The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed by the President on March 27, 2020, includes several provisions affecting employer benefit plans.
Expansion of Withdrawal and Loan Rights
The CARES Act provides additional opportunities for participants to access funds from their employer retirement plans. Specifically:
- New In-Service Withdrawal Opportunity. The CARES Act authorizes eligible retirement plans (as defined under Internal Revenue Code (“Code”) Section 402(c)(8)(B), including employer-sponsored 401(k), 403(b) and governmental 457(b) plans) to permit “Qualified Individuals” to withdraw funds (which we refer to as a “Coronavirus-Related Distributions”) from their plan account. Here are the key takeaways:
- The Group of Eligible Recipients is Fairly Broad. The following individuals qualify as “Qualified Individuals”, both for the new withdrawal right as well as for the plan loan relief discussed below:
- Someone who is diagnosed with the coronavirus (SARS-CoV-2) or coronavirus disease (COVID-19) by a test approved by the Centers for Disease Control and Prevention (the “CDC”);
- Someone whose spouse or dependent (as defined in Code Section 152) is diagnosed with such virus or disease by a CDC-approved test; or
- Someone who experiences adverse financial consequences as a result of (i) being quarantined, or being furloughed or laid off, or having work hours reduced due to such virus or disease, (ii) being unable to work due to lack of child care due to such virus or disease, (iii) closing or reducing hours of a business owned or operated by the individual due to such virus or disease (this clause (iii) essentially applies to self-employed individuals and owner-employees), or (iv) other factors as determined by the Secretary of the Treasury.
The first two prongs do not require employees to experience an adverse financial consequence as a result of the diagnosis (though it may be presumed in these cases). The third prong should be read broadly – for example, employees who are furloughed, laid off or have reduced work hours due to the general economic downturn caused by the virus, and are experiencing adverse financial consequences as a result, would be eligible for a Coronavirus-Related Distribution. This is contrast to, for example, employees who are being furloughed or laid off due to a reduction in force or plant closing that was already planned before the market downturn related to the virus.
Plan administrators may rely exclusively on an employee’s certification that the employee satisfies one of the above conditions to determine eligibility for a distribution. We recommend that employers consult with their plan record-keepers to develop a certification (written or electronic) as part of their administrative process.
- Distributions are Available Only for a Limited Time. Coronavirus-Related Distributions will be available only from January 1, 2020 through December 31, 2020. The impact of the retroactive effective date is not clear. Presumably, that is to allow Qualified Individuals who have previously taken a distribution this year to receive some of the tax benefits and the repayment right (as discussed below) with respect to that distribution. However, more guidance is needed from the Internal Revenue Service on this point.
- It’s Permissive. Employer-sponsored retirement plans are not required to allow these types of distributions. If they would like to make these distributions available, then the plan must be (i) amended by the end of the plan year that begins on or after January 1, 2022 (subject to an additional 2-year delay for governmental plans) and (ii) operated consistent with the amendment on and after the effective date of the amendment (referred to in this summary as the “Amendment Requirements”).
- Withdrawal Limited to $100,000. The aggregate amount of coronavirus-related distributions received by a participant from all plans maintained by the plan sponsor and its controlled group members, for any taxable year may not exceed $100,000. Plan sponsors that adopt these provisions may set a lower limit and/or designate the subaccount ordering rule that will apply with respect to these distributions.
- Not Subject to 10% Early Withdrawal Excise Tax. Coronavirus-Related Distributions will not be subject to the 10% excise tax on early distributions under Code Section 72(t).
- Income Tax Consequences Can be Delayed. Unless the individual opts-out, the amount of any Coronavirus-Related Distribution that would otherwise be included in income for the tax year in which it is made must be included ratably over the 3-taxable year period beginning with the year in which the distribution is made. We expect that the plan will issue a Form 1099-R related to the full distribution amount as normal, and then the participant will have to claim the 3-year ratable taxation on his or her personal tax returns. However, more guidance will be needed from the Internal Revenue Service to confirm this.
- Income Tax Consequences Can be Mitigated Through Repayment. Anyone who receives a Coronavirus-Related Distribution may repay some or all of such distribution, at one time or through multiple repayments, during the 3-year beginning the day after the distribution is received through 1 or more contributions to an eligible retirement plan (as defined above) and to which a rollover contribution could otherwise be made. Coronavirus-Related Distributions that are made from an eligible retirement (other than an IRA) will be treated as if the individual made a direct trustee-to-transfer within 60 days of the receiving the distribution. In other words, if the distribution was made from an employee’s pre-tax 401(k) account and is then repaid to the 401(k) plan, such repayment must be treated/coded like a pre-tax rollover contribution.
