Summary of Employee Benefits Provisions in CARES Act (as passed by U.S. Senate)

On March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, as a follow-up to the Families First Coronavirus Response Act.  The Act contains a number of employee benefits related provisions to address the COVID-19 emergency.  The House of Representatives intends to take up the legislation on March 27, 2020.  A summary of the Senate version of the Act follows.

Retirement Plan Provisions

Waiver of 10% Early Withdrawal Excise Tax for Coronavirus Related Distributions and Improvement of Plan Loans – Section 2202 of the Act waives the normal 10% Internal Revenue Code Section 72(t) excise tax that applies to early distributions (e.g., in-service prior to age 59 ½) from eligible retirement plans (qualified plans, 403(b) plans, 457 plans, etc.), provided the distributions for an individual (a) do not exceed $100,000 in the aggregate for a tax year, (b) are made between January 1 and December 30, 2020, and (c) are Coronavirus Related Distributions (CRD).  All controlled group, trades or businesses under common control and affiliated service group entities are aggregated for these rules. The definition of CRD is broad.  A CRD is a distribution to a plan participant (i) who is or whose spouse or dependent is diagnosed with COVID-19 or its virus, or (ii) who experiences adverse financial consequences as a result of quarantine, furlough, layoff, or reduced work hours due to the virus, or (iii) can’t work due to lack of child care due to the virus or closing or reduced hours of a business owned or operator by the participant due to the virus.  Fortunately, a plan administrator can rely on an employee’s certification that the distribution is a CRD.   The excise tax is usually self-reporting so that has not changed.

Importantly, a CRD is a permissible distribution from a retirement plan, even in-service, and even for a 401(k) plan, regardless of age.

A participant may (but is not required to) spread the amounts required to be included in gross income from a CRD over three tax years.  A participant may also repay the distribution to an eligible retirement plan any time during the three year period beginning on the date of the distribution and the repayment is treated as an eligible rollover distribution. This is similar to the repayment of amounts distributed to a participant for a qualified birth or adoption under the SECURE Act.  At this time, the income tax treatment (basis or otherwise) is not clear from the Act. A CRD is not considered an eligible rollover distribution so the usual 20% income tax withholding requirement does not apply. Instead, a 10% withholding applies unless the participant elects otherwise.

The $50,000 maximum plan loan limit is increased to $100,000 for loans made in the 180-day period from the date of the Act to participants who satisfy the CRD definition above and the limit that a loan cannot exceed 50% of the present value of the participant’s benefit is eliminated.  This appears to allow a participant to borrow against his or her entire vested plan benefit.  The due date for any loans due between the date of the Act and December 31, 2020 are extended one year, with the amount due adjusted for interest.  The additional year is not counted for purposes of the five year plan loan amortization rule.

Conforming plan amendments are due no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans) and a plan has to operate in compliance with these rules in the interim.

Temporary Waiver of Minimum Required Distribution Rules – Section 2203 of the Act waives for the 2020 year the minimum required distributions (required distributions at age 72) for participants who hit the minimum age in 2020 for defined contribution plans (e.g., 401(k), profit sharing, etc.), 403(a) and 403(b) plans, and 457(b) plans maintained by governmental employers.

Conforming plan amendments are due no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans) and a plan has to operate in compliance with these rules in the interim.

One-Year Delay in Pension Minimum Required Contributions and AFTAP Reliance – Any single employer defined benefit pension plan minimum required contribution due in 2020 is delayed one year, subject to an interest adjustment.  Plans can also rely on their adjusted funding target attainment percentages (which applies to determine certain pension plan distribution restrictions) from the last plan year ending before January 1, 2020 for plan years which include 2020.  Many pension plans obtain AFTAP certifications by April 1, 2020 so this relief is timely. It is not clear whether an AFTAP that has already been certified can be rescinded if the prior year’s AFTAP is more favorable.

Welfare Benefits Provisions

Group Health Plan Coverage of Covid-19 Services – Sections 3201-3203 of the Act clarifies language in the FFCRA that all diagnostic testing for COVID-19 or its virus are to be covered by health insurance and group health plans without cost sharing.  Plans and insurers must also pay providers for COVID-19 testing at either the pre-emergency contract rate, or, if none, a cash price posted by the provider.  Plans and insurers must also provide free coverage without cost-sharing of certain rated vaccines within 15 days for COVID-19.  The coverage aspects of these provisions should be handled by an employer’s insurance company or third party administrator.

HDHPs May Pay for Telehealth Pre-Deductible – Section 3701 of the Act allows a high-deductible health plan with a health savings account to cover telehealth or other remote care services prior to a participant reaching the deductible limit.  This increases services available to participants who may have been exposed to or have COVID-19 without resulting in the participant being ineligible for an HSA contribution.  This applies for plan years beginning on or before December 31, 2021.

Purchase of Over the Counter Medical Products from HSAs/FSAs – Section 3702 of the Act allows participants to use funds in HSAs and flexible spending accounts to purchase over-the-counter menstrual products, including those needed in quarantine and social distancing, without a prescription.  This change is effective for amounts paid/expenses incurred after December 31, 2019.

Miscellaneous Provisions

DOL Authority to Delay Reporting and Disclosure Deadlines – ERISA provides that the DOL can delay any obligation such as reporting and disclosure deadlines for up to one year in the event of disasters and terrorist attacks.  Public health emergencies have been added to the reasons for the delay.

ESOPs Are Eligible Entities for EIDLs – Section 1110 of the Act makes it clear that an Employee Stock Ownership Plan (ESOP) with fewer than 500 employees is eligible for SBA Economic Injury Disaster Loans (EIDL), the same as other eligible entities.  Under the emergency grant portion of this section, an entity that has applied for an EIDL due to COVID -19 may request an advance of up to $10,000 and advances may be used for a number of purposes, including to pay sick leave to employees unable to work due to the direct effect of COVID -19.  Advances are not required to be repaid, even if the EIDL is not granted.

Tax-Free Employer Paid Student Loan Repayments – Section 2206 of the Act allows employers to pay up to $5,250 annually on a tax-free basis to help a student repay a student loan between date of the Act and January 1, 2021.  This applies to new and existing loan repayments and other educational assistance (e.g., tuition, fees, books) provided by the employer under current law.

About the Author:

Jordan Schreier is a Member in Dickinson Wright’s Ann Arbor office and Chair of the Firm’s Employee Benefits and Executive Compensation Practice Group.  His practice primarily involves advising both for-profit and non-profit employers on planning and compliance issues involving all aspects of employee benefits, including welfare benefits, qualified retirement, and other deferred compensation plans. He can be reached at 734-623-1945 or and you can visit his bio here.