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Besides the COVID-19 pandemic, 2020 has also faced numerous disasters, including hurricanes, floods, and fires.<\/p>\n
<p>The Consolidated Appropriations Act, 2021 (the \u201cCAA\u201d) includes provisions aimed at providing tax relief for individuals and employers impacted by federally declared \u201cQualified Disasters.\u201d<\/p>\n\n<p>These provisions are detailed in Sections 301 through 306 of Title III, Division EE, known as \u201cThe Taxpayer Certainty and Disaster Relief Act of 2020\u201d (the \u201c2020 Tax Relief Act\u201d).<\/p>\n\n<p>This article will focus on Sections 301 through 303 of the 2020 Tax Relief Act, which address (i) tax-qualified retirement plans and (ii) employee retention tax credits for employers.<\/p>\n\n<p><strong><u>Definitions<\/u><\/strong><\/p>\n\n<p>To understand the provisions, it's essential to grasp a few technical definitions used throughout the law.<\/p>\n\n<p>The Robert T. Stafford Disaster Relief and Emergency Assistance Act (the \u201cStafford Act\u201d) is a federal law that authorizes federal assistance to states and localities during declared major disasters or emergencies. The Federal Emergency Management Agency (\u201cFEMA\u201d) oversees the administration of disaster relief resources.<\/p>\n\n<p>Based on the Stafford Act, Section 301 of the 2020 Tax Relief Act defines the following terms:<\/p>\n\n<p style=\"padding-left: 40px\"><u>Qualified Disaster Area<\/u><\/p>\n<p style=\"padding-left: 40px\">An area declared by the President as subject to a \u201cmajor disaster\u201d occurring between December 28, 2019, and December 21, 2020.<\/p>\n\n<p style=\"padding-left: 40px\"><u>Qualified Disaster Zone<\/u><\/p>\n<p style=\"padding-left: 40px\">A zone within a Qualified Disaster Area declared by the President for individual or public assistance between January 1, 2020, and February 19, 2021.<\/p>\n\n<p style=\"padding-left: 40px\"><u>Qualified Disaster<\/u><\/p>\n<p style=\"padding-left: 40px\">A Stafford Act \u201cmajor disaster\u201d declared by the President during the specified timeframe, excluding any disaster solely related to the COVID-19 pandemic.<\/p>\n\n<p style=\"padding-left: 40px\"><u>Incident Period<\/u><\/p>\n<p style=\"padding-left: 40px\">The period declared by FEMA, starting from the date of the Qualified Disaster and ending as determined by FEMA.<\/p>\n\n<p>* * *<\/p>\n\n<p>Numerous major disaster declarations occurred in 2020. A comprehensive list can be found on the FEMA website: <a href=\"https:\/\/www.ready.gov\/\" target=\"_blank\" rel=\"noopener noreferrer\">https:\/\/www.ready.gov\/<\/a> by searching for \u201cdisaster declarations.\u201d<\/p>\n\n<p><strong><u>Tax-Qualified Retirement Plan Rules<\/u><\/strong><\/p>\n\n<p>The retirement plan rules related to Qualified Disasters are not entirely new; similar provisions have been enacted in the past for various disasters, such as Hurricane Katrina.<\/p>\n\n<p>These rules resemble those provided in the CARES Act for withdrawals and loans from tax-qualified retirement plans, which were modeled after earlier disaster relief laws.<\/p>\n\n<p>Essentially, there are three special retirement plan rules concerning Qualified Disasters:<\/p>\n<ul>\n <li>A participant can receive \u201cQualified Disaster Distributions\u201d up to $100,000.<\/li>\n <li>A participant can take loans up to $100,000 and delay loan payments.<\/li>\n <li>A participant can repay a hardship withdrawal not used to purchase a home.<\/li>\n<\/ul>\n\n<p><u>Qualified Disaster Distributions<\/u><\/p>\n\n<p>Under Section 302(a) of the 2020 Tax Relief Act, an employer\u2019s retirement plan can be amended to allow a participant to receive a \u201cQualified Disaster Distribution\u201d if the participant meets the following criteria:<\/p>\n<ul>\n <li>The participant\u2019s principal residence was in a Qualified Disaster Area during the Incident Period.<\/li>\n <li>The participant suffered an economic loss due to the Qualified Disaster.<\/li>\n <li>The distribution does not exceed $100,000.<\/li>\n <li>The distribution is made before June 19, 2021.