On December 21, 2020, Congress passed the Consolidated Appropriations Act of 2021 ("Act"), a spending bill that combines $900 billion in stimulus relief for the COVID-19 pandemic with a $1.4 trillion omnibus spending bill for the 2021 federal fiscal year. President Trump signed the Act on December 27, 2020.
Highlights of the Provisions Relevant to Retirement Plans
- Provides that the coronavirus-related distributions provided under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") may apply to money purchase pension plans.
- Provides for qualified disaster distributions, increased loan limits, and delayed loan repayments for those individuals in qualified disaster areas, but specifically excludes from these provisions disaster declarations that are only COVID-19-related.
- Does not extend the coronavirus related distributions and loan relief provided under the CARES Act.
- These retirement plan provisions are optional. However, if a plan sponsor does decide to adopt these provisions, it will need to coordinate with its third-party administrator to establish procedures for proper plan administration and provide notice to impacted eligible employees.
A Closer Look
Below are the key retirement-related provisions under the Act:
- Extension of Repayment Period for Deferred Social
Security Tax Deductions. Under IRS Notice 2020-65, issued
on August 8, 2020, employers were allowed to defer withholding and
payment of the employee's portion of the Social Security tax if
the employee's wages were below a certain amount, generally
applicable to wages paid September 1, 2020 through December 31,
2020. Employers who deferred employee taxes were required to
withhold the deferred amounts from affected employee wages
"ratably" between January 1, 2021 and April 30, 2021. All
deferred amounts were required to be repaid by May 1, 2021 to avoid
interest and penalties.
The Act extends the period for withholding the deferred taxes from April 30, 2021 to December 31, 2021, and the deadline to repay all deferred amounts is extended from May 1, 2021 to January 1, 2022.
- Application of CARES Act Provisions to Money Purchase Pension Plans. Under the CARES Act and IRS Notice 2020-50, money purchase pension plans could not make in-service coronavirus-related distributions. The Act amends the CARES Act to allow a coronavirus-related distribution to be made as an in-service withdrawal from a money purchase pension plan, effective as if included in the enactment of the CARES Act. The provision would also give money purchase pension plan participants to whom a legally permissible distribution was made during 2020 (e.g., someone who had terminated employment or attained age 59 ½) the right to treat the distribution as coronavirus-related.
Although this change is made retroactively to the enactment of the CARES Act, because the December 30 deadline for making coronavirus-related distributions was not extended, this provision will be of little practical use, unless a money purchase pension plan had erroneously been allowing in-service coronavirus-related distributions.
- Qualified Disaster Distributions. The Act
provides for "qualified disaster distributions"
("QDDs") from "eligible retirement plans." QDDs
are treated like other types of past disaster distributions for
wildfires, hurricanes, and other natural disasters, and include the
coronavirus-related distributions that were permitted under the
CARES Act (i.e., they are exempt from the 10% early
distribution penalty, included in income ratably over 3 years, may
be repaid, etc.).
A QDD is a distribution from an eligible retirement plan made on or after the first day of the qualified disaster incident period and before June 25, 2021 to a qualified individual.
- Eligible Retirement Plan. An "eligible retirement plan" is a plan described in Code Section 402(c)(8)(B). This includes an IRA, a qualified plan, a 403(b) plan, and a governmental 457(b) eligible deferred compensation plan. It also includes a money purchase pension plan.
- Qualified Disaster Area. A "qualified disaster area" means any area where a major disaster was declared between January 1, 2020 and February 25, 2021 by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, if the "incident period" of the disaster begins on or after December 28, 2019, and on or before December 27, 2020.
- Incident Period. The term "incident period" means the period specified by the Federal Emergency Management Agency as the period during which the disaster occurred.
- Qualified Individual. A "qualified individual" is an individual whose principal place of abode, at any time during the incident period, is in the qualified disaster area and who sustains an economic loss due to the disaster.
A "qualified disaster area" does not include any area for which a major disaster has been declared only by reason of COVID-19. A list of federally declared disasters is available at https://www.fema.gov/disasters/disaster-declarations.
QDDs from eligible retirement plans are limited in aggregate to $100,000 per year without penalty or withholding, less all other QDDs received for prior taxable years. However, this limit applies separately to each qualified disaster.
