Partial Plan Termination Relief
Many employers may be facing what the IRS guidance refers to as a partial plan termination. Generally, this occurs when the number of employees participating in a qualified retirement plan, such as a 401(k) plan, decreases by 20% or more during the Plan Year. This is calculated by dividing all employer initiated severances by the number of active participants, including employees who became participants during the year.
If there is a partial plan termination, any participant who left during the Plan Year, both voluntarily and involuntarily, whose account was not fully vested must be vested.
The stimulus bill provides relief from a partial termination for any Plan Year that 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 80% of the number of active Participants on March 13, 2020. An employer may be able to avoid a partial plan termination by rehiring employees by March 31, 2021.
Qualified Disaster Relief Available for Retirement Plans
For disasters other than COVID-19 disasters, which are declared to be a disaster by the President between January 1, 2020 and February 25, 2021, enhanced distribution and loan provisions are available. For distributions made prior to June 25, 2021, amounts up to $100,000 may be withdrawn and are not subject to the 10% early distribution tax. The distribution can be taxed over three years and there is a right to repay the distribution over three years.
There are expanded loan limits available as well as a 1 year delay for repayments for qualified individuals.
This is an optional provision and if adopted, plan amendments must be made by the end of the 2022 Plan Year.
Deductibility of Retirement Plan Contributions for PPP Loan Recipients
Expenses paid with forgiven PPP loans are now deductible due to a provision in the stimulus bill. The IRS had taken the position that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan. Under this IRS position, payroll costs incurred during the covered period, which include retirement plan contributions, were not deductible. The Stimulus bill reverses this position for tax years ending after March 27, 2020.