<\/li>\n<\/ul>\n\n<p>Retirement plans covered by this rule include:<\/p>\n<ul>\n <li>Defined contribution plans under Internal Revenue Code (\u201cCode\u201d) Section 401(a) (and 401(k)),<\/li>\n <li>Code Section 403(b) plans, and<\/li>\n <li>Governmental Code Section 457(b) plans.<\/li>\n<\/ul>\n\n<p>Unlike the CARES Act, this law allows withdrawals from \u201cmoney purchase pension plans\u201d under Code Section 401(a). However, withdrawals are not permitted from tax-qualified defined benefit pension plans (including cash balance plans).<\/p>\n\n<p>Participants with a pre-existing right to withdraw (e.g., at age 59\u00bd) can treat such withdrawals as Qualified Disaster Distributions if they meet the above requirements. If not, the plan can be amended to allow the withdrawal, even for active employees.<\/p>\n\n<p>Each individual has a personal $100,000 withdrawal limit for each Qualified Disaster, but employers are only required to apply this limit concerning their own tax-qualified plans.<\/p>\n\n<p>Participants receiving a Qualified Disaster Distribution must pay taxes on it but can spread the taxable income over three years. Additionally, these distributions are exempt from the 10% penalty tax for early withdrawals (Code Section 72(t)).<\/p>\n\n<p>Participants can also repay the distribution to the plan or another tax-qualified retirement plan or an IRA within three years, treating the amounts repaid as tax-free rollovers. If repayment occurs after taxable income has been reported, an amended tax return may be necessary to claim a refund.<\/p>\n\n<p><u>Qualified Disaster Loans<\/u><\/p>\n\n<p>Under Section 302(c) of the 2020 Tax Relief Act, an employer\u2019s plan can be amended to permit a participant to receive a \u201cQualified Disaster Loan\u201d if they meet both of the following criteria:<\/p>\n<ul>\n <li>The participant\u2019s principal residence was in a Qualified Disaster Area during the Incident Period.<\/li>\n <li>The participant suffered an economic loss due to the Qualified Disaster.<\/li>\n<\/ul>\n\n<p>Typically, plan loans cannot exceed $50,000, reduced by the highest outstanding loan balance within the past year, nor can they exceed 50% of the participant\u2019s vested account balance. However, for those eligible for a Qualified Disaster Loan, the limit increases to $100,000, allowing loans up to 100% of the vested account balance.<\/p>\n\n<p>Moreover, if a participant has an existing loan, payments can be delayed for those due between the start of the Incident Period and 180 days after it ends. Payments can be delayed until the later of one year after the due date or June 19, 2021, with interest continuing to accrue.<\/p>\n\n<p>Generally, loans have a five-year maximum repayment period unless used to purchase a principal residence, in which case the repayment period can be extended by the delay period.<\/p>\n\n<p><u>Repayment of Certain Plan Withdrawals<\/u><\/p>\n\n<p>Section 302(b) of the 2020 Tax Relief Act allows an employer\u2019s retirement plan to be amended to permit participants to repay certain hardship withdrawals obtained for home construction but not used due to a Qualified Disaster.<\/p>\n\n<p>To qualify for repayment, the hardship withdrawal must have been obtained no earlier than 180 days before the Incident Period began and no later than 30 days after it ended. Repayment must be made by June 19, 2021.<\/p>\n\n<p><u>Plan Amendments<\/u><\/p>\n\n<p>If an employer\u2019s retirement plan requires amendments to comply with these rules, it is permitted to operate under them. The plan amendment must be adopted by the last day of the first plan year beginning on or after January 1, 2022.<\/p>\n\n<p><strong><u>Employee Retention Credits<\/u><\/strong><\/p>\n\n<p>The Employee Retention Credit rules related to Qualified Disasters are also not new, with similar provisions enacted in the past for employers affected by disasters like Hurricane Katrina.<\/p>\n\n<p>These tax credit rules are akin to the CARES Act employee retention credits available to employers whose operations were suspended or significantly hindered by the pandemic.