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Consolidated Appropriations Act of 2021 Consolidated Appropriations Act of 2021

Consolidated Appropriations Act of 2021

On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021, H.R. 133 ("Act"), a spending bill that combines $900 billion in stimulus relief for the COVID-19 pandemic with a $1.4 trillion omnibus spending bill for the 2021 federal fiscal year. President Trump signed the Act on December 27, 2020.

In this publication, we have highlighted several provisions in the Act that are relevant for governmental retirement plans. For additional information, we have provided a more in-depth analysis as well.
 
Highlights of the Provisions Relevant to Governmental Retirement Plans
 
  • Provides that the coronavirus-related distributions provided under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act”) may apply to money purchase plans.
  • Provides for qualified disaster distributions, increased loan limits, and delayed loan repayments for those individuals in qualified disaster areas, but specifically excludes from these provisions disaster declarations that are only COVID-related.
  • Importantly, the Act does not extend the coronavirus related distributions and loan relief provided under the CARES Act.
In-Depth Analysis of the Provisions Relevant to Governmental Retirement Plans

Below are the key retirement-related provisions under the Act:
 
  • Extension of Repayment Period for Deferred Social Security Tax Deductions. Under IRS Notice 2020-65, issued on August 8, 2020, employers were allowed to defer withholding and payment of the employee's portion of the Social Security tax if the employee's wages were below a certain amount, generally applicable to wages paid September 1, 2020, through December 31, 2020. Employers who deferred employee taxes were required to withhold the deferred amounts from affected employee wages "ratably" between January 1, 2021 and April 30, 2021. All deferred amounts were required be repaid by May 1, 2021 to avoid interest and penalties.

    The Act extends the period for withholding the deferred taxes from April 30, 2021 to December 31, 2021, and the deadline to repay all deferred amounts is extended from May 1, 2021 to January 1, 2022.
     
  • Application of CARES Act Provisions to Money Purchase Pension Plans. Under the CARES Act and IRS Notice 2020-50, money purchase pension plans could not make in-service coronavirus-related distributions. The Act amends the CARES Act to allow a coronavirus-related distribution to be made as an in-service withdrawal from a money purchase pension plan, effective as if included in the enactment of the CARES Act.
     
    • Note: Although this change is made retroactively to the enactment of the CARES Act, because the December 30 deadline for making coronavirus-related distributions was not extended, this provision will be of little practical use, unless a money purchase pension plan had erroneously been allowing in-service coronavirus-related distributions.
  • Qualified Disaster Distributions. The Act provides for "qualified disaster distributions" from eligible retirement plans. Qualified disaster distributions are treated similar to other types of disaster distributions and the coronavirus-related distributions that were permitted under the CARES Act (i.e., they are exempt from the 10% early distribution penalty, included in income ratably over 3 years, may be repaid, etc.).
     
    • Definition of Qualified Disaster Distribution. A "qualified disaster distribution" means any distribution from an eligible retirement plan made—
      1. on or after the first day of the incident period of a qualified disaster and before the date which is 180 days after the date of the enactment of the Act [approximately June 25, 2021], and
      2. to an individual whose principal place of abode at any time during the incident period of such qualified disaster is located in the qualified disaster area with respect to such qualified disaster and who has sustained an economic loss by reason of such qualified disaster.

        This definition includes a number of critical terms (these terms are also applicable to the provisions for repayment of certain home purchase distributions, and expanded loan limit and repayment provisions, both further described below):
         
        • Eligible Retirement Plan. An "eligible retirement plan" is a plan described in Code Section 402(c)(8)(B) (including an IRA, a qualified plan, a 403(b) plan, and a 457(b) eligible deferred compensation plan). The Act specifies that a money purchase pension plan may permit an in-service qualified disaster distribution
           
        • Qualified Disaster. A "qualified disaster" means, with respect to any qualified disaster area, the disaster by reason of which a major disaster was declared with respect to such area.
           
        • Qualified Disaster Area. A "qualified disaster area" means any area with respect to which a major disaster was declared, during the period beginning on January 1, 2020, and ending on the date which is 60 days after the date of the enactment of the Act [approximately February 25, 2021], by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act if the incident period of the disaster with respect to which such declaration is made begins on or after December 28, 2019, and on or before the date of the enactment of this Act.
           
          • Incident Period. The term "incident period" for a qualified disaster means the period specified by the Federal Emergency Management Agency as the period during which such disaster occurred (except that for purposes of the Act such period shall not be treated as ending after the date which is 30 days after the date of the enactment of this Act.

            Thus, the major disaster must have been declared during the period from January 1, 2020 to approximately February 25, 2021, and the "incident period" must have begun on or after December 28, 2019 and on or before December 27, 2020.
        • COVID-19 Exception. A "qualified disaster area" does not include any area with respect to which such a major disaster has been so declared only by reason of COVID–19. A list of federally declared disaster is located at https://www.fema.gov/disasters/disaster-declarations (last visited December 29, 2020).
    • Limit on Amount of Qualified Disaster Distributions. The aggregate amount of distributions received by an individual, which may be treated as qualified disaster distributions for any taxable year, shall not exceed the excess (if any) of—
       
      • $100,000, over
         
      • the aggregate amounts treated as qualified disaster distributions received by such individual for all prior taxable years.

