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Congress Provides Additional Retirement Plan ReliefThe late-December COVID-19 relief bill (the Consolidated Appropriations Act, 2021 or the “Appropriations Act”) included various retirement plan-related provisions among its 5,500+ pages. A closer look at those provisions reveals that the most significant relief applies to organizations that might otherwise experience a partial plan termination. This month’s article takes a deep dive into that relief and addresses other important nuggets for plan sponsors to consume, including some student loan repayment relief applicable outside of the retirement plan context.

Partial Plan Termination Relief. The Tax Code’s “partial plan termination” rules have been on the books for years. Yet many plan sponsors heard that term for the first time in 2020 because of the rapid pace of layoffs and terminations brought about by the COVID-19 pandemic. Although facts and circumstances dictate whether a partial plan termination has occurred, the IRS has established that a 20% or greater turnover rate during the applicable period (typically a plan year) establishes a rebuttable presumption of a partial plan termination. (The IRS has provided more interpretive background in this issue snapshot and these FAQs.)

The key aspect of a partial plan termination is that it results in all affected participants becoming fully and immediately vested. This can create a financial surprise for organizations that routinely count on forfeitures (which arise when nonvested or partially vested participants terminate employment) to fund additional employer contributions. For those organizations already facing financial stress as a result of the pandemic, a partial plan termination and the resulting full vesting could be particularly troublesome.

Fortunately, the Appropriations Act provides relief for plan sponsors that might have faced a partial plan termination as a result of big workforce reductions in 2020 and early 2021. In short, the Appropriations Act provides that a plan is not treated as having a partial termination during any plan year that 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% of the number of active participants covered by the plan on March 13, 2020.” In essence, this relief allows organizations until the end of March to rehire terminated employees before determining whether a partial plan termination occurred.

Expansion of Coronavirus-Related Distribution. The Appropriations Act did not extend the time for participants to receive the “coronavirus-related distribution” (CRD) made available by the CARES Act. However, it retroactively expanded the availability of the CRD to money purchase pension plan assets for the period of time running from the passage of the CARES Act through December 30, 2020.

Expansion of CARES Act-Style Distributions and Loans to Other Disasters. The CARES Act included four key distribution and loan provisions: (1) the CRD; (2) increasing the loan ceiling to $100,000; (3) permitting the deferral of plan loan repayments; and (4) no required minimum distributions for 2020. The Appropriations Act builds upon the first three of those provisions by providing for similar distribution and loan relief in the case of a “qualified disaster”, which includes a major disaster declared by the President between January 1, 2020, and February 25, 2021 (relating to a disaster incident period beginning on or after December 28, 2019, and ending on or before December 27, 2020). A list of qualified disasters is available on FEMA’s websiteMost importantly, a qualified disaster does not include an area with respect to which the major disaster was declared only by reason of COVID-19.

Extension of Student Loan Payment Relief. In closing, we want to draw attention to an important Appropriations Act provision that does not directly relate to retirement plans, but does relate to questions many plan sponsors have posed in the retirement plan context. The CARES Act permitted an employer to make tax-free student loan repayments (up to $5,250) on an employee’s behalf in 2020. The Appropriations Act extends that tax-free relief – up to $5,250 annually – through the end of 2025. For employers that have been looking for a tax-efficient way to help employees with student loan debt, this is a significant development. We look forward to the opportunity to discuss how employers might take advantage of this flexibility in building attractive compensation packages for current or potential employees.

Matthew Eickman
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