SECURE Act leaves questions about distributions for birth, adoption

Connecticut Enacts Paid Family and Medical Leave

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted Dec. 20 as part of a government spending package (PL 116-94), allows parents to take early withdrawals of up to $5,000 from their retirement accounts without penalty within a year of a child’s birth or adoption. Although retirement plans can permit these distributions starting Jan. 1, 2020, some employers may want to wait for much-needed guidance on a number of practical and technical questions. This article is the first in a series that will examine the SECURE Act’s impact on retirement plans.

New category of penalty-free distributions

Withdrawals from tax-favored retirement plans prior to age 59-1/2 are generally subject to a 10% early distribution tax (in addition to regular income tax) under Section 72(t) of the Internal Revenue Code, unless one of several exceptions applies. The SECURE Act adds a new exception for a “qualified birth or adoption distribution” (QBOAD).

Plans that can offer QBOADs

A QBOAD can be taken from any “eligible retirement plan” (as defined in Code Section 402(c)(8)(B)) other than a defined benefit plan. This includes 401(k) and other qualified defined contribution plans, 403(b) plans, governmental 457(b) plans (early distributions from these plans aren’t subject to the penalty tax) and individual retirement accounts (IRAs). Employers sponsoring these plans can — but aren’t required to — offer QBOADs to employees.

Eligibility for a QBOAD

Employees can take a QBOAD during the one-year period after the date of a child’s birth or adoption. For QBOADs, an “eligible adoptee” is anyone (other than a spouse’s child) younger than age 18 or incapable — physically or mentally — of self-support.

  • What steps must plans take to verify an employee’s eligibility for a QBOAD? The statute doesn’t say. However, IRS could establish substantiation requirements in future guidance. Until then, obtaining a copy of the child’s birth or adoption certificate should suffice. But a written representation from the employee might also be enough — after all, the final hardship distribution regulations allow plans to accept a written representation that an employee has insufficient cash or liquidity to meet the financial need.
  • Can QBOADs be made from elective deferrals? Yes. The statute specifically says a QBOAD doesn’t violate the rules on permissible distribution events from 401(k), 403(b) and 457(b) plans.

$5,000 limit

QBOADs are limited to $5,000 per individual for each birth or adoption. The limit applies to all plans in which the employee participates, including other plans within the employer’s controlled group, other employers’ plans in which the employee has an account balance and any IRA held by the employee. The $5,000 limit applies to an individual — not a family — so the employee’s spouse may separately receive up to $5,000 as a QBOAD, even if both spouses work in the same controlled group.

Although the limit seems straightforward, employers may have some practical questions:

  • Are employers responsible for determining if an employee has hit the QBOAD limit? Yes and no. An employer needs to monitor distributions made from all controlled-group plans to ensure an employee takes no more than the $5,000 combined limit. But the employer is not responsible for determining if the employee has taken distributions from other employers’ plans or IRAs. For example, if an employee takes a $5,000 QBOAD from an IRA and then requests the same amount from a 401(k) plan for the same birth or adoption, the 401(k) plan won’t be penalized for making the distribution.
  • Is the $5,000 limit indexed? It doesn’t seem to be. For other retirement plan limits, cost-of-living adjustments are required by statute, but nothing in the SECURE Act calls for adjusting the QBOAD limit.
  • What if the birth or adoption involves more than one child? Whether the $5,000 limit applies per birth or adoption or per child is unclear. For example, if an employee gives birth to or adopts twins, can the employee can request one QBOAD (up to $5,000) or two (up to $10,000)? Arguably, the best interpretation is that the limit applies per child, but clarification from IRS would be helpful.
  • Do any restrictions apply to the types of expenses employees can pay with a QBOAD? The statute doesn’t appear to require any justification for the distribution beyond the birth or adoption. However, IRS could add limitations in future guidance. Otherwise, employees could use QBOADs to buy a new laptop or flat-screen TV, as long as the distribution is requested within a year of the birth or adoption.


