Employee Benefit Provisions in the CARES Act Provide Employer and Participant Relief

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act became law on March 27, 2020.  The Act includes important provisions that impact employer sponsored benefit plans.  Consistent with its name, the Act provides participants enhanced access to retirement plan money, provides employers relief regarding defined benefit pension plan funding, aids employees by requiring payment of certain Covid-19 related medical expenses, and expands employee access to health accounts to pay for over-the-counter medical products.  A summary of the employee benefits portions of the Act follows.

Retirement Plan Provisions

New Distribution Option for Coronavirus Related Distributions and Waiver of 10% Early Withdrawal Excise Tax

The Act permits (but does not require) retirement plans including qualified plans, 403(b) plans and 457 plans to permit a new type of distribution to participants called a Coronavirus Related Distribution (“CRD”).  CRDs are distributions (including in-service distributions regardless of age) of up to an aggregate of $100,000 made between January 1 and December 30, 2020 (the Act says December 30, not December 31) for participants impacted by the Coronavirus.  Specifically, a CRD is a distribution to a plan participant who:

  • is or whose spouse or dependent is diagnosed with COVID-19 or its virus, or
  • experiences adverse financial consequences as a result of quarantine, furlough, layoff, or reduced work hours due to the virus, or
  • can’t work due to lack of child care due to the virus or due to closing or reduced hours of a business owned or operator by the participant due to the virus.

The Act permits a plan administrator to rely on an employee’s certification that the distribution qualifies as a CRD.  For purposes of the $100,000 limit, all plans sponsored by members of the same controlled group, group of trades or businesses under common control and affiliated service group are aggregated.  CRDs are not permitted from nonqualified plans.

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.

Under the Act, 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 amount of CRDs to an eligible retirement plan any time during the three-year period beginning on the date of the distribution.  Any repayment is treated as an eligible rollover distribution and is not counted against plan contribution limits. 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 of a repayment 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.

A plan sponsor is not required to permit CRDs but many will as a means of providing employees struggling financially due to the Coronavirus national emergency a source of tax favorable cash.  Many plan record keepers have or are in the process of adjusting their systems to administer the CRD provision.  Plan sponsors should promptly check with their record keepers to determine when CRDs will be available.

A plan is permitted to operate in compliance with the new rules pending adopting plan amendments, but plan sponsors must adopt conforming amendments no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans).

Improvement of Plan Loans

The Act increases the $50,000 maximum plan loan limit to $100,000 for loans made in the 180-day period from the date of the Act for participants who satisfy the CRD definition above.  The Act eliminates the limit that a loan cannot exceed 50% of the present value of a participant’s benefit.  This appears to allow a participant to borrow against his or her entire vested plan benefit, although importantly, the Act did not change the legal requirement that a plan loan be adequately secured.  Any due dates for 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.

This enhanced loans rules are also optional but most plans will also adopt the provisions.  Plan sponsors should check with their record keepers to determine when the record keepers can administer the loan provisions.

A plan is permitted to operate in compliance with the new rules pending adopting plan amendments, but plan sponsors must adopt conforming amendments no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans).

Temporary Waiver of Required Minimum Distribution Rules

The Act waives for the 2020 year all required minimum distributions (“RMD”) for participants under defined contribution plans (e.g., 401(k), profit sharing, etc.), 403(a) and 403(b) plans, and 457(b) plans maintained by governmental employers (but not tax-exempt employers), including for participants who turned age 70 ½ in 2019 but have not yet take a RMD in 2020.  Given that 2020 RMDs are based on the value of participant accounts on December 31, 2019, the waiver will help participants avoid having to liquidate accounts based on values that may be substantially lower than at the valuation date.  The Act provides a complete waiver for 2020.  Participants are not required to double up on RMDs for 2021.

A plan is permitted to operate in compliance with the new rules pending adopting plan amendments, but plan sponsors must adopt conforming amendments no later than the last day of the plan year that begins on or after January 1, 2022 (2024 for governmental plans).

