Employee Fringe Benefit Changes
Student Loan Repayment
The Consolidated Appropriations Act, 2021 (the “Act”) extended the period during which an employer may pay a portion of a student’s loan under an educational assistance plan and not include such payment in the employee’s taxable income, provided the payment does not exceed $5,250. This student loan payment provision was scheduled to expire on December 31, 2020. The Act extended this elective provision to amounts paid prior to January 1, 2026. This is not a required change, but an employer may consider adopting the change as part of its educational assistance plan or it could be adopted as the employer’s educational assistance plan.
Business Meal Deduction Returns for a Limited Time
The Act restores the income tax deduction for business meals (i.e., food or beverage) provided by a restaurant that were paid or incurred after December 31, 2020, and before January 1, 2023. No other changes were made to the requirements applicable to what constitutes a business meal. This is clearly intended to support the recovery of restaurants, and it is clearly not intended to apply to a meal eaten at home while working from home.
Flexible Spending Account Relief
The Act permits an employer to adopt the specified relief for employees with funds in their flexible spending accounts as of December 31, 2020. The relief is provided for both types of flexible spending accounts and provides limited exceptions due to the unique circumstances in 2020 and the impact of COVID-19 on the ability of employees to utilize funds so set aside. Please see our client alert on the topic from December 29, 2020, for more detailed information regarding the alternatives available.
Changes Related to Qualified Retirement Plans
Qualified Disaster-Related Distributions From Retirement Plans
The Act defines qualified disasters as a major disaster that is declared by the President during the period beginning on January 1, 2020, and ending on February 25, 2021, but which must have occurred between December 28, 2019, and on or before December 27, 2020, and during the period specified by the Federal Emergency Management Agency (FEMA) as the period during which the disaster occurred (the “Incident Period”). This definition of a qualified disaster applies to qualified disaster distributions from qualified retirement plans, qualified disaster employee retention credits, and qualified disaster loans to participants from qualified retirement plans.
The Act added this provision to the exceptions to the additional tax on early distributions, as permitted qualified disaster distribution to permit qualified plans to elect whether to provide participants with the ability to access and use their retirement funds for certain select disasters that are declared to be a major disaster with respect to the individual’s principal place of abode. A major disaster for this purpose does not include any area with respect to which a major declared disaster was declared only because of a COVID-19 incident.
A qualified disaster distribution is a distribution from a qualified retirement plan that is made on or after the first day of the Incident Period (which must occur between December 28, 2019, and December 27, 2020) and after the date on which the area in which the principal place of abode of the individual participant requesting such distribution is declared by FEMA to be a federal disaster area, provided the distribution is made before June 25, 2021 (the date 180 days following enactment of the Act).
A qualified disaster distribution can be available, if the plan so provides, for each qualified disaster occurring to the participant’s principal place of abode, if the disaster occurred during the time frames above defining a Qualified Disaster and the Incident Period and provided the disaster occurred for the individual during the period specified by FEMA.
A qualified disaster will permit a qualified disaster distribution from a qualified retirement plan to an affected individual. The 10% additional tax penalty under Code section 72(t) will not apply to a qualified disaster distribution from a qualified retirement plan as long as the requirements are satisfied. Such a distribution must not exceed $100,000 less the aggregate amount of prior distributions treated as qualified disaster distributions to the individual participant in all prior years from all plans maintained by all employers in the controlled group. The requirement that this limit be calculated across all plans maintained in the controlled group of companies will require coordination of such distributions across different employers in a group and separate plans which will require coordination and may be an additional reason to consider retaining one record keeper for all plans in a controlled group, provided the record keeper is capable of managing such coordination between plans in the controlled group.
The qualified disaster distribution was added as an optional form of distribution, but was not added to the Internal Revenue Code as a new provision. Plans are not required to include it or to offer it to plan participants. However, if a plan chooses to offer qualified disaster distributions, the addition of the qualified disaster distribution option will not impact the plan’s tax qualification as long as the plan ensures the $100,000 limit on qualified disaster distributions to one individual from all plans in the controlled group. Thus, a plan that chooses to add this needs to be certain it can comply with the $100,000 limitation requirements to protect the plan’s tax qualified status and avoid issues with compliance.
The qualified disaster distribution is available from the time the disaster occurred and will not end until after the date which is 30 days after the date of the enactment of this Act on December 27, 2020.
Employees who take a qualified disaster distribution may repay the distribution to the plan within the three-year period beginning on or after the date which they received the funds. Such repayment may occur in more than one payment. The repayment can be made up to the amount of the distribution, but may not include any earnings. If the qualified disaster distribution is transferred to the participant’s individual retirement account, the individual may re-contribute funds to the plan from which the participant received the qualified disaster distribution directly from the individual retirement account holding the distribution.