        However, this limit is to be applied separately to distributions made with respect to each qualified disaster. Additionally, a plan will not be treated as violating this limit unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000.
    • Exemption from the 10% Early Distribution Penalty. A qualified disaster distribution is exempt from the 10% early distribution penalty.
       
    • Repayment of Qualified Disaster Distributions. At any time during the 3-year period starting the day after receipt of a qualified disaster distribution, an individual who received such a distribution may make 1 or more contributions, in total not exceeding the amount of such distribution, to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16).
       
    • Income Inclusion Over Three Year Period. Unless the individual elects otherwise, a qualified disaster distribution will be included in gross income ratably over the 3-year period beginning with the year of the distribution.
       
    • Exemption from Rollover Notice and Withholding Rules. For purposes of Code provisions on direct rollovers, rollover notices, and tax withholding, qualified disaster distributions shall not be treated as eligible rollover distributions.
  • Recontribution of Qualified Distribution for Home Purchases. The Act permits individuals who receive "qualified distributions" to make 1 or more repayment contributions during the "applicable period," in total not to exceed the amount of the qualified distribution, to an eligible retirement plan (as defined in Code Section 402(c)(8)(B)) of which the individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Sections 402(c), 403(a)(4), 403(b)(8), or 408(d)(3).
     
    • Qualified Distribution. A "qualified distribution" is:
       
      • A hardship distribution from a 401(k) or 403(b) plan, or a first-time home purchase under Code Section 72(t)(2)(F) (note that this does not include unforeseeable emergency distributions from a 457(b) plan);
         
      • Which was to be used to purchase or construct a principal residence in a qualified disaster area, but which was not so used on account of the qualified disaster with respect to such area; and
         
      • Which was received during the period beginning on the date which is 180 days before the first day of the incident period of such qualified disaster and ending on the date which is 30 days after the last day of such incident period.
    • Applicable Period. The "applicable period" for purposes of making the repayment contributions means, in the case of a principal residence in a qualified disaster area with respect to any qualified disaster, the period beginning on the first day of the incident period of such qualified disaster and ending on the  date which is 180 days after the date of the enactment of this Act [approximately June 25, 2021]
  • Increased Loan Limits and Delayed Repayments for Certain Disaster-Related Loans.
     
    • Increased Loan Limit. The Act increases the loan limit for any loans from a qualified employer plan (as defined under Code Section 72(p)(4)) to a qualified individual made during the 180-day period beginning on the date of the enactment of the Act (approximately June 25, 2021). The loan limit is increased by (1) increasing the dollar limit from $50,000 to $100,000, and (2) increasing from one-half to the full present value of the employee's nonforfeitable accrued benefit.
       
    • Delayed Repayment. For a qualified individual (with respect to any qualified disaster) with an outstanding loan (on or after the first day of the incident period of such qualified disaster) from a qualified employer plan (as defined in section 72(p)(4) of the Internal Revenue Code of 1986)—
       
      • If the due date for any repayment with respect to such loan occurs during the period beginning on the first day of the incident period of such qualified disaster and ending on the date which is 180 days after the last day of such incident period, such due date shall be delayed for 1 year (or, if later, until the date which is 180 days after the date of the enactment of this Act [approximately June 25, 2021],
         
      • Any subsequent repayments with respect to any such loan will be adjusted to reflect the delayed repayment date and any interest accruing during such delay, and
         
      • In determining the 5-year period and the term of a loan, the delayed payment period shall be disregarded.
    • Qualified Individual. A qualified individual is an individual
      • Whose principal place of abode at any time during the incident period of any qualified disaster is located in the qualified disaster area with respect to such qualified disaster, and
      • Who has sustained an economic loss by reason of such qualified disaster.
  • Plan Amendment Deadline. If a plan sponsor wants to amend its retirement plan to take advantage of changes permitted under the Act, then the plan must be amended for such changes by the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans). For a calendar year plan, the deadline would be December 31, 2022 (December 31, 2024, for governmental plans). For a plan with a July 1 fiscal year plan, the deadline would be June 30, 2023 (June 30, 2025, for governmental plans).
Notes on Qualified Disaster Relief Provisions: While the Act has a number of specific definitions, it does not define what constitutes an "economic loss" for purposes of the qualified disaster relief retirement plan provisions. Further, unlike the CARES Act, the Act does not expressly permit a Plan to rely on an individual's self-certification of eligibility. 
 
  • 402(f) Transfers. Code Section 420 permits "qualified future transfers" from a pension plan to a retiree health account if certain requirements are met, including that the pension plan meets certain funding standards. In light of the significant market volatility issues in the past year, the Act allows for a one-time elect to end an existing transfer period if certain requirements are met.

    Note: For most governmental plans (which typically use qualified transfers, rather than qualified future transfers), this provision will not be applicable.
     
  • In-Service Distribution Age for Certain Employees in Multiemployer Plans. For certain employees in the building and construction industry participating in a multiemployer plan, the in-service distribution age under Code Section 401(a)(36) is lowered from age 59 ½ to age 55.

    Note: This provision will not impact governmental plans.
     
  • Temporary Partial Plan Termination Rule. The Act provides temporary relief under Code Section 411(d)(3) with regard to the triggering of a partial plan termination, providing that a plan will not be treated as having 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 in 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.

    Note: While not directly applicable to governmental plans, this provision may be useful by analogy in the event a governmental plan with a significant loss of active participants seeks to avoid a partial plan termination.
     
This publication is intended for general informational purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstance.
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