After months of deliberation and stagnant discussion over adequate government funding measures, on December 27, 2020, Congress signed The Consolidated Appropriations Act of 2021 (CAA) into law. The new bill, whose title is as profound and as it is arbitrary sounding, covers 5593 pages and includes $900 billion of pandemic related relief. The House and Senate overwhelmingly approved the bill on December 21, 2020, until it was finally signed into law by then-President Donald Trump on December 27, 2020. Among the affected areas of tax law as a result of the Act were trusts and estates. Notably, the Act lengthens and expands changes to the rules of charitable giving that were enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and it increases the charitable deduction to both individual taxpayers and corporations.
Under The CARES Act, a charitable deduction was created for individual taxpayers who did not itemize their deductions and it was called a “universal deduction.” It allowed for a charitable deduction for cash contributions to qualifying public charities of up to $300 per individual. The CAA addressed how the deduction applies to married couples and extended this benefit even more so by permitting a charitable deduction of up to $600 for couples filing jointly in 2021. This deduction will stay eligible only to individuals who do not itemize their deductions and it is limited to cash contributions and not those contributions associated with a donor-advised fund or a supporting organization.
Another big change that came as a result of the CAA was the extension of the no adjusted gross income (AGI) limitation for 2021. Only for 2020, under the CARES Act, an individual or married taxpayer who itemizes his or her charitable deductions is allowed to claim a deduction for cash contributions equal to up to 100% (up from 50%) of his or her AGI, excluding any net operating loss carryback to the taxable year. The CAA extends this provision for contributions paid in 2021, and only 2021. Cash contributions remain limited to the excess of AGI over the amount of all other charitable contributions. This provision will continue to not apply to contributions to most private foundations, donor-advised funds, or a supporting organization. Furthermore, there is now a 50% penalty (up from 20%) to any tax underpayments attributable to an overstated contribution by an individual who does not itemize his or her deductions.
Corporations also benefited as a result of the CAA changes to available deductions to charitable contributions. They can now deduct 25% (up from 10%) of taxable income in 2021 on qualified charitable contributions. To trigger these benefits, individuals and corporations have to make what’s called a qualified charitable distribution, the definition of which remains unchanged from the CARES Act. This means that the contribution must be applicable to cash donations only and not to any kind of property like a real asset or marketable security. In addition, the cash contributions must be made to a public charity, absent a few exceptions.
Although the CARES Act provided some guidance and temporary relief to retirement plan requirements, the provisions were clarified in a major way as a result of the CAA. The CAA makes clear that money purchase pension plans are included among the retirement plans subject to the temporary relief measures under the CARES Act. Further, the CAA includes tax relief for taxpayers in federally declared disaster areas for major disasters (not including COVID-19), by way of a “qualified disaster distribution,” (QDD) from January 1, 2020, to February 25, 2021. The CAA also adds unique rules for the re-contribution of retirement plan distributions related to home purchases in a qualified disaster area. An individual who decides to take a qualified disaster distribution may contribute the distributed total into an eligible retirement plan within three years after the date that the distribution is received. This amount that would be repaid is then considered a tax-free eligible rollover distribution, which benefits the taxpayer greatly.
Certain participants will have the ability to repay their principal residence distributions as a result of the CAA. In specific, these payments will apply to those individuals who had originally taken a hardship distribution to purchase or construct a principal residence in a qualified disaster area but did not use those distributions as intended and in relation to the disaster. The individuals must have received the hardship distribution 180 days before and up to 30 days after the qualified disaster incident and they will be able to repay those funds to the plan within 180 days from the Act’s enactment.
The Act also provides an increased loan limit for loans taken by a qualified individual on or after December 27, 2020, and on or before June 25, 2021. “Qualified individual” refers to someone (1) whose principal place of abode is located in a qualified disaster area and (2) who suffered an economic loss as a result of the qualified disaster. The increased plan loan limit is $100,000 or 100% of an individual’s vested account balance, which is an increase from the previous $50,000 or 50% of the vested account balance numbers. If the due date of an outstanding loan is between the first day of the disaster incident period and 180 days after the last day of the incident period, a qualified individual may delay the repayment for one year. Subsequent repayments must be adjusted accordingly to take into account the one-year delay in the date and any interest accrued during the suspension.
Another change promulgated as a result of the Act is an election that terminates the transfer period for qualified transfers. Section 420 of the Internal Revenue Code (IRC) describes “qualified future transfers” as transfers of an employer’s excess pension plan assets that fund up to 10 tears of a retiree’s health and life costs. It allows “qualified future transfers” through a retiree’s health benefits or life insurance account within their pension plan. The Act allows an employer to elect to terminate an existing transfer period no later than December 31, 2021. Assets that remain unused in an existing transfer period on the date of election to end the transfer period will be delivered to the transferor’s plan within a reasonable amount of time. In the event the amounts are not transferred back to the health benefits or life insurance account within five years after the original transfer period, then the termination election will be treated as a taxable employer reversion under the Act.
As noted above, the CAA brings about new changes and clarifies items left unanswered or unexplained in the CARES Act. The CAA’s effect on charitable contributions, special tax treatment for qualified disaster contributions, and retirement plan loan relief cannot be understated nor ignored particularly when it comes to private client services and employee benefits work in the legal practice. As time goes on, hopefully soon, there will be other changes and clarifications made to the CARES Act when it comes to these parts of the law but the CAA provides a necessary update to the CARES Act and what taxpayers can expect in the near future.
Matt Belenky is a lawyer who has experience working in tax, compliance, executive compensation, and employee benefits. He received his JD from the University of Pittsburgh School of Law and his Tax LLM from the Georgetown University Law Center.
Suggested Citation: Matt Belenky, What the Consolidated Appropriations Act (CAA) Means for Charitable Planning and Retirement Relief Provisions, JURIST – Professional Commentary, February 9, 2021, https://www.jurist.org/commentary/2021/02/matt-belenky-caa-cares/.
This article was prepared for publication by Vishwajeet Deshmukh, a JURIST staff editor. Please direct any questions or comments to him at firstname.lastname@example.org.