The Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020. This major funding bill included the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which contained the following provisions affecting retirement plans:
Money Purchase Pension Plan Distributions May Qualify as Coronavirus-Related Distributions
The CAA amended the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to allow in-service distributions from money purchase pension plans to qualify as coronavirus-related distributions. This applies retroactively to March 27, 2020, the date when the CARES Act went into effect. However, it does not extend the final day for plans to allow coronavirus-related distributions, which was December 30, 2020.
Excess Pension Asset Transfers
IRC Section 420 permits specific “qualified future transfers” of up to 10 years’ of retiree health and life insurance costs from a defined benefit pension plan to a retire health benefits or insurance account within the pension plan, but only if the plan is 120% funded at the outset and throughout the transfer period, among other requirements. Market volatility during the COVID-19 pandemic have caused plans that could historically meet the 120% funding requirement to fall below this level. The CAA provides for a one-time election during 2020 and 2021 to end any existing transfer period for any taxable year following the date of election if the following requirements are met:
- The maintenance of effort continues to apply as if the transfer period were not shortened,
- The employer ensures the plan stays at least 100 percent funded throughout the original transfer period,
- The plan has funding targets for the first five years after the original transfer period, and
- All amounts left in the retiree benefits account at the end of the shortened transfer period must be returned to the pension plan (without application of an excise tax to such amounts).
Phased Retirement In-Service Distributions
IRC Section 401(a)(36) allows pension plans to provide “phased retirement” options to employees who are at least 62 years of age. The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) dropped that age limit to 59 1/2. The CAA has further reduced the minimum age to 55 for certain multiemployer plans for employees who participated in the plan prior to April 30, 2013.
Partial Plan Termination Safe Harbor
The CAA provides a temporary safe harbor for partial plan terminations, stating, “A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.”
Disaster-Related Distributions
Under the CAA, individuals who have suffered losses from federally “qualified” disasters other than COVID-19 become eligible for retirement plan distributions. Eligible plans include 401k, 403b, 457b, and money purchase pension plans. The CAA defines “qualified disasters” as those that were declared between January 1, 2020, and February 25, 2021. For employers, plan amendments implementing the disaster relief provisions must be adopted by the end of the plan year beginning on or after January 1, 2022.
Qualified Disaster Distributions (QDD)
A qualified disaster distribution (QDD) is a distribution made to a qualified individual who is someone (1) whose principal residence was located in a federally declared disaster area, and (2) who suffered an economic loss as the result of the qualified disaster. A qualified individual may receive a QDD up to $100,000, which may be included as income over the next three years and repaid to the eligible retirement plan over a three-year period beginning on the date the distribution was received. The 10% early distribution penalty for employees under age 59 ½ does not apply to qualified disaster distributions.
Disaster-Related Plan Loans
The CAA provides for loans from qualified employer plans of up to $100,000 or 100% of the present value of a plan participant’s vested account balance. Loan repayment may be suspended for up to one year — or up to 180 days following the enactment of the CAA (i.e., June 24, 2021) — with interest accruing during the suspension period.
Recontribution of Principal Residence Hardship Distributions
Recipients of hardship distributions are allowed to recontribute any distributions that were taken to repair or construct a new principal residence in a qualified disaster area but were used for another purpose due to the qualified disaster. The initial hardship distribution must have been taken 180 days prior and up to 30 days following the qualified disaster. The distribution must be repaid by June 24, 2021.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.
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