Tuesday, January 19, 2021
The budget and COVID aid package for the end of the year (the “Budget Bill”), which came into force on December 27, 2020, contains several changes that have an impact on retirement provision. Most changes are temporary, but a change that affects defined benefit plans is permanent.
Avoiding partial plan terminations
As explained in ours previous newsletterCurrent tax regulations stipulate that qualifying retirement plans (such as 401 (k) or retirement plans) are partially canceled if the number of active plan participants is significantly reduced during a period of 12 months (usually an employer). initiated termination by at least 20% of the active participants in the plan during a single plan year). If a partial termination of the plan occurs, the plan must transfer in full to any plan participant who voluntarily or involuntarily terminated the employment relationship during this 12 month period.
The Budget Bill provides temporary relief from the application of the partial termination rules for plan years 2020 and 2021 to a qualifying or 403 (b) retirement plan if the number of active participants in the plan on March 31, 2021 is at least 80% of the active participants in the plan is the number of participants on March 13, 2020.
As a result of this relief, companies that have reduced their headcount since March 13, 2020 should wait until March 31, 2021 before determining whether their pension plan has been partially canceled for the plan year 2020.
Expansion of the COVID-19 distribution regulations to include pension plans with cash purchases
As explained in ours previous newsletterThe CARES Act allowed Plans 401 (k) and 403 (b) to grant plan participants temporary access to their pension funds in 2020 through extended distribution rights for certain individuals affected by the COVID-19 pandemic.
The Budget Bill extends these operating distribution rights to buy-in pension plans, which are retrospectively as effective as if buy-in pension plans were originally included in the CARES Act.
According to the CARES Act, plan sponsors who wish to implement these rules for their cash purchase pension plans must change their plans no later than the end of the plan year from 2022.
Non-COVID-19 Eligible Disaster Distributions and Loans
The Budget Bill uses rules similar to the CARES Extended Distribution and Loan Provisions for participants in “Qualified Disasters” who participate in 401 (k) and 403 (b) Pension Plans.
A “Qualified Disaster” means a disaster declared by the President in 2020 or by February 25, 2021 (60 days after the Budget Act came into force), with the exception of a disaster that was solely due to the COVID-19 pandemic. A qualified disaster participant is a plan participant whose primary residence is in the qualified disaster area and who has suffered an economic loss as a result of the qualified disaster. A qualified Disaster Participant can use the following rules:
Until June 24, 2021 (which is the end of the 180 day period after the Budget Act came into effect), a qualified Disaster Participant may make a distribution of up to $ 100,000 (reduced by the amount of any previously qualified disaster distributions in their name) ), even if a distribution would not otherwise be available under the plan. The dollar limit is set for all plans that are managed in the controlled group of companies to which the plan sponsor belongs.
This distribution is not subject to the additional 10% tax under Section 72
Until June 24, 2021, a qualified Disaster Participant may borrow up to $ 100,000 or 100% of the participant’s balance. In addition, a Qualified Disaster Participant may suspend all loan payments due during the period from the Qualified Disaster Date to 180 days from the End of the Qualified Disaster for up to 1 year (or later by June 24, 2021) , and the 5 year term of the loan can be delayed to accommodate this repayment deadline.
In addition, Participants who made a “Qualified Distribution” from a retirement plan to purchase or build primary residence in a Qualified Disaster Area but who did not use the money for that purpose due to the Qualified Disaster may repay some or all of that distribution on each Plan , for which the participant could choose a rollover until June 24, 2021. A “Qualified Distribution” is an amount received during the period beginning 180 days prior to the first day of the Qualifying Disaster Period and 30 days after the last day of that period.
All of these changes are optional. A plan sponsor wishing to implement one or more of these changes can start administering immediately, but must change their plan no later than the end of the plan year from 2022 (or, for government plans, the plan year from 2024). unless the Internal Revenue Service provides a later deadline for future guidance.
Reduced age for in-service retirement plan distributions
Defined benefit pension plans are now allowed to provide in-house distributions for plan participants aged 59½ and over. Previously, part-time distributions from pension plans were generally only permitted from the age of 62. This change is effective immediately.
This change now aligns the operating distributions for retirement plans with those for 401 (k) and 403 (b) plans. This change is optional but could help employers retain older workers who might otherwise end their employment in order to gain access to their retirement benefits. In addition, it can help employers who have added lump-sum distributions to their retirement plans to reduce their PBCG premium obligation by enabling active participants to receive all of their retirement benefits at a lump sum while at work.
Because this is an optional change and there is no specific change deadline in the draft budget, a plan sponsor wishing to implement this change must make changes to their pension plan by the end of the plan year in which the change takes effect.