The Consolidated Appropriations Act, 2021 (CAA), signed into law on December 27, 2020, changed some important rules impacting various employee benefits for 2021. With the new year underway, now is the time to review your retirement plans and other employee benefit plans to ensure compliance with law changes.
Qualified retirement plans
The CAA did not make major changes in the rules for qualified retirement plans. Remember that many of the changes were created by the SECURE Act at the end of 2019 and some of those changes apply in 2021. For example, required minimum distributions (RMDs), which had been suspended for 2020, must resume in 2021. The starting age for RMDs is 72 for who did not attain age 70½ before 2020; otherwise it’s 70½. Plans need to keep this in mind for distribution purposes this year.
But CAA made a few retirement plan changes of note:
- Partial terminations. Usually when a certain number of employees are no longer active participants (e.g., they’ve been laid off from the job), a partial termination results. This triggers a slew of consequences, including full vesting of employer contributions. However, if the number of active participants in a qualified retirement plan on March 31, 2021, is at least 80% of the number of participants on March 31, 2020, there is no partial termination. In effect, companies that had laid off workers in 2020 have until March 31, 2021, to rehire a sufficient number in order to avoid a partial termination, if this is desirable.
- Disaster distributions. Qualified disaster distributions can be made from 401(k) plans and money purchase pension plans to employees impacted by a major disaster other than COVID-19 occurring on or after January 1, 2020, through February 26, 2021 (there are other rules for COVID-19 related distributions). Such distributions are exempt from the 10% early distribution penalty and 20% mandatory withholding. Employees receiving such distributions can spread them ratably over three years and recontribute them within this period or to an IRA. The distributions must be made within 180 days after December 27, 2020.
- Disaster loans. Qualified disaster loans from retirement plans are permitted up to $100,000 or 100% of the participant’s vested account balance (instead of the usual $50,000/50% limit). Again, this option applies only if the plan allows loans and the loan is taken within 180 days after December 27, 2020. Also, repayment of outstanding loans can be delayed for one year.
If your company offers flexible spending arrangements (FSAs) for health and/or dependent care expenses, the plans can provide temporary relief for employees.
- Employees may be allowed to make mid-year election changes in 2021. This means opting to participate, opting out of participation, or changing the salary reduction contribution. A change only applies going forward.
- Employees can carry over unused contributions to the following year if the plan allows it. This means that any of the used contribution in 2020 (up to the annual limit of $2,750) can be carried over to 2021, and any unused contribution in 2021 (up to the annual limit of $2,750) can be carried over to 2022.
- The grace period for using up contributions, which normally runs only to March 15, has been extended for the entire year. This applies for 2020 and 2021. Thus, unused contributions for 2020 and be used at any time in 2021. Note: A plan can offer a carryover option or a grace period, but not both. A plan is not required to offer either option.
- The age for a covered dependent in a dependent care FSA is increased from under age 13 to under age 14 for 2021.
- Employees who cease participation during the year because they’ve left the job (e.g., they’ve been laid off) can be reimbursed for unused amounts. This applies for 2020 and 2021.
Other employee benefits
Small employers may continue to provide paid sick leave and paid family leave to employees impacted by COVID-19 through March 31, 2021; the requirement to do so ended on December 31, 2020. Remember, this benefit is paid via employment tax credits for employers.
If your company has an educational assistance plan, it can pay student loan debt up to the plan limit ($5,250). This had been a temporary rule for 2020, but has been extended through 2025.
If your company has a group health plan, the No Surprise Act within CAA makes various changes to eliminate unexpected out-of-network charges, such as fees for medical helicopter transports. These changes are consumer oriented.
As if dealing with COVID-19 was not enough, companies need to adapt to ever-changing tax rules. Be sure to discuss your existing or future employee benefit plans with your CPA or other advisor to ensure that you offer employees what you’re allowed and want to, while staying complaint with the law.