In addition to direct stimulus payments, extending unemployment benefits to many workers, and another round of Paycheck Protection Program (PPP) loans, the COVID stimulus package includes important retirement plan relief.
Partial Plan Termination
Perhaps the most significant element of the stimulus package for plan sponsors impacted by the COVID-19 pandemic is the temporary rule preventing partial plan terminations. In general, a plan may experience a partial plan termination when turnover among plan participants exceeds 20% in a particular year, resulting in full vesting of all accounts of participants affected by the partial plan termination. Whether a partial termination has occurred is not always an easy call. The IRS makes it clear that the determination is based on the facts and circumstances of the particular scenario.
The IRS previously provided guidance to clarify that generally, employees who had been furloughed or laid off due to COVID-19 but were rehired by the end of 2020 would likely not be treated as having an employer-initiated severance for the purposes of determining a partial plan termination. However, the Consolidated Appropriations Act includes the following temporary rule regarding partial plan terminations:
“A plan shall not be treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020.”
It is important to note that the 80% count does not have to be comprised of the same participants that were initially terminated. However, the plan’s eligibility requirements should be taken into consideration.
The new relief is based on 80% of the “active participants.” If the employees include new hires (e.g., the laid-off employees found other jobs), whether they count towards the 80% depends on the eligibility conditions of the plan. If the new hires do not satisfy the plan’s eligibility conditions by March 31, 2021, they cannot be included in the active participant count.
Active participants were not defined in the bill. Presumably, active participants include employees eligible to defer, even if they choose not to do so.
Qualified Disaster Distributions Extended
The Act includes a temporary extension for individuals to take a retirement plan distribution or loan if they reside in a presidentially declared disaster area. The extension is effective for 60 days after the date of enactment and applies to individuals residing in presidentially declared disaster areas (other than COVID-19) declared after Dec. 31, 2019. Participants in 401(k), 403(b), money purchase, and government 457(b) plans may take an aggregate distribution up to $100,000 without incurring the 10-percent additional tax on early distributions. Income tax on these distributions may be spread ratably over a three-year period, and participants may repay the distribution into a plan that accepts rollovers within three years.
Note that qualified disaster areas are areas where a qualified disaster was declared, but do not include areas that are disaster areas solely due to the COVID-19 pandemic.
Qualified Disaster Loans
The Act also enables qualified individuals to receive plan loans up to $100,000 or 100% of the participant’s vested account balance. Additionally, the repayment period is extended for up to one year (or up to 180 days after enactment of the Act, if longer) if repayment of the loan normally would be due during the period beginning on the first day of the disaster period and ending 180 days from the last day of the incident period.
Paycheck Protection Program (PPP) Round 2
The Act provides increased PPP funding and eligibility to those small businesses that have been hit hard by the COVID-19 pandemic. The Act extends the PPP through March 31, 2021 and allocates additional funds for forgivable loans. Among other important changes, the law allows eligible borrowers a second PPP forgivable loan for small businesses and non-profits with 300 or fewer employees that can demonstrate a 25% loss of gross receipts in any quarter during 2020 when compared to the same quarter in 2019.
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