By Pension and Benefits Editorial Staff
Legislation signed by President Trump on December 27, 2020 to continue funding the federal government and provide financial relief to address the continuing economic dislocations of the COVID-19 pandemic (Consolidated Appropriations Act, 2021; P.L. 116-260) ) would also: (1) temporarily restrict application of the partial plan termination rules; (2) lower the threshold age for distributions under a phased retirement program to employees in the building and construction industry; (3) allow in-service coronavirus-related distributions from money purchase pension plans; (4) authorize limited exceptions from the early withdrawal penalties and loan rules for qualified disaster distributions; and(5) provide relief from the funding requirements applicable to pension plans transferring excess assets to retiree health or life insurance accounts.
Restriction on partial plan termination. Plan participants are entitled to full vesting on the termination and partial termination of the plan. However, Code Sec. 411(d)(3) does not define partial termination. Whether or not a partial termination occurs is, under the governing regulations, to be determined on the basis of all of the facts and circumstances of a particular case. For example, a partial termination may occur when a group of employees is excluded from coverage through amendment or discharge, when benefits or employer contributions are reduced, or when eligibility or vesting requirements are made less liberal. In addition, plan amendments that adversely affect the rights of employees to vest in benefits under the plan may also be determinative.
A partial termination of plan has been found to occur if a “significant percentage” of employees is excluded from participation in the plan either by reason of plan amendment or by discharge from employment (i.e., “vertical plan termination”). Significant percentages viewed as triggering partial plan terminations have varied from 20 percent to 80 percent. However, the IRS typically views a partial plan termination as occurring if more than 20 percent of total plan participants have been laid off in a year.
Temporary restriction on partial plan terminations. The Appropriations Act would temporarily restrict application of the partial plan termination rules. Specifically, under the temporary relief, a plan will not be treated as experiencing a partial termination under Code Sec. 411(d)(3) during any plan year which includes the period beginning March 13, 2020 and ending March 31, 2021, if the number of active participants covered by 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 (Appropriations Act, 2021, Division EE, Title II, Act Sec. 209).
Reduced threshold age for distributions to employees in building and construction industry under phased retirement programs. A pension plan will not fail to meet the qualification requirements of Code Sec. 401 solely because it provides for a distribution to an employee who has attained age 59 1/2 and who is not separated from employment at the time of the distribution but instead is in a phased retirement program (Code Sec. 401(a)(36), as amended by Division M, Act Sec. 104(a) of the Bipartisan Miners Act, enacted as part of the Further Consolidated Appropriations Act, 2020, (P.L. 116-94). However, a qualified plan is not required to provide for in-service distributions. Thus, if a plan does not provide for in-service distributions, or provides for in-service distributions at an age that is later than age 59 1/2, the plan is not required to be amended to permit in-service distributions to commence at age 59 1/2 (IRS Notice 2020-68). For example, the IRS confirms that a qualified plan that provides for in-service distributions commencing at age 62 is not required to be amended to provide for in-service distributions commencing at age 59 1/2.
Lower threshold age for employees in building and construction industry. Under the Appropriations Act, the threshold age for distributions to employees in a multiemployer plan under ERISA Sec. 4203(b)(1)(b)(i) has been reduced to 55, effective for individuals who were participants in the plan before April 30, 2013 (Code Sec. 401(a)(36)(B), added by Appropriations Act, 2021, Title II, Act Sec. 208). The amendment applies to distributions made before, on, or after the December 27, 2020 date of enactment of the Consolidated Appropriations Act, 2021. However, in order for the provision to apply: (1) the trust must have been in existence on January 1, 1970; and (2) the plan, before December 31, 2011, at a time when the plan authorized distributions to an employee who has attained age 55 and who is not separated from employment at the time of the distribution, received at least one written declaration from the IRS of the plan’s qualified status. Thus, the Act effectively allows employees who have been receiving such benefits to continue working.
Coronavirus-related distributions extended to money purchase plans. Defined contribution plans and IRAs were authorized, in 2020, to make “coronavirus-related distributions” of up to $100,000 to “qualified individuals” affected by COVID-19 or the virus causing it, without being subject to penalty tax under Code Sec. 72(t) (Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136), Act Sec. 2202(a)). A coronavirus-related distribution was defined as any distribution from a defined contribution plan (401(k), 403(b), or 457(b) plan) or IRA made on or after January 1, 2020 and before December 31, 2020 to a qualified individual.
The relief did not extend to distributions from defined benefit plans. However, the relief also did not expressly cover money purchase pension plans, which are essentially defined contribution plans, although funding rules apply, and contributions are limited to a fixed employer contribution. In addition, unlike DC plans, money purchase plans do not allow for in-service withdrawals, including hardship distributions.
