The Consolidated Appropriations Act, 2021 (Act), includes relief under tax-qualified ERISA retirement plans with respect to plan loans and withdrawals for certain natural disasters in 2020 through February 25, 2021.
- Disaster Relief. The
Act provides for disaster relief similar to the relief provided in
prior years to individuals impacted by natural disasters, such as
hurricanes and wildfires. The disaster relief applies to major
disasters (except any coronavirus-related disaster) declared during
the period beginning January 1, 2020, and ending on February 25,
2021, so long as the incident period applicable to the disaster
began on or after December 28, 2019. The disasters for which relief
is provided under the Act include the California wildfires
occurring in late summer and early fall of 2020 and a number of
recent hurricanes, such as Hurricanes Laura and Sally. Although
these types of disasters may also satisfy existing preconditions in
the plan for taking a hardship withdrawal, the Act allows new
flexibility for these distributions, such as increased dollar
amounts and repayment rights, that would not be available for
regular hardship withdrawals. To take advantage of the disaster
relief provided under the Act, an individual must maintain a
principal residence within the disaster area and must have
sustained an economic loss due to the disaster.
The disaster relief provided under the Act consists of the following:
- Disaster-Related Distributions. Qualified individuals may take a distribution from their retirement plan account that does not exceed $100,000 (less amounts previously taken for the same qualified disaster from plans maintained in the same controlled group) without incurring an early-distribution penalty. If taken, income taxes owed as a result of the distribution may be avoided by repayment of the distribution to a qualified retirement plan or Individual Retirement Account (IRA) within the three-year period beginning as of the date following the distribution date or, if the distribution is not repaid, may be spread over a period of three years.
- Recontribution of Hardship Withdrawals for Home Purchases. Qualified individuals who requested a hardship withdrawal for the purpose of purchasing or constructing a primary residence in a qualified disaster area, and who were unable to use such hardship withdrawal due to such disaster, may be permitted to recontribute the withdrawal under the Act.
- Loan Relief. For loans made to qualified individuals during the period beginning December 27, 2020, and ending June 25, 2021, the limit on the amount of a plan loan may be increased to the lesser of 100% (up from 50%) of the qualified individual's plan account balance or $100,000 (up from $50,000). In addition, loan repayments scheduled during the disaster period and up to 180 days following the end of the disaster period may be delayed for one year (or until June 25, 2021, if later). In the event loan repayments are suspended under the Act, the overall term of the loan may also be extended in proportion to the loan repayment suspension.
To the extent a plan sponsor implements these changes, plan amendments will need to be put in place on or before the last day of the first plan year beginning on or after January 1, 2022, or such later date as the Secretary of the Treasury may prescribe.
This article is part of our "Unpacking the Employee Benefits Provisions in the Consolidated Appropriations Act, 2021" series. Click here for other CAA-related articles. Please contact a member of the Winston & Strawn Employee Benefits and Executive Compensation Practice Group or your Winston relationship attorney for further information.
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