The IRS issued an FAQ on May 4, 2020 that indicates that repayment is treated as a rollover contribution and that a plan that does not otherwise allow rollover contributions does not have to allow repayment of a CARES Act distribution. If a plan does not allow repayment, the participant would still have the option of repaying all or some of the distribution to an IRA. If a plan does allow repayments, one unknown is whether the repayments are treated as rollover contribution to the plan for all purposes under the plan, such as, for example, if rollovers are available for withdrawal at any time, a CARES Act distribution repayment would be available for withdrawal at any time.
The May 4, 2020 IRS FAQs also indicate that if a participant repays a CARES Act distribution, then the individual recovers related taxes that the individual already paid by filing an amended tax return or returns and claiming a refund relating to the amount of the distribution included in income for a prior year.
- Not Rollover Eligible. Coronavirus-Related Distributions are not eligible rollover distributions. Therefore, the typical 20% federal income tax withholding requirement will not apply.
- Expansion of Plan Loans. The CARES Act provides favorable provisions for loans made to Qualified Individuals from qualified plans as follows:
- Higher Limits. Loans from qualified employer plans may generally not exceed the lesser of: (i) $50,000 (reduced by the excess of the participant’s highest outstanding loan balance(s), if any, during the prior 12 months over the balance(s) immediately prior to the date the loan is made) and (ii) 50% of the participant’s vested account balance. Plan sponsors may now permit loans that are made to Qualified Individuals (as defined above) during the 180-day period following the enactment date of the CARES Act changes the $50,000 limit to $100,000 and changes the 50% account balance limit to 100% . This provision is permissive provided that the Amendment Requirements are satisfied. Plan sponsors should check their plan documents to determine whether the Code limits are cross-referenced, in which case this provision would apply automatically to the plan.
- Repayment Delays. For Qualified Individual who have outstanding loan(s), whether the loan is already in effect on the date of the enactment of the CARES Act or is a new loan taken after the date of enactment:
- The payments due on such loan(s) between the date of enactment and December 31, 2020 may be delayed for 1 year,
- Subsequent repayments with respect to such loans shall be appropriately adjusted to reflect the 1-year delay in the due dates and any interest accruing during such delay, and
- In determining the 5-year period and term of the loan, the period during which the payments are delayed shall be disregarded.
Although the CARES Act is written as if plan sponsors are required to allow loan repayment suspensions, the IRS issued an FAQ on May 4 that makes it clear that this is an optional feature that a plan sponsor is not required to adopt. In addition, while the CARES Act only changed the plan loan limits under the Internal Revenue Code and not under ERISA, the DOL clarified in EBSA Disaster Relief Notice 2020-01 that plan loans that are within the CARES Act loan limits will not violate ERISA.
Waiver of 2020 Required Minimum Distributions (for Defined Contribution Plans Only)
The CARES Act includes a provision pursuant to which required minimum distributions (“RMDs”) from defined contribution plans under Code Section 401(a), 403(a), and 403(b), and governmental 457(b) plans are waived for calendar year 2020. This waiver would also apply to RMDs that are due by April 1, 2020 for individuals who turned age 70½ last year, unless those payments were already made last year. However, any amounts distributed during 2020 that would otherwise have been 2020 RMDs are not eligible for direct rollover (although an indirect rollover should still be available) and are not subject to the federal 20% withholding tax. The Amendment Requirements apply, and a plan will not be deemed to have cutback benefits in violation of Code Section 411(d)(6) by failing to make 2020 RMDs.
Delays for ERISA and Other Plan Deadlines
The CARES Act expands the authority of the Department of Labor to postpone certain deadlines pursuant to ERISA Section 518 in the event of a public health emergency declared by the Secretary of HHS. In addition, the President’s March 13, 2020 emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act gave the Secretary of the Treasury the authority to extend certain tax-related deadlines. To date, the IRS and DOL have issued guidance providing for the following extensions:
The IRS has extended certain plan-related deadlines that fall after April 1, 2020 and before July 15, 2020 to July 15, 2020. This includes, among others, the deadlines for:
- Form 5500 filings for plan years that ended in September, October, or November of 2019;
- Repayment of loans from qualified retirement plans;
- The five year deferral of recognition of certain employee equity grants as income;
- Distributions of deferrals in excess of the 402(g) limit; and
- Distributions of contributions in connection with failed nondiscrimination testing.
