Taxpayer Certainty and Disaster Tax Relief Act of 2020 – Employee Benefit Provisions

Charles C. Shulman, Esq.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as part of the Further Consolidated Appropriations Act, 2021, enacted December 27, 2020 (TCDTRA), provides for the following:

Special Rules for Health and Dependent Care FSAs. Under the Taxpayer Certainty and Disaster Tax Relief Act § 214, with respect to health and dependent care flexible spending arrangements:  (i) the health and dependent care FSAs may provide for carryovers of unused account balances from the 2020 plan year to 2021 and from the 2021 plan year to 2022) and where the 2-1/2 month grace period is used the plan can extend the grace period in 2020 and 2021 to 12 months instead of 2-1/2 months; (ii) health FSA participants terminated in the middle of 2020 or 2021 can continue to receive reimbursements from unused amounts through the end of the year;  (iii) the maximum age for dependent care FSAs is extended by one year (age 13 instead of age 12) for dependents who age out during the pandemic; and (iv) a prospective mid-year election changes for health and dependent care FSAs is allowed in 2021.

Partial Terminations.  Under § 209 of the Taxpayer Certainty and Disaster Relief Act, a plan will not be treated as having a partial termination during any plan year that includes the period from March 13, 2020 to 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.

Coronovirus-Related Distributions Extended to June 25, 2021. The Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES Act) allowed individuals to take penalty free in-service coronavirus-related distributions of up to $100,000 from their retirement accounts between January 1, 2020 and December 31, 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“TCDTRA”) § 302 extends the period for in-service coronavirus-related distributions of up to $100,000 (in total) through June 25, 2021.

Plan Loan Repayments Tolled for up to the later of One Year and June 25, 2021. Similar to provisions in the CARES Act, the Taxpayer Certainty and Disaster Tax Relief Act § 302(c)(3) increases the maximum dollar limit allowed for plan loans to “eligible employees” up to $100,000 and 100% of the vested account balance for loans initiated between December 27, 2020 and June 25, 2021. Repayments for existing plan loans with payment dates between December 27, 2020 and June 25, 2021 may be delayed to the later of June 25, 2021 or one year, with subsequent loan payments to be appropriately adjusted to reflect the extension and any interest accruing during the extension. With respect to existing plan loans with payment dates is between December 27, 2020 and June 25, 2021 repayments may be delayed to the later of June 25, 2021 or one year, with the repayment period tolled for the duration of the one-year period and subsequent loan payments to be appropriately adjusted to reflect the extension and any interest accruing during the extension.

Recontribution of Hardship Distribution for Home Purchase not used because of Disaster. Under the Taxpayer Certainty and Disaster Tax Relief Act § 302(b), where an individual received a hardship distribution from a 401(k) or 403(b) plan that was used to purchase or construct a principal residence in a qualified disaster area during the period beginning 180 days before the first day of the qualified disaster period and ending 30 days after the qualified disaster period and which was not used because of the disaster, may be returned to the plan at any time within the period which begins at any time within the first day of the period of withdrawal and ends June 25, 2021 (180 days after the date of enactment).

Reduced Minimum Age for Pension Plan In-Service Distributions for Employees in the Building and Construction Industries. The SECURE Act amended Code § 401(a)(36) which allows in-service distributions from defined benefit plans at age 59-1/2 rather than age 62. The Taxpayer Certainty and Disaster Tax Relief Act amended Code § 401(a)(36) to provide that pension plans may allow certain employees in the building and construction industries who are not separated from employment to begin taking distributions at age 55.

Amendment Deadlines. The Taxpayer Certainty and Disaster Tax Relief Act changes that are effective in 2020 would require to be reflected in plan amendments by 12/31/2021, and TCDTRA changes that are effective in 2021 would require to be reflected in plan amendments by 12/31/2022.