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The Consolidated Appropriations Act (CAA) and Retirement Benefits

  • Learn how the Consolidated Appropriations Act (CAA) may affect your retirement benefits.
  • Discover the CAA’s changes regarding future transfers.
  • Find out how the CAA treats special distributions made during the pandemic.
  • Learn more about the CAA’s partial termination safe harbor for qualified retirement plans.

The Consolidated Appropriations Act (CAA) includes a variety of provisions that address the economic hardships caused by the COVID-19 pandemic. There are so many provisions, in fact, that you may find it challenging to track everything pertinent to your organization.

One example is retirement benefits. Although the CAA doesn’t make sweeping changes to defined benefit plans, such as pensions, or defined contribution plans, such as 401(k)s, the law does affect both. Here’s Fiducial’s brief overview of the provisions in question.

Future transfers

The tax code allows “qualified future transfers” of up to 10 years of retiree health and life costs from a company’s pension plan to a retiree’s health benefits or life insurance account within the plan. These transfers must meet certain requirements, such as the plan being 120% funded. This has become too difficult to meet in some cases due to pandemic-related market volatility.

In response, the CAA allows an employer to make a one-time election on or before December 31, 2021, to end any existing transfer period for any taxable year beginning after the election in certain circumstances.

Special distributions

The CARES Act provides for special tax treatment for a “coronavirus-related distribution” from a retirement plan. The law also provides that coronavirus-related distributions meet various Internal Revenue Code requirements.

For example, Section 401(a) requires that a trust, created or organized in the United States, and forming part of a stock bonus, pension or profit-sharing plan of an employer for the exclusive benefit of employees or their beneficiaries, must be constituted as a qualified trust. Under Sec. 501(a), a qualified trust is exempt from tax.

The CAA provides that, in the case of a money purchase pension plan, a coronavirus-related distribution that’s an in-service withdrawal — in other words, a withdrawal made while the beneficiary is still employed by the plan owner — is treated as meeting the distribution rules of Sec. 401(a). This provision applies retroactively as if included in the CARES Act; that is, as of March 27, 2020.

How will the Consolidated Appropriations Act (CAA) affect your retirement benefits?

The CAA and the partial termination safe harbor

The CAA also includes a partial termination safe harbor for qualified retirement plans — including 401(k)s. Under the provision, plans won’t be treated as having a partial termination (which triggers 100% vesting for affected participants) 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.

The safe harbor applies to any plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021.

Any questions about the CAA?

At over 5,500 pages, the CAA gives employers (and individuals, for that matter) much to learn about and consider. Do you have questions about how the law affects your organization’s sponsored retirement plans? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!

For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.