The Consolidated Appropriations Act, 2021, signed into law by President Donald Trump on Dec. 27, 2020, relaxes several normally rigid health, welfare and retirement plan rules in light of the ongoing COVID-19 pandemic. This article covers the Act’s effects on employer-sponsored retirement plans.
Partial Termination Relief
As a condition of qualification, Section 411(d)(3) of the Internal Revenue Code requires retirement plans to provide for 100 percent vesting upon termination or partial termination of a plan. The Act grants a brief reprieve to employers with calendar year plan years concerned that employment actions because of the COVID-19 pandemic may have caused them to lose the financial benefit of utilizing annual plan forfeitures with respect to those who were separated.
Section 209 of the Act provides that a plan will not be treated as having had a partial termination during any plan year which includes the period beginning March 13, 2020, and ending March 31, 2021, if the number of active participants in the plan covered on March 31, 2021, is at least 80 percent of the number on March 13, 2020. This means businesses that may have suffered greatly from the pandemic, forcing layoffs and plant closings, but whose employment numbers rebound by the end of March of 2021, will not be required to fully vest those who were terminated.
Money Purchase Pension Plan Distributions Can Qualify as COVID-19-Related Distributions (CRDs)
The COVID-Related Tax Relief Act of 2020, which is Subtitle B of the Act, amends the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide that in-service distributions from money purchase pension plans can qualify as CRDs. This change is effective as if made part of the CARES Act.
Disaster-Related Distribution and Loan Relief
In response to recent wildfires and hurricanes, Congress included its go-to disaster relief distribution, loan, and recontribution rules as part of the Act, liberalizing distribution rules and providing penalty relief for qualified disasters. These types of provisions are not new. They regularly appeared before 2020 in response to many disasters.
For this purpose, “qualified disasters” include those occurring from December 28, 2019, until the date of the Act that are declared disasters by the President under the Robert T. Strafford Disaster Relief and Emergency Assistance Act during the period beginning Jan. 1, 2020, and ending 60 days after the enactment of the Act. “Qualified disaster areas” are those areas with respect to which a qualified disaster was declared, but do not include areas that are disaster areas solely due to the COVID-19 pandemic, relief for which was provided by the CARES Act.
Employers interested in implementing these provisions have until the last day of the plan year beginning on or after Jan. 1, 2022 (i.e., Dec. 31, 2022, for calendar year plans) to amend their plans.
Qualified Disaster Distributions
The Act adds relief in the form of qualified disaster distributions (QDDs).
Like CRDs, QDDs permit up to $100,000 to be withdrawn from eligible retirement plans without penalty or withholding. The distribution is taxed ratably over a three-year period and may be recontributed in three years, with repayments receiving direct rollover treatment.
For purposes of the Act, a QDD is a distribution made to a qualified individual on or after the first day of the incident period of a qualified disaster and before 180 days after the enactment of the Act.
A “qualified individual” is someone:
- Whose principal place of abode is located in a qualified disaster area; and
- Who suffered an economic loss as a result of the qualified disaster.
Disaster-Related Plan Loans
The Act also enables “qualified individuals” to receive plan loans in amounts up to $100,000 or 100 percent of the present value of the participant’s vested account balance. Repayment on these loans may be suspended for a period of up to one year (or up to 180 days after enactment of the Act, if longer) 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. Interest on the plan loan must accrue during the suspension period.
Recontributions of Pre-Disaster Hardship Distributions for Principal Residence
Special recontribution rules allow recipients to recontribute hardship distributions initially taken 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 180 days after enactment of the Act.
Phased Retirement In-Service Distribution Relief for Certain Multiemployer Plans
Section 401(a)(36) was added to the Internal Revenue Code in 2006 as part of the Pension Protection Act. It permits employers with pension plans to offer “phased retirement” options to employees who have attained at least age 62, enabling older workers to afford to reduce their hours as they approach retirement age. The Setting Every Community Up for Retirement Enhancement (SECURE) Act dropped the age limit from 62 to 59 1/2.
The Act drops this minimum age to 55 for certain multiemployer plans for individuals who were participants in the plan before April 30, 2013. To qualify for this grandfather rule, the trust must have been in existence as of Jan. 1, 1970, and the plan must have received at least one IRS favorable determination letter before Dec. 31, 2011, affirming the age 55 in-service distribution provision.
Suzanne G. Odom is a principal in the Greenville, S.C., office of law firm Jackson Lewis. Stephanie O. Zorn is a principal in the firm St. Louis, Mo., office. Jackson Lewis P.C. © 2021 Jackson Lewis P.C. All rights reserved. Republished with permission.
Related SHRM Articles:
Coronavirus Relief Package Includes Key Workplace Provisions, SHRM Online, December 2020
Fiscal 2021 Omnibus and COVID-19 Relief, SHRM Government Affairs, December 2020
After Layoffs, Employers Risk Invoking 401(k) Partial Termination Rule, SHRM Online, October 2020
IRS FAQs Clarify Coronavirus-Related Retirement Plan Relief, SHRM Online, May 2020
How the CARES Act Changes Health, Retirement and Student Loan Benefits, SHRM Online, March 2020
SECURE Act Alters 401(k) Compliance Landscape, SHRM Online, January 2020