Delay in Pension Minimum Required Contributions and AFTAP Reliance

The Act provides cash flow relief to sponsors of single employer defined benefit pension plans by delaying the due date of all minimum required contributions due in 2020 until January 1, 2021.  On that date, all 2020 minimum required contributions are due, with interest from the original due date to the payment date.

For plan years which include 2020, defined benefit pension plans can rely on their adjusted funding target attainment percentages (applicable to determine certain pension plan accrual and distribution restrictions) from the last plan year ending before January 1, 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.  Plan sponsors should discuss with the plan’s actuary the implications of using the prior year v. current year AFTAP certification.

Welfare Benefits Provisions

Group Health Plan Coverage of Covid-19 Services

The Act expands the types of COVID-19 diagnostic tests which must be paid for by health insurance and group health plans with no cost sharing (as originally provided for in the FFCRA). Under the Act, these diagnostic services must be reimbursed at the in-network rate, or for out of network providers, at the cash price posted by the provider on its website, or a lower rate negotiated with the provider.  Group health plans and insurers must also provide as a no cost-sharing preventative benefit, certain qualifying coronavirus preventive services.  A “qualifying coronavirus preventive service” is an item, service, or immunization that is intended to prevent or mitigate COVID-19 that satisfy certain federal standards.  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

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/MSAs/HRAs

The Act allows participants to use funds in health savings accounts, flexible spending accounts, Archer medical savings accounts, and health reimbursement arrangements, to purchase over-the-counter medications (expanded to include 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.

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 JSchreier@dickinson-wright.com and you can visit his bio here.

IRS Provides Details on the Extension of the April 15 Filing Date

In a series of FAQ’s issued on March 24, the IRS has provided additional information on the extension of the April 15 tax deadline announced in response to the COVID-19 pandemic. As mentioned in a prior tax blog prepared by Dickinson Wright, the IRS has provided an automatic extension to July 15, 2020 of Federal income tax returns and payments that would otherwise be due on April 15. This tax blog highlights a few of the FAQ’s that may be of interest to individuals and sponsors of retirement plans.

  • Individuals or businesses that have a Federal income tax filing that would otherwise be due on April 15 do not need to file an extension form to take advantage of the automatic extension to July 15.
  • Contributions to individual retirement accounts (IRAs) made on or before July 15 may be designated as a contribution for the 2019 tax year.
  • Contributions to health savings accounts (H.S.A.s) made on or before July 15 may be designated as a contribution for the 2019 tax year.
  • An individual’s first quarter 2020 estimated income tax payment has been postponed from April 15 to July 15, 2020. However, the second quarter 2020 estimated tax payment is still due on June 15, 2020.
  • Unrelated business income tax returns (Form 990-T) that are due on April 15 have been granted an automatic extension to July 15. Calendar year retirement plans and IRAs that have $1,000 or more of unrelated trade or business gross income (usually from investments in partnerships) are required to file IRS Form 990-T.
  • Employers with an April 15 Federal income tax due date now have until July 15 to make contributions to their retirement plans for their prior tax year.
  • Payroll and excise tax returns due April 15 have not been extended.
  • Information returns, such as IRS Form 5500, due April 15 have not been extended, although an extension may be requested using IRS Form 5558.
  • ACA information returns, on IRS Form 1095-C and 1094-C due March 31 for electronic filers, have not been extended, although a 30-day automatic extension will be granted by filing Form 8809 before March 31.
  • Gift tax returns (IRS form 709) due April 15 have not been extended, although an extension can be requested using IRS Form 8892.
  • Estate tax returns (IRS form 706) due April 15 have not been extended, although an extension can be requested using IRS Form 4768.
  • The April 15 deadline for removing 2019 excess elective deferrals from an employer’s retirement plan has not been extended.
  • Taxpayers who have filing or payment due dates other than April 15 have not been granted relief at this time.

The IRS relief does not apply to state tax filings and payment deadlines which vary from state to state. Taxpayers should check with their individual state tax agencies for details of any extension.

For more information, please contact Deb Grace at 248-433-7217, or any one of the attorneys in our Tax Group or Employee Benefits and Executive Compensation Group.

