Repayment of Qualified Birth or Adoption Distribution

Updated by Richard Phillips, EA, AIFA, CPC, CPFA, QPA, QKA

Any individual who receives a qualified birth or adoption distribution generally has the right to repay all or a portion of the amount distributed in one or contributions, up to the total amount of the qualified child or adoption distributions, to a plan that can accept rollovers under the IRC. The repayment cannot be adjusted for earnings. The law originally did not impose a deadline on the repayment. Section 311 of the SECURE 2.0 Act fixed this by providing that a repayment may only be made during the 3-year period beginning on the day after the date the distribution was received. 

Repayment deadline for distributions made prior to December 30, 2022. Because the SECURE Act did not originally contain a repayment deadline, the SECURE 2.0 Act of 2022 sets a repayment deadline of December 31, 2025 for qualified birth or adoption distribution made on or before December 29, 2022.

Limitation on repayments to plans other than IRAs. There are two additional conditions that apply to plans other than IRAs. According to the Joint Committee on Taxation report on an earlier version of the law, if these two conditions are met, a plan must accept the repayment. 

  1. The total contributions to a plan cannot exceed the amount distributed by the plan. For example, if a participant withdrew $2,500 from an IRA and $2,500 from a 401(k) plan, the maximum that could be contributed to the 401(k) plan is $2,500 whereas if the contribution were made to an IRA, it could be for the full $5,000.Note that if a plan does not permit an adoption or childbirth distribution, then a participant has no repayment rights with respect to that plan.
  2. A contribution can only made to a plan if the individual is eligible to make other contributions to the plan. Presumably participants who are “limited participants” (i.e., who are only able to make rollover contributions to a plan) would also be able to make a contribution under this provision. 

Repayment treated as a rollover. If a repayment of a qualified child or adoption distribution from a plan other than an IRA, then the  individual is deemed to have received an eligible rollover distribution and as having rolled over the amount in direct-rollover within 60 days of the distribution. Similar treatment is provided for IRAs, except that the repayment would not be treated as a rollover for purposes of the  limitation on only one rollover contribution being permitted in any year. The Joint Committee on Taxation report of an earlier version of the law provides: "Such a recontribution is a rollover and thus is not includible in income." 

In order for a receiving plan to treat the repayment as a rollover, the individuals will need to be able to claim a deduction for the repayment (to the extent the distribution was included in income when made). It's possible the tax reporting will be handled in a manner similar to the repayment of disaster distributions (i.e., an approach similar to the IRS Form 8915 series).

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