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September 2020

Additional 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The SECURE Act repealed the age 70 1/2 and older eligibility contribution rule. A person older than age 70 1/2 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 70 1/2 or older could be amended and not those under age 70 1/2 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 70 1/2 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.