On Dec. 22, 2020, Congress passed, and President Trump recently signed, the Consolidated Appropriations Act, 2021. This Act contains over $900 billion of additional stimulus funding intended for COVID-19 relief. In addition, the Act amends some Internal Revenue Code (Code) provisions pertaining to qualified retirement plans, including non-COVID disaster emergency relief, partial plan termination relief and other provisions affecting multiemployer and other defined benefit plans.

Notably, the Act does not extend the timeframes applicable to qualified plan participants under the CARES Act. The Act provides the following with respect to qualified retirement plans.

Non-COVID-19 disaster emergency relief

The Act includes tax relief for plan sponsors in presidentially declared disaster areas for major disasters declared on or after Jan. 1, 2020 and ending 60 days after the date of the Act’s enactment.

The Act’s disaster emergency relief provisions allow qualified individuals to withdraw up to an aggregate limit not to exceed $100,000 counting cumulative qualified disaster distributions from prior years. The distributions are not subject to the 10% early withdrawal penalty tax and may be included in income ratably over a three-year period unless elected otherwise. Alternatively, the individuals are permitted to repay all or a part of the distributions back to an eligible retirement plan within three years of the date of the withdrawal. 

Distributions under this provision are allowed for 180 days after the enactment of the Act to individuals whose principal residence is located in a qualified disaster area. The provision treats any re-contribution as if it was a direct trustee-to-trustee transfer.

The Act allows for re-contributions of previous plan withdrawals for home purchases or construction that were not used due to the qualified disaster.

Plan loan relief is provided for individuals impacted by a qualified disaster. Specifically, the maximum plan loan limits are temporarily increased from the lesser of $50,000 or 50% of their vested account balance to the lesser of $100,000 or 100% of their vested account balance. These limits apply to loans made within 180 days of the enactment of the Act.

Relief from plan loan repayments is also provided for individuals with an outstanding loan and a repayment due date between the disaster date and 180 days after the last day of the incident. These loan repayments can be delayed for one year or, if later, until the date that is 180 days after the date of enactment of the Act. The repayments must reflect the suspended payments including interest accruals during the delay.

Plan amendments related to these provisions must be completed by the last day of the first plan year beginning on or after Jan. 1, 2022 (or Jan. 1, 2024 for governmental plans).

Partial plan termination relief

The Act provides that a qualified plan will not be treated as having a partial termination under Code section 411(d)(3) 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. The provision is effective on the date of enactment.

Generally, the IRS considers a partial termination to have occurred when the number of employees participating in a qualified plan drops by at least 20% in a plan year or in some circumstances over more than one plan year. The effect of a partial termination is that all affected participants must become 100% vested in their plan benefits.

This provision may provide some relief to plan sponsors who have experienced periodic workforce reductions under governmental restrictions related to Covid-19. No partial termination will be deemed to have occurred where an employer is able to restore plan participation to at least 80% of its March 13, 2020 level, presumably by hiring or rehiring employees, on or before March 31, 2021.

The Act expanded the relief the IRS previously provided which clarified that employer do not need to count employees furloughed or laid off due to COVID-19 but rehired by the end of 2020 in determining whether a retirement plan incurred a partial plan termination for the plan year.

Coronavirus-related in-service withdrawals from a money purchase pension plan

The Act now permits money purchase pension plans to provide for in-service coronavirus-related withdrawals. Section 2202(a)(6) of the CARES Act allowed certain qualified cash or deferred arrangements, such as 401(k) plans, to allow coronavirus-related distributions without regard to the otherwise applicable distribution rules requiring a severance from employment, disability or attainment of age 59½. Such coronavirus-related distributions specifically included 401(k) plans, custodial accounts under section 403(b)(7)(A)(i), annuity contracts under section 403(b)(11), governmental deferred compensation plans under section 457(d)(1)(A) and the Thrift Savings Plan under 5 U.S.C. 8433(h)(1), but specifically excluded money purchase pension plans and defined benefit plans.  The Act now specifically allows money purchase pension plans to make in-service coronavirus-related distributions, effective back to the enactment of the CARES Act.

Reduction in the minimum age for certain in-service distributions from building and construction industry multiemployer plans

Code section 401(a)(36) allows defined benefit plans to make in-service distributions to participants who reach age 59½. In a special provision applicable in very limited circumstances to multiemployer plans in the building and construction industry, the Act amends the Code to allow such distributions at age 55, effective for distributions made before, on or after the date of enactment.

Employer action steps

The partial plan termination relief may be too late for employers that have already elected to treat a reduction in force as having triggered a partial plan termination. However, employers that have not yet determined that a partial termination occurred during 2020 should act now to review the relief the Act provides.

Employers should review their plans to determine whether any amendments are mandatory under the Act, or whether any amendments permitted by the Act on a voluntary basis may be advantageous or advisable based on their particular business circumstances.