2021 Retirement Plan Enhancements for COVID-19

January 7, 2021

The Consolidated Appropriations Act, 2021 (the Act) introduced changes and enhancements to retirement plans as a result of COVID-19. Below is a review of these updates.

In an effort to enable workers to access retirement funds, the minimum age at which a participant in a qualified pension plan can get an in-service distribution is decreased from age 62 to age 59 ½ and, in the case of certain multiemployer plan participants in the building and construction industry, age 55.

A qualified retirement plan can have a partial plan termination if the number of plan participants declines as a result of voluntary and involuntary separation from service for a significant number of employees, often as the result of a contracting business. Participants affected by a partial plan termination become fully vested in their plan benefits, sometimes requiring the plan to pay additional retirement benefits. It is often difficult to determine if and when a partial plan termination occurs. The Act provides that a partial plan termination would not occur during any plan year that includes the March 31, 2020 to March 31, 2021 period if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the March 31, 2020 active participants. This will provide certainty for some plan sponsors that may be concerned that a plan termination has occurred.

Special rules often apply when an individual is affected by a major disaster, declared as such by the President. Under these rules, applicable to disasters declared on or after January 1, 2020 and before February 25, 2021 other than the COVID pandemic disaster, IRA and plan participants have the ability to get a plan distribution of up to $100,000 that can be included in income over a three-year period or repaid to the plan during that period. In addition, these amounts are not subject to the 10 percent additional tax on certain early distributions from retirement plans. Distributions must occur after an area has been declared a disaster area and before June 26, 2021, to someone whose principal place of residence is the disaster area. Plan participants who accessed retirement funds to purchase or construct a home in a qualified disaster area that were not so used due to the disaster can recontribute amounts to the plan before June 26, 2021, to avoid tax on the amounts.

Finally, maximum loan amounts for plan participants in qualified retirement plans are increased and loan payments can be extended for loans made before June 26, 2021, to individuals whose principal place of residence was in the qualified disaster area and who sustained an economic loss by reason of the disaster.

Cherry Bekaert’s tax professionals are ready to answer your questions and identify how your retirement plans are impacted by these changes.

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