The United States Consolidated Appropriations Act 2021, enacted on December 27, 2020 (the Act), includes certain provisions relating to tax-eligible plans, which are summarized below. A separate update from Sidley will address the health and welfare provisions of the law.
Summary of important provisions
Temporary rule preventing partial termination of the plan
A turnover rate of 20% or more in a plan year may trigger a partial plan termination which would require all members affected by the partial termination to be fully vested. For example, if the number of active members of a plan decreased by 20% or more in plan year 2020 of the plan due to layoffs related to the pandemic, the plan would be treated as having a partial termination. . The Act provides that a plan will not be considered to have experienced partial termination if, during a plan year that includes the period from March 13, 2020 to March 31, 2021, the number of active members covered by the plan as of March 31, 2021, represents at least 80% of the number of active members covered by the plan on March 13, 2020. This temporary rule allows an employer to avoid a partial termination of the plan by re-hiring laid-off employees by March 31, 2021.
Special provisions for disaster relief unrelated to COVID-19
The law adds the following special provisions for plan members affected by a major disaster declared by the President under the Stafford Act, for reasons other than COVID-19, during the period beginning January 1, 2020 and ending February 25, 2021:
- Special tax treatment for eligible distributions in the event of a disaster
The law provides for special tax treatment for a “qualifying disaster distribution”, defined as a distribution from a qualifying pension plan on or after January 1, 2021 and before June 25, 2021 to an affected individual (qualifying person). by a declared disaster. whose main residence is located in the disaster area. The 10% advance penalty tax and 20% withholding tax do not apply to the first $ 100,000 of eligible disaster distributions from all plans maintained by the employer and its controlled group members . In addition, any amount to be included in the gross income of a qualified natural person receiving such distributions may be spread over three years. An eligible person who receives an eligible disaster distribution may contribute the amount distributed to an eligible pension plan within three years from the date on which such distribution is received, and the refunded amount is treated as an eligible distribution free of charge. ‘tax.
- Recontributions of Hardship Withdrawals intended for the purchase of housing
The Act provides that an eligible person who has made a withdrawal because of difficulty in purchasing or building a principal residence, but who cannot use the funds to do so due to the eligible loss, may return the funds to a qualifying retirement plan and avoiding paying distribution taxes. The hardship allocation must have been received within the period beginning 180 days before the first day of the qualifying disaster incident period and ending 30 days after the last day of the qualifying disaster incident period, and the contribution must be paid on or after the first day of the eligible claim period and before June 25, 2021.
- Eligible plan loans
The Act provides for an increase in the loan limit for loans taken out by an eligible person on or after December 27, 2020 and no later than June 25, 2021. The increased limit for plan loans is the lesser of $ 100,000 and $ 100. % of the acquired rights of the eligible person. the account balance rather than the otherwise applicable limit of the lesser of $ 50,000 and 50% of the account balance acquired from the qualifying person.
In addition, if the maturity date of an outstanding loan is between the first day of the incident period of a qualified disaster and 180 days after the last day of that incident period, a qualified person with such an outstanding loan can delay repayment for a year. . Subsequent repayments should be adjusted to reflect the one year delay in the due date and the interest accrued during the delay. To determine the maximum loan term of five years, the delay period can be ignored.
Application of the distribution rules related to the coronavirus to defined contribution pension plans
The law retroactively amends the Coronavirus Aid, Relief, and Economic Security Act to extend favorable tax treatment to in-service coronavirus-related distributions made from defined contribution pension plans during the period March 27, 2020 to December 30, 2020 .
Election to end the transfer period for eligible transfers
Typically, the administrator of an over-funded pension plan can transfer surplus pension assets over a period of up to 10 years to a retiree health insurance account or an applicable life insurance account. to pre-finance the medical benefits of retirees, 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 taxation year specified by the taxpayer that begins after the election. Any asset transferred during an existing transfer period but not yet used on the date of the election to end the transfer period will be returned to the relinquishing plan within a reasonable period of time. The transferred amount will be treated as a reversion of the employer, unless an equivalent amount is transferred back to the health insurance account or the life insurance account within five years of the transfer period. original.