulty of care payments is eligible to make certain designated nondeductible contributions to an IRA even though the person does not otherwise have sufficient compensation to make an IRA contribution (lesser of $6,000 if under age 50, $7,000 if age 50 or older or 100% of compensation).

These designated nondeductible contributions are limited. An individual is eligible to make a nondeductible IRA contribution to the extent of the lesser of the amount excluded under section 131 or the maximum IRA contribution amount as reduced by the amount of compensation which is includible in income. For example, Jane Doe, age 39, receives compensation of $11,000 for certain difficulty of care payments. She is able to exclude $9,000 under section 131 and she includes $2,000 in her taxable income. She is limited to make a non-deductible contribution of $4,000. The $4,000 is the lesser of $6,000 as reduced by the $2,000 or $9,000. If Jane Doe’s excludable difficulty of care payments were $5,000 and she has no other taxable compensation, then her nondeductible IRA contribution amount would be limited to $5,000.

The IRS has stated that it will be providing guidance on how the excess contribution rules and reporting are affected by these new difficulty of care payment rules. The IRS will also need to provide guidance if a person is eligible to make a Roth IRA contribution based on difficulty of care payments.

Difficulty of care payment also impact contribution which are made under a qualified plan. In general an employer will make a contribution for a participant only if a participant has compensation for the current year. And the law imposes a maximum amount which can be contributed on behalf of a participant. Under pre-2020 law, difficulty of care such payments were not considered in applying the limitations on annual additions set forth in code sections 415( c)(1) and (2). Under section 415( c)(1 ), a person’s annual additions may not exceed the lesser of $40,000 as increased by annual cost of living adjustments ($57,000 for 2020) or 100% of the participant’s compensation. Under section 415(c)(2) a person’s annual additions are the sum of the employer contributions, employee contributions and forfeitures.

As revised by the SECURE Act a person’s compensation for section 415 purposes is increased by the amount of excludable difficulty of care payments. Thus, a person may make contributions to their account or receive allocations to their account based on these difficulty of care payments even if the person has no other compensation. Such a contribution is treated as investment in the contract and will not cause a plan to be treated as failing any requirements of code sections 1- 1400Z-2. This law change applies to plan years beginning after December 31, 2015. It appears the IRS position is, this law change is a mandatory change and it is not a permissive or discretionary change.

SECURE Act Guidance

September 2020

SECURE ACT Guidance

Including Guidance on IRA Amendments

The IRS issued Notice 2020-68 on September 8, 2020. It furnishes additional guidance for IRA and qualified plans. IRAs (and qualified pension plans) are subject to the rule that in order to take a certain action the plan document must authorize that action, be it a contribution, a distribution, or an investment. The law is complicated because the IRS requires certain laws be set forth in the plan document for the plan document to be qualified and entitled to receive the associated tax benefits. Other laws are permissive and are not required to be set forth in the IRA plan agreement for the IRA or qualified plan to be qualified.

It’s been a long time since the IRS has discussed the topic of an IRA custodian’s duty to furnish an IRA amendment. Many institutions have adopted the approach, since the IRS hasn’t said anything about amendments, we don’t need to furnish our existing IRA accountholders and beneficiaries with an IRA amendment. The IRS has now spoken.

The SECURE Act repealed the age 701/2 and older eligibility contribution rule. A person older than age 701/2 is now eligible to make an IRA contribution as long as they have qualifying compensation. The IRS has stated a financial institution serving as the IRA custodian/trustee may accept such a contribution and the individual is authorized to make such a contribution only if the IRA is amended. If the IRA has not been amended, such contribution is unauthorized. Presumably it would be an excess contribution subject to the 6% excess contribution tax. The other alternative is, the IRA becomes unqualified because of the SECURE Act and the CARES Act and there is a deemed distribution.

In general, both the IRA plan agreement and the IRA disclosure statement must be amended.

The IRS cited the governing regulation for when the IRA must be amended. The IRS indicates it will be modifying its model IRA forms, but the IRS did not furnish a tentative date for doing so. The IRS must revise the Article four dealing with the required distribution rules. These RMD law changes are mandatory and are not permissive. In general, such amendments must be adopted by December 31, 2022.

Note that for a permissive law change, the IRA custodian may amend some customer IRAs, but not others. This would create some administrative complexities. For example, the IRAs of all individuals aged 701/2 or older could be amended and not those under age 701/2 in 2020. A mandatory law change requires all existing IRAs be amended.

The IRA plan agreements set forth in CWF’s IRA FormSystem have been revised to set forth the changes made by the SECURE Act and the CARES Act including the right of a person age 701/2 or older to make a contribution as long as the person has qualifying compensation. Those institutions which have purchased CWF’s 2019-2020 IRA amendment may accept such IRA contributions.

We at CWF are able to furnish an IRA custodian with an IRA amendment. Send us an email and we will contact you to discuss your situation. Many institutions will want to furnish an IRA amendment by January 31, 2021, in order to realize cost savings from a combined mailing. We may assist you even if your IRA plan agreement has not been provided written by CWF, but another IRA vendor.