The Appropriations Act, retroactively effective to the March 27, 2020 effective date of the CARES Act, authorizes in-service coronavirus-related distributions from money purchase pension plans (Appropriations Act, 2021, Division N, Act Sec. 280, amending CARES Act Sec. 2206(a)(6)(B)). However, note that, under the CARES Act, coronavirus-related distributions needed to be made before December 31, 2020.
Qualified disaster distributions. A 10% additional tax is imposed on an individual under age 59 ½ who receives a distribution from a plan qualified under Code Sec. 401(a) or from an individual retirement arrangement. The tax applies to the amount of the distribution includible in income. The penalty tax is imposed in addition to the regular income tax that a recipient pays on the distribution.
However, designated distributions have been exempted from the early distribution penalty. Among these distributions are payments made in respond to qualified disasters (e.g., hurricanes and wildfires), as well as distributions made to individuals affected by COVID-19 or the virus causing it. The relief typically waives the penalty for distributions up to a specified level (e.g., $100,000), allows for the distributions to be recontributed into a plan or IRA, spreads the income tax assessed on the distribution ratably over a three-period, eases the restrictions on plan loans (amount of loan and repayment period), and allows for the recontribution of hardship withdrawals for home purchases precluded by qualified disasters. The relief is generally authorized by Congress in response to a specific event.
Qualified disaster distributions. The Consolidated Appropriations Act authorizes relief for qualified disasters declared during the period beginning January 1, 2020 and ending 60 days after the December 27, 2020 date of enactment of the Act (Appropriations Act, 2021, Division EE, Title III, Sec. 302). Similar to the relief authorized under the Tax Cuts and Jobs Act of 2017, the Further Consolidated Appropriations Act of 2020, and the Coronavirus Aid, Relief, and Economic Security Act, the new law allows for: penalty-free withdrawals of $100,000 (less the aggregate amount treated as qualified disaster distribution received by the individual for all prior tax years), with respect to each qualified disaster; allows individuals to repay the amount of the distribution to an eligible retirement plan at any time during the 3-year period beginning on the day after the date on which the distribution was received (Appropriations Act, 2021, Division EE, Title III, Act Sec. 302(a)(2)-(4)).
Qualified disaster area A qualified disaster distribution would include any distribution from an eligible retirement plan made on or after the first day of the incident period of a qualified disaster and before the date which is 180 days after the December 27, 2020 date of enactment of the Act. In addition, the principal abode of the individual to whom the distribution is made must be located in the designated qualified disaster area and must have sustained an economic loss by reason of the disaster.
Note: A qualified disaster area will not include any area with respect to which a major disaster has been declared only because of COVID-19 (Appropriations Act, 2021, Division EE, Title III, Act Sec. 301(1)(B)).
Inclusion in income over 3-year period. Any amount of a qualified disaster distribution that must be included in employee’s gross income for the tax year will be included ratably over a 3-year tax period, beginning with the tax year. Alternatively, an employee may retain the option of being subject to tax on the amount of the distribution for year it was received (Appropriations Act, 2021, Title III, Act Sec. 302(a)(5)).
Note, with respect to coronavirus-related distributions, the IRS explained that an election with respect to the tax treatment of the distribution may not be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of the distribution (IRS Notice 2020-50 ). All coronavirus-related distributions received in a taxable year must be treated consistently. Thus, all distributions must be included in income over a 3-year period or all distributions must be included in income in the current year. Presumably, the IRS would apply the same reasoning to the newly authorized qualified distributions.
Recontribution of hardship withdrawals for home purchases. Individuals who have taken hardship withdrawals in order to purchase a home have faced problematic tax issues when they have been precluded from actually purchasing or constructing the home because of disasters. Legislation enacted in 2019 provided relief for taxpayers who took a hardship distribution from an eligible retirement plan in order to purchase or construct a principal residence in a qualified disaster area that was not used because of the disaster. Such taxpayers were authorized to recontribute the amount of the distribution back to the plan without adverse tax consequences (Division Q, Act Sec. 202(b) of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94).
Under the new relief, individuals who received a qualified distribution (defined as a hardship withdrawal) during a designated “applicable period” may make one or more contributions, not to exceed the amount of the qualified distribution, to an eligible retirement plan of which the individual is a beneficiary and to which a rollover contribution may be made (Appropriations Act, 2021, Title III, Act Sec. 302(b)). The hardship withdrawal must have been taken to purchase or construct a principal residence in a qualified disaster area but was not be used because of an intervening qualified disaster. In addition, the hardship withdrawal must have been received during the period beginning 180 days before the first day of the incident period of the qualified disaster and ending on the date 30 days after the last day of the incident period.