An individual may repay a QBOAD to the distributing plan (if it accepts rollover contributions) or an IRA. The repayment is treated as a rollover contribution. However, two important limitations apply to repayments to an employer-sponsored plan. First, repayment is allowed only if the individual is still eligible to make contributions to the plan (other than QBOAD repayments). Second, the repayment amount can’t exceed the QBOAD.

Again, this raises a number of practical questions:

  • Must plans accept repayment? The statute doesn’t specifically say that a plan must accept repayment. However, the Joint Committee on Taxation and House reports on the SECURE Act state that if an employer plan offers QBOADs, it must allow employees to repay the distributions to the plan.
  • Does an employee face any deadline for repayment? The law doesn’t appear to place any time-limit on when an employee can repay a QBOAD. So an employee presumably could repay the distribution several years after taking it. However, as discussed in the next two bullets, the ability to repay a QBOAD to an employer-sponsored plan may be cut short if the employee becomes ineligible to contribute to the plan.
  • What if the employee terminates employment after taking the QBOAD? The statute says an employee can repay a QBOAD only if eligible to make contributions to the plan (other than QBOAD repayments). So, even if plans must allow repayment of a QBOAD, an exception apparently applies to terminated employees, since they can’t continue contributing to their former employer’s plan. However, former employees can repay QBOADs to an IRA.
  • What if the employee transfers to a position that’s ineligible for the plan that distributed the QBOAD? This situation could arise, for example, if an employee transfers from an hourly to salaried position after taking a QBOAD, and the employer maintains separate 401(k) plans for its hourly and salaried employees. Under a strict reading of the statute, the employee may be prohibited from repaying the distribution to either plan. The employee can’t repay the QBOAD to the distributing plan because the employee can no longer contribute to that plan. And repayment to the employee’s current plan is limited to the total QBOADs received from that plan — i.e., zero. It seems unlikely that Congress intended this result.
  • Can the repayment include interest? The statute says the repayment can’t exceed the QBOAD. This appears to mean the employee can’t repay the distribution with interest. This interpretation is consistent with the statute’s requirement that plans treat the repayment like a rollover (employees can’t add interest to a rollover contribution). Allowing repayment with interest would arguably turn the QBOAD into a loan, which is not the law’s intent. Still, clarification would be helpful.

Tax withholding

QBOADs aren’t subject to the 20% mandatory withholding that applies to eligible rollover distributions (and the special tax “402(f)” notice isn’t required). Instead, QBOADs are subject to the usual tax withholding rules for lump sum payments that aren’t eligible rollover distributions — i.e., mandatory 10% withholding, unless the employee elects no withholding.

Relation to hardship distributions

QBOADs are not hardship distributions. They are an entirely new type of distribution subject to their own rules. But adding QBOADs to a plan might affect hardship withdrawals: To take a hardship withdrawal, an employee must take all currently available distributions from all plans maintained by the employer. This presumably will include QBOADs if an employer decides to offer them.

Administrative uncertainty about implementation

Plans can start offering QBOADs this year. Sponsors implementing QBOADs this year will need to revise their administrative procedures immediately, including providing explanations of the distributions to participants, verifying eligibility, ensuring proper withholding and allowing for repayment.

However, the many unanswered questions may leave employers reluctant to rush into offering these distributions. In particular, employers may want to wait to see what steps, if any, they must take to substantiate an employee’s eligibility. Hopefully, IRS will prioritize guidance on QBOADs, given employees’ interest in these distributions.

Plan amendments

Employers that choose to offer QBOADs will need to amend their plans accordingly. Under the usual amendment timing rules, discretionary plan amendments are due by the end of the plan year in which they take effect. However, the SECURE Act states that amendments for its changes won’t be due before the last day of the first plan year beginning on or after Jan. 1, 2022 (or a later date prescribed by IRS).

Related resources

Non-Mercer resources

Mercer Law & Policy resources

Ellen Stone
by Ellen Stone

Principal, Mercer’s Law & Policy Group

Margaret Berger
by Margaret Berger

Principal, Mercer’s Law & Policy Group

Brian Kearney
by Brian Kearney

Principal, Mercer’s Law & Policy Group

Speak with a Mercer consultant
Provide your contact information to get in touch
*Required Fields