On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the Act). In addition to expanding eligibility for the Paycheck Protection Program and the Employee Retention Tax Credit, the Act contains provisions directly impacting employee benefit plans. The over 2,000 page Act makes a number of changes aimed at easing the financial consequences and administrative burdens triggered by the COVID-19 pandemic and other disasters. We have summarized some of the key provisions applicable to retirement plans below See our article on provisions applicable to health and welfare plans here.
Non-COVID-19 Related Disaster Relief for Retirement Plans
In line with various disaster relief previously granted by Congress, the Act liberalizes tax-qualified retirement plan distribution rules for “qualified disasters” occurring from December 28, 2019, until the date of the Act. This applies if such disasters were declared by the President, under the Robert T. Strafford Disaster Relief and Emergency Assistance Act, during the period beginning January 1, 2020 and ending February 25, 2021, 60 days after the enactment of the Act. Specifically, the Act provides for qualified disaster distributions, special repayment provisions, and relaxed plan loan provisions.
- Qualified Disaster Distributions – Similar to COVID-19 relief provided under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the Act allows participants in eligible retirement plans to take qualified disaster distributions of up to $100,000 without implication of the 10% additional tax on early distributions. For these purposes, an eligible retirement plan includes IRAs, 401(k) plans, 403(b) plans, and 457(b) plans, among others. A “qualified disaster distribution” is any distribution from an eligible retirement plan made (i) on or after the first day of the incident period (as determined by FEMA) of a qualified disaster and prior to June 25, 2021 (the date which is 180 days after the date of the Act’s enactment), and (ii) to an individual whose principal place of abode is located in the qualified disaster area and who has sustained an economic loss by reason of the qualified disaster (a “qualified individual”). “Qualified disaster areas” are those areas with respect to which a qualified disaster was declared. However, a qualified disaster area does not include any area with respect to which such major disaster has been declared only by reason of COVID-19.
Qualified disaster distributions are taxed ratably over a three-year period, though a participant can elect to be taxed immediately. The distribution may also be repaid within three years, with repayments treated as eligible rollover distributions transferred back to the plan on a tax-free basis.
- Repayment of Certain Hardship Distributions – Participants can also repay hardship distributions taken with the intention to purchase or construct a principal residence in a qualified disaster area, but which were used for a different purpose due to the qualified disaster. The hardship distribution must have been received 180 days before and up to 30 days after the qualified disaster incident. The repayment period ends June 25, 2021, 180 days after enactment of the Act.
- Disaster-Related Loans – Similar to COVID-19 relief provided under the CARES Act, the Act temporarily increases the limit on retirement plan loans for qualified individuals to $100,000, or 100% of the present value of the participant’s vested balance, instead of the $50,000 and 50% of the vested account balance limits under current law. Repayment on these loans may be suspended for up to one year (or, if later, until June 25, 2021) if repayment of the loan normally would be due during the period beginning on the first day of the disaster incident period and ending 180 days from the last day of such incident period. However, interest on the plan loan must still accrue during the suspension period.
While these changes are not mandatory, employers interested in implementing these provisions have until the last day of the first plan year beginning on or after January 1, 2022, to amend their plans (e.g., December 31, 2022, for calendar year plans). Governmental plan sponsors have two additional years to amend their plans (e.g., by December 31, 2024 for calendar year plans).
Partial Plan Terminations
Under Internal Revenue Code (Code) Section 411(d)(3), a qualified retirement plan that incurs a termination or partial termination must fully vest benefits for all affected participants. Under IRS guidance, a partial termination is generally deemed to have occurred if there is at least a 20% reduction in participating employees due to an employer-initiated severance (e.g., layoff, furloughs, etc.) that is not considered “routine” turnover. This has been a substantial area of concern for many employers implementing workforce reductions in response to the COVID-19 pandemic.
The IRS previously released guidance providing that employees who are terminated, laid-off, or furloughed in 2020 due to COVID-19 do not have to be counted as terminated participants for partial termination purposes if they are rehired or called back before the end of 2020. The Act builds on this relief by further providing that no partial termination will be deemed to have occurred if the number of active participants in the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020. This new safe harbor from partial plan termination applies to any plan year that includes the period beginning on March 13, 2020 and ending on March 31, 2021.
Money Purchase Pension Plan Distributions related to COVID-19
The CARES Act allowed for coronavirus-related distributions to “qualified individuals” from a retirement plan. See our articles on coronavirus-related distributions here and here. The Act retroactively amends the CARES Act to provide that in-service distributions made from money purchase pension plans during the period from March 27, 2020 through December 30, 2020, can qualify as coronavirus-related distributions. This change is effective as if it was initially included in the CARES Act. Please note that the Act does not extend the CARES Act provisions for coronavirus-related distributions or loans beyond 2020.
Employers interested in utilizing the non-COVID-19 related disaster relief should coordinate with their service providers to ensure necessary updates to the plan’s administrative practices, including communicating the new relief to plan participants. Employers also need to adopt corresponding plan amendments prior to the applicable deadline. Sponsors of money purchase pension plans should also coordinate with service providers to confirm that in-service distributions made during 2020 were treated as coronavirus-related distributions if all other applicable requirements were satisfied.
Additionally, employers in jeopardy of a partial plan termination due to layoffs or furloughs in 2020 or early 2021 should continue tracking new hires, re-hires, and plan participation rates so that you are ready to use the temporary relief if available.
If you have any questions about this legal update, please reach out to the MMM Employee Benefits & Executive Compensation Team.