COVID-19 Relief Bill Changes to Retirement Plans
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At the end of 2020, Congress passed a $900 billion COVID-19 stimulus relief bill, the Consolidated Appropriations Act, 2021 (CAA). It was designed to extend certain protections and benefits from the CARES Act and provide additional support to individuals, families, and businesses still struggling from the persistent COVID-19 pandemic. While there are many dimensions of relief available such as extended tax incentives, a renewed Paycheck Protection Program (PPP), and economic stimulus payments, there were also several changes to employee benefit plans. There are a number of considerations that plan participants and sponsors will need to make in light of these changes. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key points below.
Retirement Plan Provisions in the CAA
An overview of the provisions affecting retirement plans is as follows:
- Waiver of 10 percent early withdrawal penalty for qualified plan distributions.
- Temporary access of up to $100,000 in qualified retirement plan loans.
- Expanded access to retirement funds for individuals located in federally declared disaster zones other than COVID-19.
- Money purchase pension plans can now be used to access coronavirus relief funds.
- Permitted re-contributions of retirement plan withdrawals for a principal residence.
For plan administrators, there is welcome news in the partial termination relief available through March 31, 2021. In addition, there is a new temporary rule reducing the age for phased retirement options for older workers in a multiemployer pension plan.
Waiver of 10 Percent Early Withdrawal Penalty
Under normal circumstances, plan participants cannot withdraw retirement funds prior to age 59 ½ without facing a 10 percent penalty. The CARES Act temporarily suspended this rule, which was set to expire on December 30, 2020. This benefit was not extended; however, if an individual was adversely affected by COVID-19 in 2020 and withdrew money from a qualified retirement account but did not designate the withdrawal as a Coronavirus Relief Distribution (CRD), then the individual could still qualify for the early withdrawal exception.
$100,000 in Plan Loans
Typically, plan loans cannot exceed 50 percent of the vested account balance, up to a maximum of $50,000. The CARES Act allowed participants to borrow up to 100 percent of their account balance with a $100,000 maximum. These temporary changes expired at the end of 2020.
Though this provision was extended to June 25, 2021, under the CAA, the focus has been expanded to include not just COVID-19 but other federally declared disasters. To qualify, an individual must reside in a qualified disaster area and have suffered economic loss from the event.
Under the new legislation, retirement plan loans now have a one-year reprieve before loan payments are due. This applies to both existing and new loans.
Qualified Disaster Distributions
Under the CAA, Congress took the above elements – $100,000 limit and waiver of early withdrawal penalty – and made them permanent for federally declared disasters (other than COVID-19). The exception was made with wildfires and hurricanes in mind, though the nature of the disaster does not matter as long as the President declares it a federal disaster zone.
Also, like the CRD funds, amounts can be repaid over three years and treated as a rollover beginning after the distribution was taken. Tax will be assessed over the three years unless the individual elects to pay the full tax in the distribution year. Qualified disaster incidents must have occurred from December 28, 2019 and ending 60 days after a disaster declaration.
It is important to note these distributions are an optional benefit. Plan administrators can choose whether to participate and to what extent. If elected there needs to be a verification process to ensure compliance with relevant rules and regulations. Administrators must amend plans by the last day of the plan year beginning on or after January 1, 2022, or December 31, 2022, for calendar year plans.
Money Purchase Pension Plans
The CAA added money purchase pension plans to the list of qualified retirement accounts from which emergency funds can be accessed. These are in addition to:
- Traditional and Roth IRAs
- 401(k) accounts
- SEP, SIMPLE, and SARSEP IRAs
- 403(b) and (a) accounts
- 457(b) accounts
- Pension and profit-sharing plans
Initially, these plans were disallowed because the CARES Act did not alter the rules for when such plans were permitted to make distributions. The changes are retroactive to March 27, 2020.
Re-contributions of Retirement Plan Distributions for Primary Residence
First-time homebuyers were already allowed to receive penalty-free distributions to use towards the purchase of a first primary residence. New in the CAA, first-time homebuyers may now re-contribute the amount if they did not use it to buy a home. The time period for re-contribution expires on February 25, 2021, unless the principal residence is in a qualified disaster area. In that case, the deadline for re-contribution is June 25, 2021.
Employer-Plan Administrator Notices
As a result of COVID-19, many were forced to furlough or lay off staff, which also reduced the number of plan participants. In some cases, this could have meant a partial plan termination according. According to the CAA, if during the period from March 13, 2020, until March 31, 2021, the number of plan participants is at least 80 percent of the number of active participants covered on March 13, 2020, then partial termination rules do not apply.
More good news for employers and plan administrators expands on a provision from the SECURE Act. In that piece of legislation, employers with certain multiemployer pension plans can drop the minimum age for phased retirement options from 59 ½ to 55. (Note that the SECURE Act already reduced the age requirement from 62.) This could be an effective option to encourage older workers to reduce hours without retirement savings suffering.
To qualify, the trust must have existed as of January 1, 1970, received at least one favorable IRS determination before December 11, 2011, and an employee must have been a plan participant before April 30, 2013.
These plan changes are a welcome relief for many struggling to manage through the pandemic. For plan administrators, several decisions need to be made about which benefit to offer and the required compliance steps. If you have questions about the information outlined above or need assistance with a plan management or audit issue, JLK Rosenberger can help. For additional information call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.