Additional information on the IRS extensions can be found in IRS Notices 2020-18 and 2020-23, and Revenue Procedure 2018-58.
The DOL, in consultation with the IRS and the Department of Health and Human Services, has extended the deadline for certain participant and plan deadlines during the period beginning March 1, 2020 and ending 60 days after the end of the COVID-19 National Emergency (the “Outbreak Period”) and extended other related relief.
Plan and Plan Fiduciary Deadlines
The new deadline for plans and plan fiduciaries to provide certain ERISA-required notices, disclosures, and documents that would otherwise be due during the Outbreak Period is “as soon as administratively possible”, provided that the plan and fiduciary act in good faith to get the notice, disclosure, or document out as soon as possible. Acting in good faith includes using electronic alternate means of communication with plan participants such as email, text messages, and continuous access websites. This applies to all notices, disclosures, and other documents required by Title I of ERISA, such as the following:
- Participant benefit statements;
- Statement of accrued and vested benefits for terminated participants;
- Annual funding notices;
- Notice of reduction in future benefit accruals (204(h) notice);
- Suspension of benefits notice;
- Summary plan descriptions;
- Summary of Material Modifications;
- Blackout notices;
- Qualified Default Investment Alternative (QDIA) notices;
- Fee disclosures;
- 404(c) disclosure for participant directed investments; and
- Automatic enrollment notices.
A plan administrator will not be treated as failing to follow the terms of a plan’s loan or distribution verification provisions where the failure to follow those provisions is solely due to the COVID-19 outbreak, the plan administrator makes a good-faith diligent effort to comply with the requirements, and the plan administrator makes a reasonable attempt to correct any procedural deficiencies. This relief does not extend to spousal verification requirements such as spousal consent to a distribution.
Individual Deadlines. The Outbreak Period (as defined above) is disregarded when calculating the following deadlines:
- 30-day (or 60-day) time period to request HIPAA special enrollment;
- 60-day election period for COBRA continuation coverage;
The date for making COBRA premium payments (including for qualified beneficiaries on COBRA who elected COBRA prior to the COVID-19 outbreak);
- 60-day period for a COBRA qualified beneficiary to provide notice of a qualifying event or disability determination;
- The date within which an individual may file a benefit claim or appeal of an adverse benefit determination;
- The date within which an individual may file a request for an external review (or perfect a request for an external review upon a finding that the request was incomplete); and
- The date for a group health plan to provide a COBRA election notice.
Example. Assume the Outbreak Period ends on June 29, 2020 (the 60th day after the hypothetical end of the National Emergency). An employee experiences a termination of employment in March 2020 and loses active employee coverage as a result. The terminated employee is provided a COBRA election notice on April 1, 2020. The Outbreak Period is disregarded for purposes of determining the individual’s COBRA election period. The last day of the individual’s COBRA election period is 60 days after June 29, 2020, which is August 28, 2020.
Additional information on these extensions can be found in EBSA Disaster Relief Notice 2020-01 and in this joint notice: https://www.federalregister.gov/documents/2020/05/04/2020-09399/extension-of-certain-timeframes-for-employee-benefit-plans-participants-and-beneficiaries-affected. Plan sponsors need to be aware of these expanded deadlines for both plans and individuals as they administer plans during and after the COVID-19 emergency.
Pension Plan Relief
The CARES Act provides limited relief for single-employer pension plans, as follows:
- Minimum required contributions due during 2020, including quarterly contributions, can be delayed until January 1, 2021. If the plan sponsor chooses to delay making such contributions, the plan sponsor will have to pay the plan interest on the delayed contribution amounts, at the plan’s effective rate from the time the contribution was originally due until when it is actually made.
- A plan may choose to use its adjusted funding target attainment percentage (“AFTAP”) calculation for the most recent plan year ending before January 1, 2020 as its AFTAP for its plan year beginning in 2020 for all purposes of Code Section 436. For calendar year plans, this may not be that important, since a calendar year plan’s 2020 AFTAP will be based on assets valued as of January 1, 2020, before the market downturn. For non-calendar year plans, however, this could provide significant relief. For example, a plan with a March 31 plan-year end would normally have to determine its AFTAP for the plan year beginning April 1, 2020 based on the plan’s asset values on such date. Such a plan would instead be able to continue to use its AFTAP as determined for the prior plan year that ended March 31, 2019, if it wishes. As a reminder, if a plan’s AFTAP falls below 80%, certain restrictions apply, such as restrictions on plan amendments that increase benefits and restrictions on the amount of benefits that may be paid as lump sums. Plan sponsors should discuss with their plan actuaries whether to apply their prior year’s AFTAP for the plan year beginning in 2020.
