Seyfarth Synopsis: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (the “Act”), which includes several changes that impact tax-qualified retirement plans (both defined benefit and defined contribution plans, including certain multiemployer plans). This Legal Update summarizes the key changes impacting retirement plans. See our parallel Legal Update for a description of the health and welfare-related provisions of the Act.
Partial Plan Terminations Typically, whether a partial termination has occurred (which would require a plan to fully vest affected participants) is based on applicable facts and circumstances, and there is a rebuttable presumption that a turnover rate of at least 20% creates a partial termination. Under the Act, however, a plan will not experience a partial termination under the Code during any plan year that occurs during the period that begins on March 13, 2020 and ends on March 31, 2021, if the number of active participants covered by 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.
Observation. The Act’s bright line rule should be helpful to plan sponsors who experienced high turnover, furloughs and layoffs among its employee population in 2020 due to the COVID-19 pandemic.
Disaster Relief Provisions The Act includes a number of disaster relief provisions that allow defined contribution plan participants who reside in a qualified disaster area and who have sustained an economic loss by reason of a qualified disaster to take a tax-favored withdrawal or distribution from a retirement plan, borrow more money from a plan or suspend loan repayments on new or existing plan loans.
A “qualified disaster area” under the Act is generally any area where a major disaster was declared by the President during the period beginning on January 1, 2020, and ending on February 25, 2021, if the period during which such disaster occurred (the “incident period” as specified by FEMA), began on or after December 28, 2019, but on or before December 27, 2020 (i.e., the date of the enactment of the Act). Notably, the disaster relief under the Act does not apply where the President has declared a disaster only on account of the COVID-19 pandemic.
Tax-Favored Disaster Withdrawals. A participant may take a tax-favored withdrawal from defined contribution plan (including an IRA) of up to $100,000, free from the 10% penalty that normally applies to early withdrawals. When determining whether the $100,000 limit has been exceeded, you take into account all plans maintained by the employer and members of its controlled group. For an individual affected by more than one qualified disaster, these limits apply separately to each qualified disaster.
A qualified disaster distribution must be made on or after the first day of the incident period of a qualified disaster and before June 25, 2021 (180 days after the date of the enactment of the Act). A participant who takes a tax-favored disaster withdrawal may elect to include the distribution in taxable income ratably over a three-year period and/or re-contribute the distribution to an eligible retirement plan within such three-year period. A participant who chooses to repay is treated as having received the distribution in an eligible rollover distribution, and then directly transferring it tax-free to the eligible retirement plan.
Re-contribution of Certain Hardship Withdrawals. The Act allows a defined contribution plan participant who took hardship withdrawal that was intended to be used to purchase or construct a principal residence to re-contribute the distribution to an eligible retirement plan in the event that it could not be used for such purpose on account of the occurrence of a qualified disaster in the area where the home was located or was to be constructed.
In order to be eligible for this relief, the participant must have received the hardship withdrawal during the period beginning on the date that is 180 days before the first day of the incident period of the qualified disaster, and ending on the date that is 30 days after the last day of the incident period. A participant who meets the requirements for this relief must re-contribute the hardship withdrawal during the period that begins on or after the first day of the incident period of a qualified disaster and before June 25, 2021 (i.e., 180 days after the date of the enactment of the Act).
Plan Loans: Increase in Limit and Extension of Period to Repay. Certain “qualified individuals” (defined below) may now borrow more from their defined contribution retirement plans, and have additional time to repay new or existing plan loans if the requirements below are satisfied.
Increase in Limit for New Loans. For a qualified individual, the limit on plan loans is increased to the lesser of $100,000, or 100% of the participant’s vested account balance, instead of the $50,000 and 50% vested account balance limits that normally apply under law. This applies for loans made from December 27, 2020 to June 25, 2021 (the 180-day period beginning on the date of the Act’s enactment).