- Exemption from the 10% Early Distribution Penalty. A qualified disaster distribution is exempt from the 10% early distribution penalty.
- Repayment of Qualified Disaster Distributions. Individuals may repay the QDDs during the 3-year period that immediately follows their receipt of the QDD. Repayments must be made to an eligible retirement plan to which the individual could make a direct rollover contribution of the distribution.
- Income Inclusion Over Three Year Period. Unless the individual elects otherwise, QDDs are included in gross income ratably over the 3-year period beginning with the year of the distribution, unless the Qualified Individual elects otherwise.
- Exemption from Rollover Notice and Withholding Rules. QDDs are not "eligible rollover distributions" for purposes of Code provisions applicable to direct rollovers, rollover notices, and tax withholding.
- Recontribution of Qualified Distribution for Home
Purchases. The Act permits individuals who receive
"qualified distributions" to recontribute the
distribution during the "applicable period," to an
eligible retirement plan to which the individual could make a
- Qualified Distribution. A "qualified distribution" is a hardship distribution from a 401(k) or 403(b) plan, or to a first-time home purchase under Code Section 72(t)(2)(F). The distribution must have been intended to be used to purchase or construct a principal residence in a qualified disaster area but was not used due to the qualified disaster. The distribution must have been received within 180 days before the incident period of the disaster and 30 days after the incident period.
- Applicable Period. The "applicable period" means the period beginning on the first day of the disaster's incident period and ending on June 25, 2021. Repayment must be made to an eligible retirement plan in which the individual is a beneficiary and for which rollover contributions are permitted.
- Increased Loan Limits and Delayed Repayments for
Certain Disaster-Related Loans.
- Increased Loan Limit. The Act increases the loan limit for any loans from a qualified employer plan (as defined under Code Section 72(p)(4)) to a qualified individual (as defined above) made between December 27, 2020 and June 25, 2021. The loan limit is increased by (1) increasing the dollar limit from $50,000 to $100,000, and (2) increasing the percentage limit from one-half to the full present value of the employee's nonforfeitable accrued benefit.
- Delayed Repayment. A qualified individual with an
outstanding loan from a qualified employer plan during a qualified
disaster may delay any repayment due between the beginning of the
incident period and up to 180 days after the incident period. The
due date is delayed for one year, or until June 25, 2021, if later.
This loan relief is similar to the loan provisions provided in the
- Subsequent repayments will be adjusted to reflect the delayed repayment date and any interest accruing during such delay.
- In determining the 5-year period and the term of a loan, the delayed payment period shall be disregarded.
The Act does not expressly permit a Plan to rely on an individual's self-certification of eligibility as a "qualified individual" for loan relief.
The Qualified Disaster relief rules are optional under the Act and plan sponsors have until December 31, 2022 (for calendar year plans) to amend retirement plans for this relief (governmental plans have until December 31, 2024 to amend). For a plan with a July 1 fiscal year, the deadline would be June 30, 2023 (governmental plans would have until June 30, 2025).
- 420(f) Transfers. Code Section 420 permits
"qualified future transfers" from a pension plan to a
retiree health account if certain requirements are met, including
that the pension plan meets certain funding standards. In light of
the significant market volatility issues in the past year, the Act
allows for a one-time election to end an existing transfer period
if certain requirements are met.
- In-Service Distribution Age for Certain Employees in
Multiemployer Plans. For certain employees in the building
and construction industry participating in a multiemployer plan,
the in-service distribution age under Code Section 401(a)(36) is
lowered from age 59 ½ to age 55.
- Temporary Partial Plan Termination Rule. In
general, although the determination of whether a partial plan
termination has occurred is based on the facts and circumstances of
each situation, a reduction of more than 20% in the number of
covered participants during a plan year has been considered a
partial plan termination by the IRS.
The IRS recognizes that significant reductions in workforce size due to the pandemic may be temporary and for this reason the Act provides temporary relief so that a retirement plan will not be treated as having a partial plan termination if the number of active participants in the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020. The provision is effective during any plan year which includes the period from March 13, 2020 to March 31, 2021.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.