In response to the ongoing need of Americans as the Coronavirus continues, Congress passed the Consolidated Appropriations Act, 2021 (the “CAA”). The Act was signed by the President December 27, 2020. While its primary purpose was to provide funds for the federal government, it also contains relief for employer-sponsored plans.
Defined Contribution plans
Coronavirus-related distribution (“CRD”) expansion – under the CARES Act, money purchase plans were not included in the relief for these distributions. The CAA amended the CARES Act to include money purchase pension plans as plans that are allowed to permit eligible participants to take CRDs.
Disaster Relief: Distributions and Loans – this provides relief to those who have experienced an economic loss because of a “qualified disaster” and whose principal residence is located in a presidentially declared disaster area. This does not apply to disaster declarations that are made only because of COVID-19. The requirements are:
- Individuals may receive up to $100,000 for disasters beginning December 28, 2019 through December 27, 2020. Distributions must be taken within 180 days of December 27, 2020. The dollar limit applies separately to each disaster.
Disaster distributions are:
- Not subject to 10% early withdrawal penalty
- Taxed equally over 3 years
- May be repaid within 3 years of distribution
- Distributions may be made from IRAs and employer-sponsored retirement plans. Distributions are not subject to the mandatory 20% withholding.
Individuals who meet the following requirements may repay hardship distributions or first-time homebuyer distributions taken to purchase or construct a principal residence:
- Individual received distribution 180 days before disaster to 30 days after disaster ended.
- The principal residence is in the disaster area.
- Individual did not use the distribution because of the disaster.
- Loans are allowed up to $100,000 or 100% of the participant’s vested account balance, whichever is less. This amount is available to those who take a loan within 180 days following December 27, 2020.
- Loan repayments may generally be delayed for a year (or, if later, 180 days after December 27, 2020). However, interest will accrue during this time. This extended deadline applies to loan repayments due within the period beginning on the first day of the disaster and ending 180 days following December 27, 2020.
Similar to CRDs, the disaster-related provisions are also optional.
Partial plan termination relief – normally, a reduction in workforce of more than 20% would constitute a partial plan termination and result in 100% vesting for affected workers. The CAA changes the rules to provide that if the active participant count as of March 31, 2021 is at least 80% of the active participant count on March 13, 2020, there will not be a partial plan termination.
Health and Welfare plans
The following provisions apply to health and welfare plans:
Flexible Spending Accounts
Much needed additional flexibility and relief for both healthcare and dependent care flexible spending arrangements (“FSAs”) has been added:
- Any unused funds from a plan year ending in 2020 or 2021 may be carried over and used at any time in the next plan year. The rules for these carryovers are similar to the carryover rules that already apply to health FSAs but without the customary dollar limit on carryovers .
- Similarly, FSAs with grace periods may extend those grace periods to up to 12 months. Normally, grace periods have a maximum 2 ½-month period.
- If an employee terminates participation during calendar year 2020 or 2021, FSAs may also reimburse for otherwise eligible expenses incurred through the end of that year (plus any grace period).
- For dependent care FSAs, if a dependent became too old to have their care expenses reimbursed (age 13) due to the pandemic, any unused funds may be used for the remainder of the plan year in which they aged out (if the regular enrollment period was before January 31, 2020). If any funds remain unused at that time, they can be used until the child turns 14.
- For plan years ending in 2021, employees may make any prospective changes in their FSA contributions without regard to a change in status.
- For health FSAs, the grace period and carryover options can have different effects on an employee’s ability to contribute to a health savings account. This should be carefully considered.
These provisions are optional, not required. Plan sponsors who choose to implement these provisions must operationally comply with them until the plan can be amended to reflect the change.
If you have any questions regarding the CAA and how it may affect your plan, please contact a Nyhart consultant for more information.