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Federal Government Allows 401(k) Distributions for Birth or Adoption

Your employees can use their 401(k) savings to help with the costs of a qualified birth or adoption.

The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act gives employers the option of allowing employees to take money out of their 401(k) retirement account to help with the costs of the birth or adoption of a child.

The act’s Qualified Birth Or Adoption Distribution (QBOAD) took effect Jan. 1, 2020, and the Internal Revenue Service issued guidance for employers in September 2020, which many employers were waiting on before determining whether to allow the benefit. The Q&A can be found at

QBOAD gives employees the option to take up to $5,000 per parent per child from a 401(k) or other eligible retirement plan without paying the 10 percent early distribution penalty for withdrawing funds before age 59½. To qualify, the distribution must be taken during the 1-year following the date when the child is born or the date when the legal adoption is finalized.

The employees must report the amount of the distribution in their gross income for the year and pay income taxes on it. Depending on an individual’s income tax bracket, that amount could mean significant federal and state taxes.

An employee who takes the distribution can pay it back. No time frame has yet been set by the Treasury Department for the repayment, but employees need to realize that they could be missing out on investment gains if they delay replacing the money. If they change jobs after they take a QBOAD, they may make their recontribution into a personal IRA.

Your Responsibilities as an Employer

It’s optional for employers to allow the QBOAD in their 401(k) plans. But if it’s decided to allow it, the plan must be amended by the last day of the 2022 plan year; if QBOADs are added after 2022, the plan must be amended by the last day of the plan year in which the QBOAD is implemented.

Employers who decide to allow a QBOAD, will need to have their retirement plan administrators update their systems and plan documents.

Other issues to consider, which are covered in the IRS Q&A, include how to handle participation by long-term and part-time employees in 401(k) plans; the expansion of qualified birth or adoption distributions; and the timing of related plan amendments.

Employee Options

For employers who decide not to offer this option, employees still have other ways to get a penalty-free distribution. An eligible employee can treat the distribution as a qualified birth or adoption distribution on their federal income tax return. The same rules, about including the distribution in their gross income and the waiver of the 10 percent early distribution fee, still apply.

An employee also can apply for a loan if their employer’s 401(k) allows it. They generally can borrow up to 50 percent of their vested account balance to a maximum of $50,000. There is no credit check or qualification process. Interest rates are generally reasonable and both the principal and the interest must be paid within five years back into their own 401(k) account.