Extension of Period to Repay for New and Existing Loans. The Act also provides some relief for new and existing loans, delaying repayments for plan loans outstanding on or after the first day of the incident period of the disaster by one year (or if later, June 25, 2021), provided the payment is otherwise due on or before and ending on the date which is 180 days after the last day of such incident period. This additional year is disregarded for purposes of applying the maximum 5-year term that applies to a general purpose loan, or the maximum term that applies to a home loan (pursuant to the terms of the plan and loan agreement). When payments recommence, they are reamortized to reflect the delay in repayment and any interest accrued during the suspension period.
A “qualified individual” is defined under the Act as an individual whose principal place of residence at any time during the incident period of a qualified disaster is located in the qualified disaster area, and such individual has sustained an economic loss by reason of the qualified disaster.
Plan Amendment Deadline. Plan sponsors have at least until the last day of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022 for calendar year plans) to amend their plans to provide for this disaster relief. Plan sponsors of governmental plans would have an extra two (2) years to amend their plans to provide for this relief (i.e., until December 31, 2024 for calendar year governmental plans). (These are the same amendment deadlines that apply under the CARES Act).
Observations. The disaster relief provisions under the Act are reminiscent of distribution and loan relief issued for prior disasters, including the relief provided recently under the CARES Act, which made it easier for certain individuals to access retirement plan money in light of the coronavirus pandemic. Similar to the loan relief issued for past disasters, these provision appears to be optional. However, it would be helpful if we heard from Treasury and/or IRS with respect to whether these provisions are optional, and also with respect to the type of certification/documentation that may be necessary for plan administrators to obtain from participants requesting the disaster relief provided for under the Act.
Pension Plan Asset Transfers for Retiree Medical Under Code Section 420, sponsors with overfunded pension plans may transfer excess pension assets to a Code Section 401(h) account in the pension plan to prefund retiree medical benefits. A “qualified future transfer” under Code Section 420 can prefund up to 10 years of future medical benefits, but these transfers must meet a number of requirements, e.g., the plan must be 120 percent funded at the outset and it must remain 120 percent funded throughout the transfer period. The Act allows employers to make a one-time election during 2020 and 2021 to end any existing transfer period for any taxable year beginning after the date of election. Assets previously transferred to a Code Section 401(h) account that were not used as of the election effective date are required to be transferred back to pension plan within a reasonable amount of time. Assets transferred back to plan are treated as a taxable employer reversion, unless the amount is transferred back to the applicable Code Section 401(h) account before the end of the five-year period beginning after the original transfer.
Observation. The market changes due to the COVID-19 pandemic may have caused plans that have been consistently over 120 percent funded to fall below 120 percent, and plan sponsors may face a requirement to address large market losses in order to get back to the 120 percent funding threshold. The Act may be welcome relief for pension plans that are using surplus assets to offset retiree welfare costs.
Money Purchase Pension Plan CARES Act Distributions The Act amends the CARES Act to reflect that the in-service coronavirus distributions allowed under the CARES Act are also permitted to be made from money purchase pension plan assets. See our prior blog post and legal update for information on coronavirus distributions under the CARES Act.
Observation. Under the Act, this treatment is retroactive to the date of the passage of the CARES Act (i.e., March 27, 2020). However, because coronavirus distributions under the CARES Act must be made before December 31, 2020, this provision was likely enacted too late in the year to allow for many plans and participants to take advantage of the clarification. The Act did not extend the deadline for taking a coronavirus distribution beyond 2020.
In-Service Distributions from Certain Multiemployer Plans The Act allows in-service distributions at age 55 from certain multiemployer plans in the construction industry for employees who were participants in the plans on or before April 30, 2013. (The general rule for pension plans is that in-service distributions are permitted at age 59-1/2.) In order for this provision to apply, the multiemployer plan trust must have (1) been in existence before January 1, 1970, and (2) received a favorable determination letter before December 31, 2011, at a time when the multiemployer plan provided that in-service distributions may be made to employees who have attained age 55.
The Act is lengthy and there is a lot to digest. We hope that Treasury and IRS will issue additional guidance pertaining to these provisions. For further information and updates, continue to follow our blog.