The U.S. Consolidated Appropriations Act, 2021, signed into law on December 27, 2020 (the Act), includes certain provisions relating to tax-qualified plans, which are summarized below. A separate Sidley Update will address provisions of the Act relating to health and welfare plans.
Summary of Significant Provisions
Temporary Rule Preventing Partial Plan Termination
A turnover rate of 20% or more within one plan year may trigger a partial plan termination that would require all participants affected by the partial termination to be fully vested. For example, if a plan’s active participants decreased by 20% or more during the plan’s 2020 plan year on account of layoffs related to the pandemic, the plan would be treated as having a partial termination. The Act provides that a plan will not be treated as having experienced a partial termination if, during any plan year that includes the period from March 13, 2020, to March 31, 2021, 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. This temporary rule permits an employer to avoid a partial plan termination by rehiring laid-off employees by March 31, 2021.
Special Non-COVID-19-Related Disaster Relief Provisions
The Act adds the following special provisions for plan participants affected by a major disaster declared by the President under the Stafford Act, for reasons other than COVID-19, during the period beginning on January 1, 2020, and ending on February 25, 2021:
- Special Tax Treatment for Qualified Disaster Distributions
The Act provides special tax treatment for a “qualified disaster distribution,” defined as a distribution from a qualified retirement plan on or after January 1, 2021, and before June 25, 2021, to an individual (Qualified Individual) affected by a declared disaster whose principal place of residence is located in the declared disaster area. The 10% early penalty tax and the 20% withholding tax do not apply to the first $100,000 of qualified disaster distributions taken from all plans maintained by the employer and members of its controlled group. In addition, any amount to be included in the gross income of a Qualified Individuals taking such distributions may be spread over three years. A Qualified Individual who takes a qualified disaster distribution may contribute the distributed amount back to an eligible retirement plan within three years following the date such distribution is received, and the amount repaid is treated as a tax-free eligible rollover distribution.
- Recontributions of Hardship Withdrawals Intended for Home Purchases
The Act provides that a Qualified Individual who has taken a hardship withdrawal in order to purchase or construct a principal residence, but cannot use the funds to do so on account of the qualified disaster, may recontribute the funds back to an eligible retirement plan and avoid paying taxes on the distribution. The hardship distribution must have been received during the period beginning 180 days before the first day of the qualified disaster incident period and ending 30 days after the last day of the qualified disaster incident period, and the recontribution must be made on or after the first day of the qualified disaster incident period and before June 25, 2021.
- Loans From Qualified Plans
The Act provides an increased loan limit for loans taken by a Qualified Individual on or after December 27, 2020, and on or before June 25, 2021. The increased limit on plan loans is the lesser of $100,000 and 100% of the Qualified Individual’s vested account balance rather than the otherwise applicable limit of the lesser of $50,000 and 50% of the Qualified Individual’s vested account balance.
In addition, if the due date of an outstanding loan falls between the first day of the incident period of a qualified disaster and 180 days after the last day of such incident period, a Qualified Individual with such outstanding loan may delay the repayment for one year. Subsequent repayments must be adjusted to reflect the one-year delay in the due date and any interest accrued during the delay. In determining the loan’s maximum five-year term, the period of delay can be disregarded.
Application of Coronavirus-Related Distribution Rules to Money Purchase Pension Plans
The Act retroactively amends the Coronavirus Aid, Relief, and Economic Security Act to extend favorable tax treatment to in-service coronavirus-related distributions made from money purchase pension plans during the period from March 27, 2020, through December 30, 2020.
Election to Terminate Transfer Period for Qualified Transfers
Generally, the administrator of an overfunded pension plan may transfer excess pension assets over a period of up to 10 years to a retiree health benefits account or an applicable life insurance account to prefund retiree medical benefits, subject to certain requirements. The Act allows an employer to elect to terminate an existing transfer period, no later than December 31, 2021, with respect to any taxable year specified by the taxpayer that begins after the election. Any assets transferred in an existing transfer period but not yet used as of the date of the election to terminate the transfer period will be sent back to the transferor plan within a reasonable period of time. The amount transferred back will be treated as employer reversion unless an equivalent amount is transferred back to the health benefits account or life insurance account again within five years following the original transfer period.
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