CAA Benefits alert: disaster relief unrelated to the coronavirus for loans and withdrawals from plans in the 2021 consolidated finance law
The Consolidated Appropriations Act, 2021 (Act), includes relief under qualifying pension plans with respect to plan loans and withdrawals for certain natural disasters from 2020 through February 25, 2021.
- Disaster relief. The law provides for disaster relief similar to relief provided in previous years to people affected by natural disasters, such as hurricanes and forest fires. Disaster relief applies to major disasters (excluding any coronavirus-related disaster) declared during the period beginning January 1, 2020 and ending February 25, 2021, as long as the incident period applicable to the disaster began on or after December 28, 2019. Disasters for which relief is provided under the law include the California wildfires that occur in late summer and early fall 2020 and a number of recent hurricanes, such as Hurricanes Laura and Sally. While these types of catastrophes may also meet the pre-conditions existing in the plan to make a hardship withdrawal, the law allows new flexibility for such distributions, such as dollar amounts and increased redemption rights, which do not. would not be available for withdrawals in the event of regular difficulties. To enjoy statutory disaster relief, a person must maintain a primary residence in the disaster area and must have suffered economic loss as a result of the disaster. Disaster relief provided under the Act consists of the following:
- Disaster-related distributions. Eligible individuals may withdraw from their pension plan account a distribution that does not exceed $ 100,000 (less amounts previously withdrawn for the same eligible loss from plans maintained in the same controlled group) without incurring an early distribution penalty. . If withheld, income taxes due as a result of the distribution can be avoided by repaying the distribution to a qualifying pension plan or to an Individual Retirement Account (IRA) during the three-year period beginning. on the date following the distribution date or, if the distribution is not reimbursed, may be spread over a period of three years.
- Recontribution of hardship withdrawals for home purchases. Qualified persons who requested a hardship withdrawal for the purpose of purchasing or building a primary residence in a qualified disaster area, and who were unable to use this hardship withdrawal due to such a disaster, may be authorized to contribute to the withdrawal under the Act.
- Loan relief. For loans made to eligible persons 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% (instead of 50%) of the eligible person’s amount. plan account balance or $ 100,000 (instead of $ 50,000). Additionally, loan repayments scheduled during the disaster period and up to 180 days after the end of the disaster period may be delayed for up to one year (or until June 25, 2021, if later). In the event that loan repayments are suspended under the law, the overall loan term may also be extended in proportion to the suspension of loan repayment.
To the extent that a plan sponsor implements these changes, plan changes will need to be implemented no later than the last day of the first plan year beginning on or after January 1, 2022, or on a later date than the Secretary of the Treasury can prescribe.