A May 4, 2020 IRS FAQ makes it clear that pension plans, including traditional defined benefit pension plans, cash balance pension plans, and money purchase pension plans, cannot offer CARES Act distributions to participants who are not otherwise eligible for a distribution under the plan (e.g., a pension plan cannot permit in-service CARES Act distributions).
Health Plan Rules and Relief
Coverage for In-Network and Out-of-Network Coronavirus Testing. As discussed in our previous article addressing the Families First Coronavirus Response Act (“FFCRA”), FFCRA requires group health plans to cover coronavirus testing without any cost-sharing (i.e., deductibles, copayments, or coinsurance) imposed on the plan member during the declared public health emergency. The CARES Act clarifies that this applies to services conducted by both in-network and out-of-network health care providers.
Reimbursement Calculation for Out-of-Network Coverage. Since there is no pre-negotiated rate with out-of-network providers, the CARES Act provides a special calculation for determining the rate paid to out-of-network providers for coronavirus testing. Each provider is required to make public the “cash price” for such testing on a publicly-available website. Health plans are required to reimburse out-of-network providers at this cash price, or negotiate a rate for less than cash price.
- Expediting Coronavirus Vaccines (Once Available) as a Permanent Cost-Free Preventive Service. The CARES Act expedites the process by which coronavirus vaccines (once available) will be determined a preventive service that must be covered by non-grandfathered health plans at no cost to the plan member, pursuant to the Affordable Care Act (“ACA”). Unlike FFCRA’s coverage mandate (which is temporary mandate to cover testing with no cost-sharing during the public emergency), this would be a permanent coverage mandate. To be determined a “preventive service,” ACA requires the vaccine to achieve a certain recommendation from a specified governmental health-related committee or task force, and then the coverage requirement is triggered upon the first plan year beginning one year from the date of the recommendation. The CARES Act would fast-track this requirement and require coverage (with no cost-sharing) within 15 days of the date of the recommendation.
- Temporary Relief for Telehealth and High Deductible Health Plans. The CARES Act provides a temporary safe harbor to high deductible health plans (“HDHPs”) compatible with health savings accounts (“HSAs”). Under the Act, a HDHP will not lose HDHP qualified status if it offers cost-free telehealth services to plan members before the annual deductible is satisfied. In other words, HDHPs can offer plan members access to telehealth services with no cost-sharing to the member, regardless of whether the deductible is met, and such members will remain eligible to make and receive contributions to an HSA. This offers significant relief to plan sponsors who want to offer first-dollar, pre-deductible telehealth coverage while still desiring to preserve HDHP qualified status. This is only temporary relief. This safe harbor only applies for plan years beginning before January 1, 2022.
- Over-the-Counter Drug Reimbursements from HSAs, FSAs, and HRAs. Eliminating an ACA prohibition, HSAs, health flexible spending accounts (“FSAs”), and health reimbursement arrangements (“HRAs”) can once again reimburse the costs of over-the-counter drugs with no prescription. This provision is effective for expenses incurred and amounts paid after December 31, 2019.
Expansion of Educational Assistance Program Benefits
The CARES Act expands Code Section 127(c) to allow employers to provide “educational assistance” to an employee, by reimbursing employees for qualified education loan payments the employee has made or making such payment directly to the lender. Qualified education loan payments include payments on principal or interest with respect to loans incurred by the employee to pay for “qualified higher education expenses” at an “eligible educational institution,” each as defined in Code Section 221(d).
The employee can exclude the first $5,250 of such payments in 2020 from the employee’s gross income. The payments must be for a student loan incurred for the education of the employee (i.e., they cannot be for an employee’s child’s or spouse’s student loans). This is a temporary benefit that is only available through the end of the year.
The rules that are already in place for Educational Assistance Programs under Code Section 127 will also apply to the new student loan assistance benefit, and include the following requirements:
- The payments cannot relate to the provision of any benefits with respect to any course or other education involving sports, games, or hobbies;
- The employer must adopt a written plan or program describing the benefit and communicate the terms of the program to eligible employees;
- The program cannot favor highly compensated employees (those earnings more than $125,000 in 2019);
- No more than 5% of the benefits under the program can be paid to shareholders or other owners; and
- Employees may not choose between student loan repayments and other taxable benefits (e.g., student loan payments or additional salary).
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