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Year-End Stimulus: What Changed for Retirement Plan Participants

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The year-end COVID-19 stimulus bill extended some of the relief created under the CARES Act earlier in 2020. However, it’s also generated much confusion over which retirement-related relief provisions were extended. In fact, much of the retirement relief related to COVID-19 was not carried over into 2021. Rather, the law provided new forms of relief for different situations — some of which are entirely unrelated to the pandemic.

It’s important to pay close attention to the fine print to make sure clients understand what types of new penalty relief might be available in 2021 — and the details will be key to preventing unpleasant tax surprises for clients in the future.

CAA Retirement Distribution Relief Provisions

Some key COVID-19 relief provisions were allowed to expire at the end of 2020, including the rules that allowed penalty-free coronavirus-related distributions (CRDs) from retirement plans. The CARES Act relief for qualified plan loans was also allowed to expire if the reason for extending the repayment period was COVID-19.

Despite this, the year-end Consolidated Appropriations Act of 2021 (the CAA) provides the same type of tax relief for non-COVID-19 disasters, such as wildfires and hurricanes. Taxpayers impacted by any type of federally declared disaster that is not related to COVID-19 are permitted to withdraw up to $100,000 from a qualified plan or IRA within 180 days of the CAA’s passage (i.e., by June 25, 2021).

As usual, these disaster-related distributions are exempt from the 10% early withdrawal penalty that would typically apply — but are subject to ordinary income tax treatment. However, taxpayers who take qualified disaster distributions are also permitted to spread the tax liability over three years (and repay the distribution over a three-year period without tax implications).

The CARES Act relief provided for qualified plan loans was also extended for victims of non-COVID-19 disasters. Taxpayers affected by a hurricane, wildfire or other natural disaster are entitled to borrow up to $100,000 (double the typical $50,000 limit) or 100% of their vested account balance.

While the CAA does not generally extend the CRD provisions, it does add money purchase plans to the list of plans from which clients can take a CRD. That change is retroactive to the date the CARES Act was passed, potentially creating a new option for clients who participate in a money purchase plan.

Required Minimum Distributions in 2021

Required minimum distributions (RMDs) are also back on the table for 2021. In other words, the year-end stimulus bill did not extend the RMD waiver into 2021.

Plan participants aren’t required to do anything special if they skipped their 2020 RMD under the CARES Act rules. 2021 RMDs are calculated using the year-end account balance just like any other year.

Did the 2021 CAA Do Anything to Help Retirement Plan Participants?

The CAA did permanently lower the threshold for deducting medical expenses. Under prior law, medical expenses could be deducted only if they exceeded 10% of adjusted gross income (AGI). This AGI threshold was repeatedly lowered to 7.5% — but only temporarily. The CAA made the 7.5% limit permanent.

This lowered threshold can help more retirement plan participants take penalty-free distributions from 401(k)s and IRAs. Usually, a 10% penalty applies for distributions if the account owner has yet to reach age 59½. That penalty does not apply, however, to distributions taken for tax-deductible medical expenses.

In other words, if the client’s medical expenses for the year exceed 7.5% of AGI and are thus deductible as itemized deductions, the client could opt to take a penalty-free withdrawal to cover those costs. However, the penalty-free withdrawal must be equal to or less than the actual amount of medical expenses incurred by the client. Clients should also be aware that they will be responsible for ordinary income taxes on the withdrawal — and that the withdrawal could potentially push them into a higher income tax bracket.


The year-end stimulus provided a number of benefits for employers and employees — but unfortunately did not continue much of the retirement-related relief into 2021. Clients should pay close attention to take advantage of the new relief moving into the new year.


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