Applicable period. The designated “applicable period” during which a qualified distribution may be recontributed to the plan would be the period, beginning on the first day of the incident period of the qualified disaster and ending on the date which is 180 days after the date of the December 27, 2020 date of enactment of the Appropriations Act.
Loans. Similar to the relief authorized under the CARES Act, the Appropriations Act allows plan participants, during the 180-day period beginning on the date of enactment of the Act, to obtain a loan of up to the lesser of: (1) $100,000 (reduced by the highest outstanding loan balance during the preceding 12 months, or (2) the present value of the employee’s nonforfeitable accrued benefit (i.e., 100% of vested account balance) (Appropriations Act, 2021, Division EE, Title III, Act Sec. 302(c)).
Delayed date of repayment. In addition, the Act authorizes a one-year delay for the repayment of loans made to qualified individuals that were outstanding on or after the first day of the incident period of a qualified disaster. Pursuant to the relief, the due date for any loan repayment occurring during the period beginning on the first day of the incident period of the qualified disaster and ending on the date which is 180 days after the last day of such incident period, may be delayed for one year (or, if later, until the date which is 180 days after the date of enactment of the Act).
Adjustment of repayments. As with the prior relief, any subsequent repayments with respect to the loan should be appropriately adjusted to reflect the delayed repayment date and any interest accruing during such delay. However, in determining the maximum 5-year loan repayment period, the delayed payment relief should be disregarded.
Qualified individuals must have sustained economic loss. The relief is limited to qualified individuals whose principal place of abode at any time during the incident period was located in the designated qualified disaster area. In addition, the qualified individual must have sustained an economic loss as a result of the qualified disaster.
Qualified transfers of excess pension assets to retiree health accounts. Employers are authorized under Code Sec. 420 to transfer excess pension plan assets to a retiree health benefits account or a retiree life insurance account, during a specified 10-year transfer period, beginning with the tax year in the transfer is made. However, such “qualified future transfers” may only be made to the extent that the plan assets exceed the greater of the plan’s accrued liability or 120 percent of the plan’s current liability.
Maintain funded status throughout transfer period. Following the transfer of excess pension assets to fund future retiree or collectively bargained health benefits, an employer is required to maintain the pension plan’s funded status at the minimum level during the transfer period. Specifically, if, on the valuation date of any plan year in the transfer period, the retirement plan’s liabilities exceed the value of its assets, the employer maintaining the plan must either: (1) make an additional contribution to the pension plan in an amount that will reduce the excess of liabilities over assets to zero, or (2) transfer that same amount from the health benefits account or life insurance account back to the pension retirement account.
Election to terminate transfer period. The Appropriations Act, in an implicit acknowledgement of the effects of the pandemic on the funded status of pension plans, authorizes employers who have made qualified future transfer to make a one-time election, no later than December 31, 2021, to terminate the existing transfer period, effective for any tax year specified by the employer that begins after the date of such election (Code Sec. 420(f)(7), as added by Appropriations Act, 2021, Div. N, Sec, 285). The election, however, is conditioned on several requirements.
Return of transferred amounts to plan. Any assets transferred to a health benefits account, or an applicable life insurance account, in a qualified future transfer and (any income allocable thereto) which are not used as of the effective date of the election to terminate the transfer period must be transferred back to the transferor (i.e., pension plan) plan within a reasonable period of time. The transfer will be treated as a reversion (but will not be subject to the excise tax under Code Sec. 4980(d)), unless within the 5-year period beginning after the original transfer period, an equivalent amount is transferred back to the health benefits account or the life insurance account.
Minimum cost requirements continue to apply. The minimum cost requirements of Code Sec. 420(c)(3) continue to apply to the qualified future transfer, irrespective of an election to terminate the transfer period (Code Sec. 420(f)(7)(C) as added by Appropriations Act, 2021, Div. N, Sec, 285).
Maintain funded status during original transfer period. The employer, following the election, must continue to maintain the funded status of the plan at 100 percent (rather than 120 percent) during the original transfer period. (Code Sec. 420(f)(7)(D) as added by Appropriations Act, 2021, Div. N, Sec, 285).
Maintenance of funded status after original transfer period. In the event a plan has excess assets, as of the valuation date of the plan year in the last year of the original transfer period, the plan must maintain funded status for five years, according to a range of applicable funding percentages, ranging from 104 percent in the first year to 120 percent in the fifth year (Code Sec. 420(f)(7)(E) as added by Appropriations Act, 2021, Div. N, Sec, 285). The continued maintenance period would no longer apply if the plan, within the first 4 years after the original transfer period, was 120 percent funded.
Source: P.L. 116-260.
Interested in submitting an article?
Submit your information to us today!Learn More