To be a qualified disaster distribution, the distribution must occur on or after the date of the incident of a qualified disaster impacting the principal place of abode of the participant and prior to June 25, 2021. The income the individual recognizes from the qualified disaster distribution is automatically spread over three years beginning with the tax year of the distribution, unless the individual elects otherwise.
A qualified disaster distribution can be provided from a money purchase pension plan without violating the distribution rules applicable to such plan.
Qualified Disaster Loans to Retirement Plan Participants
From December 27, 2020, until June 25, 2021, a qualified retirement plan may make a Qualified Disaster Loan to a qualified individual in an amount of up to $100,000. The requirement that the loan not exceed one-half of the participant’s vested account balance is replaced, and the Qualified Disaster Loan is limited to the present value of the nonforfeitable accrued benefit of the employee under the plan. For an individual to be qualified to receive this higher loan amount, the individual’s principal place of abode at any time during the Incident Period for a Qualified Disaster must be located in the qualified disaster area and the individual must have suffered an economic loss from the Qualified Disaster.
Participant loan administration will need to obtain additional information from the participant to verify these requirements. Plan sponsors will want to verify that their plan’s record keeper will be gathering this additional information before implementing this new type of loan for disasters occurring in a limited time period.
Federal Income Tax Withholding Requirements and Qualified Disaster Distributions
The Act clarified that qualified disaster distributions are exempt from the normal federal income tax withholding requirements on eligible rollover distributions. A qualified disaster distribution also will not be treated as a distribution in violation of the requirements of section 401(a) of the Code.
Participant Loan Payment Delay for Qualified Disasters
The Act amends the requirements for participant loan repayments in the event of a qualified disaster for a qualified individual. If a qualified disaster occurs with respect to a qualified individual (a participant whose principal place of abode is in a qualified disaster area and who suffered an economic loss from the qualified disaster) with a loan that is outstanding during the Incident Period, such qualified individual’s loan payments are delayed automatically from the first day of the Incident Period to 180 days after the last day of the Incident Period of the qualified disaster.
These loan payment delays only apply to participants whose principal residence is located in the qualified disaster area at the time of the qualified disaster, and it only applies if the individual sustained an economic loss as the result of the qualified disaster. This means plan administrators and record keepers will not be able to know for whom loans must be delayed without obtaining information about the participant’s principal residence, the applicable qualified disaster, and details on the individual’s economic loss.
The periods of the delayed payment do not count toward the five-year loan maximum limit. Subsequent loan payments must be adjusted for the missed payments, and interest must be paid on any delay in the payment due dates. Plans generally must be amended to incorporate this loan payment delay provision by the last day of the plan year beginning on or after January 1, 2022, or for calendar year plans by December 31, 2022. Governmental plans have a separate deadline for the amendment.
Re-Contributions of Distributions for Qualified First-Time Homebuyers
While distributions have been permitted for qualified first time homebuyers without imposition of the additional 10% penalty tax, the Act adds a provision permitting re-contribution of amounts withdrawn for first time home purchases. This re-contribution must be completed during the “applicable period.” In the case of a principal residence in a qualified disaster area, the re-contribution of first-time homebuyer distributions must occur during the period beginning on the first day of the Incident Period and ending on June 25, 2021.
Coronavirus Distributions Can Be Paid by a Money Purchase Pension Plan
The Act also clarified that money purchase pension plans may also permit coronavirus distributions, and this was effective as if included in the CARES Act at enactment on March 27, 2020.
Partial Plan Termination May Be Avoided
Many employers have seen a decline in the number of employees and plan participants due to the impact of COVID-19, and significant reductions in plan participants have been found to constitute a partial termination of the retirement plan resulting in full vesting of the participants in the plan impacted by the reduction. During the period from March 13, 2020, until March 31, 2021, if the number of participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020, the plan will not suffer a partial termination. This provides a bright line test for this time period.
Overfunded Defined Benefit Plan Qualifying Transfers to a 401(h) Retiree Medical Account
Relief was provided for employers making transfers of excess assets from a defined benefit pension plan to the retiree medical account in the pension (a 401(h) account), permitting an employer to elect on or before December 31, 2021, to terminate the transfer period and stop the transfers for future tax years beginning in 2022. The provision makes changes addressing the tax consequences of such change and additional details.
Qualified Retirement Plan Distributions During Working Retirement
The special rule for distributions from a retirement plan on or after an employee attains the age of 59½ years was extended to permit distributions from certain multiemployer plans in certain circumstances for an employee in the building and construction industry. This change was effective on December 27, 2020.
Additional Insights on Consolidated Appropriations Act, 2021: