On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “Act”). The Act, which consists of over five thousand pages, addresses many areas (e.g., providing funding for the government and for COVID-19 vaccines). This article, however, focuses solely on its provisions affecting retirement plans.
Disaster-Related Distributions: Under the Act, the Internal Revenue Code (the “Code”) section 72(t) 10% tax penalty (which generally applies to qualified plan distributions received before the recipient attains age 59 ½) does not apply to any “qualified disaster distribution.” That term is defined as any distribution from an eligible retirement plan that is made (1) on or after the first day of the incident period of a qualified disaster and before June 25, 2021; and (2) to an individual whose principal place of abode at any time during the incident period is located in a “qualified disaster area” and who sustained an economic loss because of such disaster.
The term ‘‘qualified disaster area’’ means any area with respect to which a major disaster was declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act from January 1, 2020 to February 25, 2021, if the incident period of the disaster began on or after December 28, 2019 and on or before December 27, 2020. However, that term does not include any area with respect to which such a major disaster is declared only by reason of COVID-19. Thus, this part of the Act focuses on people affected by disasters such as wildfires and hurricanes.
The aggregate amount of these distributions for any tax year cannot exceed the excess (if any) of (a) $100,000; over (b) the aggregate amounts treated as qualified disaster distributions received by an individual for all prior tax years. Any amount required to be included in gross income for a tax year because of a qualified disaster distribution will be included ratably over the 3-taxable year period beginning with the distribution year (unless the recipient elects to not have that rule apply).
Also, any individual who receives a qualified disaster distribution can, at any time during the 3-year period beginning on the day after such distribution was received, make one or more contributions (in an aggregate amount not to exceed the amount of such distribution) to an eligible retirement plan of which such individual is a participant and to which a rollover contribution of such distribution can be made. In that case (to the extent of the contribution amount), the individual will be treated as having received the qualified disaster distribution in an eligible rollover distribution and as having transferred the amount to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.
Disaster-Related Plan Loans: Under the traditional rules for participant loans, a participant’s loan generally cannot exceed the lesser of (i) $50,000 (reduced by the participant’s highest outstanding loan balance in the plan for the previous 12 months); or (ii) the greater of one-half of the participant’s vested account balance or $10,000. The Act changes the $50,000 amount to $100,000. The Act also substitutes the greater of the participant’s vested account balance or $10,000 for the greater of one-half of the participant’s vested account balance or $10,000. Those changes apply to any loan from a qualified plan to a “qualified individual” that is made from December 27, 2020 to June 25, 2021.
In addition, under the traditional rules for participant loans, loans must be fully repaid via regular payments within five years (or within a longer period, for loans used to purchase a principal residence). Under the Act, in the case of a “qualified individual” (with respect to any qualified disaster) with an outstanding loan on or after the first day of the incident period of such disaster:
A “qualified individual” is any individual whose principal place of abode at any time during the incident period of any qualified disaster is located in the “qualified disaster area” and who has sustained an economic loss because of such qualified disaster. The term “qualified disaster area” is defined as described above under my heading titled “Disaster-Related Distributions.”
Note that if a plan amendment is required because of the plan sponsor’s adoption of one or more of the above rules, the amendment must be executed by the end of the 2022 plan year for non-governmental plans. Governmental plans have until the end of the 2024 plan year to execute such an amendment.
Exclusion of Employer Payments for Student Loans: The Act extends to January 1, 2026 (from January 1, 2021), the following rule: a plan participant’s gross income does not include amounts paid by his or her employer for educational assistance to the participant if the assistance is furnished pursuant to a program that satisfies the requirements of Code section 127. (As one example of those requirements, the program cannot unduly discriminate in favor of highly compensated employees.) For this purpose, “educational assistance” includes an employer’s payment(s) to an employee or to a lender with respect to principal and/or interest on the employee’s student loan(s). Note that the maximum exclusion from gross income under this rule equals $5,250.
Certain Distributions from a Money Purchase Pension Plan: Under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), the Code section 72(t) 10% tax penalty does not apply to any “coronavirus-related distribution” if the aggregate amount of such distribution(s) received by an individual does not exceed $100,000. The CARES Act defined this type of distribution as any distribution from an eligible retirement plan, such as a 401(k) plan or a 403(b) plan, that is made during 2020 to a qualified individual (e.g., one who experiences adverse financial consequences as a result of COVID-19, such as being laid off). Also, unless the recipient elects otherwise, any such distribution required to be included in gross income will be included ratably over the 3-tax-year period beginning with the distribution year. Even better, to avoid that taxation, the recipient can contribute the distributed amount to the plan from which it came or to another plan if that is done within three years from the distribution date.
Under the Act, those CARES Act provisions apply to any “coronavirus-related distribution” from a money purchase pension plan which constitutes an in-service withdrawal. (Those plans cannot otherwise allow in-service distributions.) This Act provision applies retroactively as if it were included in the CARES Act. Given that “coronavirus-related distributions” under the CARES Act had to be received before December 31, 2020, however, this provision will have little benefit unless further guidance extends its timeframe. Nonetheless, this provision will provide relief to money purchase pension plans that erroneously allowed one or more “coronavirus-related distributions” in 2020.
Partial Plan Terminations: In general, if a plan sponsor lays off more than 20% of its total plan participants in a particular year, the plan experiences a partial plan termination. In that event, affected participants must be made fully vested in their plan account. (Please note that the rules here can be complex, so let me know if you have any questions about this.) Under the Act, however, a plan will not be treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020 and ending on March 31, 2021 if: