On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the Act). In addition to expanding eligibility for the Paycheck Protection Program and the Employee Retention Tax Credit, the Act contains provisions directly impacting employee benefit plans. The over 2,000 page Act makes a number of changes aimed at easing the financial consequences and administrative burdens triggered by the COVID-19 pandemic and other disasters. We have summarized some of the key provisions applicable to retirement plans below See our article on provisions applicable to health and welfare plans here. Show Non-COVID-19 Related Disaster Relief for Retirement Plans In line with various disaster relief previously granted by Congress, the Act liberalizes tax-qualified retirement plan distribution rules for “qualified disasters” occurring from December 28, 2019, until the date of the Act. This applies if such disasters were declared by the President, under the Robert T. Strafford Disaster Relief and Emergency Assistance Act, during the period beginning January 1, 2020 and ending February 25, 2021, 60 days after the enactment of the Act. Specifically, the Act provides for qualified disaster distributions, special repayment provisions, and relaxed plan loan provisions.
Qualified disaster distributions are taxed ratably over a three-year period, though a participant can elect to be taxed immediately. The distribution may also be repaid within three years, with repayments treated as eligible rollover distributions transferred back to the plan on a tax-free basis.
While these changes are not mandatory, employers interested in implementing these provisions have until the last day of the first plan year beginning on or after January 1, 2022, to amend their plans (e.g., December 31, 2022, for calendar year plans). Governmental plan sponsors have two additional years to amend their plans (e.g., by December 31, 2024 for calendar year plans). Partial Plan Terminations Under Internal Revenue Code (Code) Section 411(d)(3), a qualified retirement plan that incurs a termination or partial termination must fully vest benefits for all affected participants. Under IRS guidance, a partial termination is generally deemed to have occurred if there is at least a 20% reduction in participating employees due to an employer-initiated severance (e.g., layoff, furloughs, etc.) that is not considered “routine” turnover. This has been a substantial area of concern for many employers implementing workforce reductions in response to the COVID-19 pandemic. The IRS previously released guidance providing that employees who are terminated, laid-off, or furloughed in 2020 due to COVID-19 do not have to be counted as terminated participants for partial termination purposes if they are rehired or called back before the end of 2020. The Act builds on this relief by further providing that no partial termination will be deemed to have occurred if the number of active participants in the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020. This new safe harbor from partial plan termination applies to any plan year that includes the period beginning on March 13, 2020 and ending on March 31, 2021. Money Purchase Pension Plan Distributions related to COVID-19 The CARES Act allowed for coronavirus-related distributions to “qualified individuals” from a retirement plan. See our articles on coronavirus-related distributions here and here. The Act retroactively amends the CARES Act to provide that in-service distributions made from money purchase pension plans during the period from March 27, 2020 through December 30, 2020, can qualify as coronavirus-related distributions. This change is effective as if it was initially included in the CARES Act. Please note that the Act does not extend the CARES Act provisions for coronavirus-related distributions or loans beyond 2020. What’s Next? Employers interested in utilizing the non-COVID-19 related disaster relief should coordinate with their service providers to ensure necessary updates to the plan’s administrative practices, including communicating the new relief to plan participants. Employers also need to adopt corresponding plan amendments prior to the applicable deadline. Sponsors of money purchase pension plans should also coordinate with service providers to confirm that in-service distributions made during 2020 were treated as coronavirus-related distributions if all other applicable requirements were satisfied. Additionally, employers in jeopardy of a partial plan termination due to layoffs or furloughs in 2020 or early 2021 should continue tracking new hires, re-hires, and plan participation rates so that you are ready to use the temporary relief if available. If you have any questions about this legal update, please reach out to the MMM Employee Benefits & Executive Compensation Team. Can I withdraw from my 401k in 2022 without penalty?You can avoid the early withdrawal penalty by waiting until at least age 59 1/2 to start taking distributions from your 401(k). Once you turn 59 1/2, you can withdraw any amount from your 401(k) without paying the 10% penalty.
What are the current rules for 401k withdrawals?The IRS allows penalty-free withdrawals from retirement accounts after age 59 ½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs.) There are some exceptions to these rules for 401k plans and other qualified plans.
Can I still withdraw from 401k without penalty CARES Act?Can I still withdraw from my 401k without penalty in 2021? You can still make a withdraw from your 401(k) plan in 2021; however, the penalty exemptions offered by the CARES Act ended on December 31, 2020.
Can I take a hardship withdrawal from my 401k in 2022?The CARES Act of 2020 allowed up to $100,000 in early hardship withdrawal distributions from 401(k) and IRA retirement savings plans without the usual 10% penalty. However, the IRS discontinued the early pandemic program on December 20, 2020, and it is no longer available in 2022.
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