As Out-of-Pocket Childbirth Costs Soar, SECURE Act Offers Relief

Effective January 1, 2020, the SECURE Act exempts new parents from the 10% penalty tax that ordinarily would apply to retirement plan or IRA withdrawals before age 59.5, for distributions of up to $5,000 on account of a “qualified” birth or adoption.  This new optional plan feature is called a “Qualified Birth or Adoption Distribution” or QBAD.

The timing could not be more apt.  The out-of-pocket costs of childbirth for women with health insurance have been reported to have increased 50% between 2008 and 2015 (citing Health Affairs study; subscription required.)  The same sources report that, with employee health insurance, the average out-of-pocket cost for hospital-assisted childbirth is approaching $5,000.  The costs of a domestic, private adoption can be much higher, approaching $40,000, although parents who adopt may qualify for an adoption tax credit of up to $14,300 per child in 2020, or tax-qualified employer provided adoption benefits under Internal Revenue Code Section 137.

How will the new QBAD work?

• As mentioned, the distribution cannot exceed $5,000 per child
• Children must not have attained age 18 (or, if older, be physically or mentally incapable of self-support) and must not be the child of the taxpayer’s spouse
• The dollar limit applies per parent, so a couple could each qualify for the dollar limit unless an employer plan provides otherwise
• The distribution must be taken after the date of birth or date on which adoption is finalized and within one year of the birth or adoption event.
• Distributions can be repaid back to the qualified plan or IRA notwithstanding normal contribution dollar limits; the repayment will be treated as the equivalent of a rollover contribution for these purposes
• Future regulations may specify timing rules for the repayment process
• The parent must include the name, age, and taxpayer ID (SSN) of the child on his or her tax return.

Plans and IRA custodian/trustees will likely allow the distributions to occur in 2020 but ultimately a plan amendment – or amendment to an IRA custodial account or trust agreement – is required for this option to be available.  For qualified plans, the amendment deadline will generally be the last day of the first plan year beginning on or after January 1, 2022 and the amendment must be effective retroactively to January 1, 2020, or a later date on which the date the QBAD is first implemented.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo credit:  Randy Rooibaatjie (Unsplash)