Signed into law in December 2020, the Consolidated Appropriations Act of 2021 (CAA)[1] contains several provisions impacting defined contribution (DC) plans. The CAA temporarily allows additional non-COVID-19 qualified disaster relief distributions and loans that are similar to those in the CARES Act, includes provisions to help plan sponsors avoid partial plan terminations in the current environment, and clarifies rules regarding coronavirus-related distributions from money purchase pension plans (MPPPs).

What You Should Know

Optional retirement plan distribution and loan rules for natural disasters other than COVID-19 occurring between January 1, 2020, and February 25, 2021 include:

  • Penalty-free distributions with repayment option: eligible DC plan participants under age 59½ can be allowed to take qualified disaster-related distributions of up to $100,000 of their vested account balances without incurring an early withdrawal penalty or withholding. An employee may avoid income tax on a distribution if it is repaid within three years.
  • Expanded plan loans: participants may be allowed to receive a disaster-related plan loan in amounts up to $100,000 or 100% of the their vested account balance (whichever is less) instead of the lesser of $50,000 or 50% of account balance limits that normally would apply.
  • Suspension of plan loan payments: participants may be allowed to suspend repayment of a disaster-related plan loan for a period of up to one year.

If a plan sponsor chooses to implement any of these optional provisions, the plan must be amended by no later than the last day of the plan year beginning on or after January 1, 2022 (December 31, 2022, for calendar year plans).

CAA provides qualifying DC plan sponsors that experienced fluctuations in employment relief to avoid a partial plan termination. Many employers laid off employees in 2020 only to restaff at a later date. A partial plan termination will not be deemed to have occurred if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number covered by the plan on March 13, 2020.

CAA clarifies that MPPPs are included in the types of plans qualifying for CARES Act provisions that permitted coronavirus-related withdrawals without penalty and with increased plan loan limits. Under the CARES Act, MPPP participants were not expressly identified as eligible for coronavirus-related distributions; the CAA retroactively applies the coronavirus-related distribution rules to MPPP distributions taken by December 31, 2020.