Alert / Retirement
Last-minute stimulus impacts retirement plans

On Dec. 27, 2020, Congress and President Trump enacted the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions impacting retirement plans. The CAA provides relief to employers with temporary reductions in their workforce, disaster relief, and relief for money purchase pension plans.

Partial plan termination relief
As many employers were compelled by financial necessity or local regulation to shut down and reduce their workforces, often temporarily, the impact on their retirement plans was significant. As a result, many plan sponsors incurred what is known as a partial plan termination, which requires a plan to fully vest affected participants if their turnover rate was 20% or more. Under the CAA, however, a plan will not experience a partial termination during any plan year that 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. This will be especially helpful to plan sponsors who temporarily experienced high turnover, furloughs and layoffs due to the COVID-19 pandemic.

Disaster relief
The CAA includes disaster relief provisions allowing defined contribution plan participants who live in a qualified disaster area and who have sustained an economic loss by reason of a qualified disaster to take a tax-favored disaster withdrawal and distribution, borrow money from a plan, and suspend loan repayments on new or existing plan loans.

The disaster relief applies to major disasters (except any coronavirus-related disaster) declared from Jan. 1, 2020, and ending on Feb. 25, 2021. This will apply to the California wildfires occurring in late summer and early fall of 2020 and a number of hurricanes, including Laura and Sally. Although these types of disasters may also satisfy existing preconditions in the plan for taking a hardship withdrawal, the CAA allows for increased dollar amounts and repayment rights, that would not be available for regular hardship withdrawals. The following relief is available to impacted participants:

  • TAX-FAVORED DISASTER WITHDRAWALS — A participant may take a tax-favored withdrawal from their defined contribution plan (including an IRA) of up to $100,000, not subject to the 10% penalty that normally applies to early withdrawals. The $100,000 limit must be applied across all plans maintained by the employer and members of its controlled group. These will be available until June 25, 2021. A participant who takes the withdrawal may elect to include the distribution in taxable income over a three-year period and/or pay back the distribution to an eligible retirement plan within the 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.
  • RECONTRIBUTION OF CERTAIN HARDSHIP WITHDRAWALS — The CCA allows a defined contribution plan participant who took a hardship withdrawal to purchase or construct a principal residence to recontribute the distribution to an eligible retirement plan if they could not use it because of a qualified disaster in the area where the home was located or was to be constructed. The participant must recontribute the hardship withdrawal before June 25, 2021.
  • INCREASED PLAN LOAN LIMIT AND EXTENSION OF PERIOD TO REPAY – The CAA allows qualified individuals to obtain loans 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. This applies for loans made from Dec. 27, 2020, to June 25, 2021. The CAA also provides relief for new and existing loans by delaying repayments up to June 25, 2021. The additional year would be ignored for purposes of applying the maximum five-year term on normal loans. When payments start, they are reamortized to incorporate interest accrued during the suspension period.

Money Purchase Pension Plan CARES Act distributions
In a bit of a thanks for nothing, the CAA finally amends the CARES Act to allow coronavirus-related distributions from money purchase pension plans. This was an oversight by the CARES Act, and is retroactive to March 27, 2020 when the CARES Act was passed. Unfortunately, the deadline to take a coronavirus-related distributions was Dec. 31, 2020, so this only gave a four-day window to allow plans and participants to take advantage of the clarification.

Amendment Deadline
Plan sponsors wishing to implement these changes will need to do so on or before the last day of the first plan year beginning on or after Jan. 1, 2022 (Dec. 31, 2022, for calendar year plans).

Summary
Overall, the CAA provisions related to partial plan terminations are very welcomed and should aid many plan sponsors who, through no fault of their own, were required to navigate those costly rules. There are still several needs that retirement plan sponsors have related to COVID-19. Hopefully Congress will consider them early in the 2021 legislative session. Glaringly missing from the CAA was the severely needed defined benefit plan funding relief that plan sponsors have been requesting for months. Should you have any questions regarding the CAA and its impact on your plan, please contact your Lockton Retirement Services team.

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