New Coronavirus Bill Proffers Guidance for Partial Plan Terminations and Other COVID-19 Related Distributions

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 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which contained the following provisions affecting partial plan terminations and other COVID-19-related distributions:

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.” 

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.

Disaster-Related Relief

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 following 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. 

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.

Phased Retirement In-Service Distribution Relief

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. 

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.

The following two tabs change content below.

Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

Latest posts by Hall Benefits Law, LLC (see all)

%d bloggers like this: