It’s hard to find among the nearly 5,600 pages of text, but there is some important retirement plan relief in the $900 billion COVID stimulus package.
Perhaps the most significant element is a “temporary rule preventing partial plan termination.” The provision, for which the American Retirement Association has been a strong and leading advocate, reads:
A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on 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.
In other words, this will allow sponsors of defined contribution retirement plans to avoid the partial plan termination rules if the active participant count as of March 2021 is 80% of the active participant count at the time the national emergency was declared.
Culminating several months of disagreement between House Democrat leaders and the Trump administration, the relief package, as expected, is paired with a $1.4 trillion bill—the Consolidated Appropriations Act, 2021—to fund the federal government through the remainder of fiscal year 2021, which ends Sept. 30, 2021.
Among other things, the legislation, which was approved by the House and Senate late Dec. 21 by overwhelming majorities (and is expected to be signed by President Trump), also includes an extension of retirement-based disaster relief, CARES Act clarifications for money purchase pension plans, another round of Paycheck Protection Program (PPP) loans, and allowing businesses to deduct expenses associated with their forgiven PPP loans.
There is some good news for plan advisors and small businesses that took advantage of forgivable loans under the PPP only to subsequently be informed by the IRS that expenses paid with those loan proceeds would not be deductible.
The bill clarifies that expenses paid or incurred with proceeds from PPP loans that are forgiven under the CARES Act and are not included in gross income do not result in a denial of any deduction or basis of any asset for federal tax purposes. Additionally, the provision clarifies that the tax basis and other attributes of the borrower’s assets will not be reduced because of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for second draw PPP loans.
The bill extends the PPP through March 31, 2021, and allocates another $284 billion for first- and second-round forgivable loans, including dedicated set-asides for small businesses and lending through community-based lenders, as well as expanding PPP eligibility for 501(c)(6) nonprofits. The changes include:
- providing a second PPP forgivable loan for small businesses and non-profits with 300 or fewer employees that can demonstrate a loss of 25% of gross receipts in any quarter during 2020 when compared to the same quarter in 2019;
- allowing borrowers to elect a covered period ending at the point of the borrower’s choosing between 8 and 24 weeks after origination;
- expanding PPP eligibility for more critical access hospitals, local newspapers and TV and radio broadcasters, housing cooperatives, and 501(c)(6) nonprofits, including tourism promotion organizations and local chambers of commerce;
- allowing for small businesses in the restaurant and hospitality industries to receive larger awards of 3.5 times average total monthly payroll, rather than 2.5 times;
- adding PPE expenses, costs associated with outdoor dining, and supplier costs as eligible and forgivable expenses; and
- simplifying the application and forgiveness process for loans under $150,000.
Disaster Tax Relief
Like past disaster relief bills, the legislation includes a temporary extension for individuals to take a retirement plan distribution or loan if they reside in a presidentially declare disaster area. The extension is effective for 60 days after the date of enactment and applies to individuals residing in presidentially declared disaster areas (other than COVID-19) declared after Dec. 31, 2019.
As such, residents are permitted to take a distribution or loan of up to $100,000 from a retirement plan or IRA without penalty. Amounts withdrawn can be included in income ratably over a three-year period or may be recontributed to avoid tax and restore savings. Additionally, the repayment period is extended for one year for new and outstanding retirement plan loans.
However, note that the legislation does not appear to include an extension of Coronavirus-related distributions (CRDs) or loan provisions under the CARES Act.
Money Purchase Pension Plans
The legislation clarifies that money purchase pension plans are included in the types of retirement plans qualifying for the CARES Act provisions, allowing individuals to make penalty-free withdrawals from certain retirement plans for Coronavirus-related expenses and increasing the allowed limits on retirement plan loans. The provision applies retroactively as if included in Section 2202 of the CARES Act—which means, of course, that those checks will have to be cut before year-end.
Minimum Age for Distributions During Working Retirement
Certain construction and building trades workers age 55 or older who are receiving retirement benefits will be allowed to continue working and receiving such benefits.
Relief for Qualified Pension Plan Transfers for Covering Future Retiree Costs
In general, Code Section 420 permits “qualified future transfers,” under which up to 10 years of retiree health and life costs may be transferred from a company’s pension plan to a retiree health benefits account and/or a retiree life insurance account within the pension plan. Such transfers must meet several requirements, including that the plan must be 120% funded at the outset and throughout the transfer period. But applying the current-law requirements during the market volatility related to the pandemic has caused plans that have been historically far over 120% funded to fall below 120% and face a requirement to immediately restore these large market losses in order to get back to 120% funded.
Under the provision, employers will be permitted to make a one-time election during 2020 and 2021 to end any existing transfer period for any taxable year beginning after the date of election, provided:
- the maintenance of effort continues to apply as if the transfer period were not shortened;
- the employer ensures that the plan stays at least 100% funded throughout the original transfer period;
- the plan has funding targets for the first five years after the original transfer period; and
- all amounts left in the retiree benefits account at the end of the shortened transfer period must be returned to the pension plan (without application of an excise tax to such amounts).
Employee Retention Tax Credit
To help keep additional U.S. workers on payroll and more small businesses and nonprofits afloat, the bill extends and expands the refundable Employee Retention Tax Credit (ERTC) established under the CARES Act through June 30, 2021. In general, the ERTC covers the wages and benefits—including 401(k) contributions—of employees of businesses affected by COVID-19. The ERTC was originally viewed as an alternative relief mechanism for those businesses unable to take advantage of the PPP, but this legislation also modifies the ERTC for 2020 by allowing businesses with PPP loans to qualify.
Among other things, the provision:
- increases the credit rate from 50% to 70% of qualified wages;
- expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility;
- increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
- increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
- provides rules to allow new employers that were not in existence for all or part of 2019 to be able to claim the credit;
- clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance; and
- provides that employers that receive PPP loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds.
Exclusion for Certain Employer Payments of Student Loans
The bill extends through 2025 the allowance for employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee through 2025.
Other Items of Interest
- Extends the repayment period deferred payroll taxes through Dec. 31, 2021; penalties and interest on deferred unpaid tax liability will not begin to accrue until Jan. 1, 2022.
- Allows for unused Flexible Savings Account (FSA) funds to be rolled over from 2020 to 2021 and from 2021 to 2022, and allows employers to allow employees to make a prospective 2021 mid-year change in contribution amounts.
- Provides an additional one-time stimulus payment of $600 for individuals making up to $75,000 per year, and $1,200 per couple making up to $150,000 per year (including $600 per child).