<\/p>\n\n<p><u>Overview<\/u><\/p>\n\n<p>Under Section 303 of the 2020 Tax Relief Act, an employer may claim a \u201c2020 Qualified Disaster Employee Retention Credit\u201d if they operated within a Qualified Disaster Zone that became inoperable and paid wages to an employee employed in that zone.<\/p>\n\n<p>The credit is 40% of the wages paid to the employee, up to a maximum of $2,400, resulting in a maximum tax credit of $960 per employee.<\/p>\n\n<p><u>Eligible Employers<\/u><\/p>\n\n<p>An employer qualifies for the tax credit if:<\/p>\n<ul>\n <li>During the Incident Period, they conducted a trade or business within a Qualified Disaster Zone.<\/li>\n <li>At any time between the start of the Incident Period and December 21, 2020, their business became \u201cinoperable\u201d due to damage from the Qualified Disaster.<\/li>\n<\/ul>\n\n<p><u>Eligible Employees<\/u><\/p>\n\n<p>An \u201celigible employee\u201d is one whose principal place of employment was in the Qualified Disaster Zone immediately before the disaster.<\/p>\n\n<p><u>Qualified Wages<\/u><\/p>\n\n<p>The tax credit applies to \u201cqualified wages\u201d paid to an eligible employee during the following timeframe:<\/p>\n<ul>\n <li>From when the trade or business became inoperable until \u201csignificant operations\u201d resume (but not later than 150 days after the Incident Period ends).<\/li>\n<\/ul>\n\n<p>All wages paid to an eligible employee are eligible for the credit (up to the $2,400 limit), regardless of whether the employee rendered services during that time. \u201cWages\u201d include all compensation subject to federal unemployment tax under Code Section 3306, and health coverage payments for eligible employees can also be included.<\/p>\n\n<p>However, wages and health coverage payments cannot be counted if they are used to claim loan forgiveness for a PPP Loan or if they are used to claim the employee retention credit under Section 2301 of the CARES Act.<\/p>\n\n<p>Furthermore, wages used to claim the 2020 Qualified Disaster Employee Retention Credit cannot be used for tax deductions or other employee-related tax credits.<\/p>\n\n<p><u>Tax-Exempt Organizations<\/u><\/p>\n\n<p>Section 303(d) of the 2020 Tax Relief Act allows certain tax-exempt organizations to claim the 2020 Qualified Disaster Employee Retention Credit if, absent their tax-exempt status, they would be considered to operate a trade or business within a Qualified Disaster Zone and meet all other legal requirements.<\/p>\n\n<p>If eligible, the credit can reduce the organization\u2019s obligation to pay the employer \u201cOASDI\u201d social security tax (6.2% of wages for \u201cOld Age, Survivors and Disability Insurance\u201d).<\/p>\n\n<p><u>State and Local Government Employers<\/u><\/p>\n\n<p>State and local government employers are generally not eligible for the 2020 Qualified Disaster Employee Retention Credit. However, an exception exists for tax-exempt colleges and universities whose primary purpose is to provide medical or hospital care.<\/p><\/code><\/pre>\n<\/div>\n","protected":false},"excerpt":{"rendered":"Besides the COVID-19 pandemic, 2020 has also faced numerous disasters, including hurricanes, floods, and fires. <p>The Consolidated Appropriations Act, 2021 (the \u201cCAA\u201d) includes provisions aimed at providing tax relief for individuals and employers impacted by federally declared \u201cQualified Disasters.\u201d<\/p> <p>These provisions are detailed in Sections 301 through 306 of Title III, Division EE, known as […]<\/p>\n","protected":false},"author":1,"featured_media":1915,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[57],"tags":[],"class_list":["post-1914","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-retirement"],"_links":{"self":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts\/1914","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/comments?post=1914"}],"version-history":[{"count":0,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts\/1914\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/media\/1915"}],"wp:attachment":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/media?parent=1914"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/categories?post=1914"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/tags?post=1914"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}