Tax Return Filing Deadline Extended; Tax Credits Made Available for Small and Midsize Employers

Tax Return Due Date Extended to July 15; Tax Payments Deferred

On Friday, March 20, 2020 the United States Treasury extended the April 15, 2020 tax-filing deadline to July 15, 2020.  Treasury Secretary Steven Mnuchin communicated this extension via Twitter stating, “All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”

The automatic extension applies to all individual and business federal income tax filings that would otherwise be due on April 15.

In IR 2020-18, the IRS also confirmed that taxpayer can defer federal income tax payments (including 1st quarter estimated taxes) that were otherwise due on April 15, 2020, to July 15, 2020, without incurring penalties and interest (regardless of the amount owed).  IR 2020-18 explains that this deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.

Importantly, taxpayers do not need to file any additional forms for this automatic federal tax filing and payment relief.

The deferral does not apply to payroll taxes, estate taxes or excise taxes, nor does it apply to estimated taxes due on June 15, 2020.

Tax Credits

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (the “Act”) which provides relief to employees and small and midsize businesses due to the COVID-19 outbreak.

Under the Act, employers with less than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act are entitled to certain tax credits based on qualifying leave they provide between the effective date of the Act and December 31, 2020. Similar credits are available to self-employed individuals as well.

For employees that are unable to work because of their own COVID-19-related health issues, such employers may receive a refundable tax credit at the employee’s regular rate of pay, up to $511 per day for 10 days (for a maximum of $5,110).

For an employee who is caring for another with COVID-19-related health issues (or is caring for a child due to  a school or child care facility closure or unavailability of child care provider due to COVID-19 issues), such employers may receive a refundable tax credit at  two-thirds of the employee’s regular rate of pay, up to $200 per day for 10 days (for a maximum of  $2,000).

In addition to the aforementioned tax credits related to sick leave, if an employee is unable to work because of a need to care for a child affected by a school or child care facility closure or whose child care provider is unavailable due to COVID-19 issues, such employers may receive a refundable child care leave tax credit at two-thirds of the employee’s regular pay, up to $200 per day (up to a maximum of $10,000).  A total of 10 weeks of qualifying leave can be counted towards the child care leave tax credit.

The Department of Treasury and the IRS have indicated that guidance will be released this week allowing eligible employers who pay qualifying sick leave or child care leave to retain a corresponding amount of payroll taxes instead of depositing them with the IRS.

For more information, please contact J. Troy Terakedis at 614-744-2589, or any one of the attorneys in our Tax Group or Employee Benefits Group.

Estate Planning Amidst the Coronavirus Pandemic

The Coronavirus (COVID-19) Pandemic has impacted every corner of the world at this point. As medical experts, financial advisors, and our colleagues that specialize in healthcare law, employment law, and other related areas are busy advising clients on the best course of action for the weeks and months ahead, we – as estate planners – also want to remind our clients and friends of some important considerations during these uncertain times.

At this point, we would simply promote the following actions to ensure that your estate planning affairs are in order:

(1)        Review your existing documents. Make sure that you have copies (either paper or electronic) of your existing estate planning documents, and review them to confirm that they still reflect your wishes. If you cannot locate your documents, consider calling or emailing your estate planning attorney to obtain copies.

(2)        Pinpoint any items that require attention sooner rather than later. As you review, take note of any major changes that may have occurred in your family since you last updated your estate plan. These might include child births, deaths, marriages, divorces, etc. And also consider whether the individuals that you previously appointed to serve as your agents are still appropriate.

(3)        Follow up with your loved ones and advisors.

  • Make sure that your loved ones know if you have appointed them to any role in your estate plan. This includes your executor (i.e. personal representative under your will, or trustee of your trust), guardian for your minor children, attorney-in-fact under your financial durable power of attorney, and patient advocate under your health care power of attorney.
  • Consider reaching out to your financial advisor, insurance advisor, etc. to ensure that your beneficiary designations are up to date and discuss any new planning opportunities relative to your current financial status.
  • If you require any medical attention in the near future, confirm that your medical provider has a copy of your patient advocate designation and is informed as to who you wish to have access to your confidential health information.

NOTE – If you do not already have an estate plan, now is as good of a time as any to consider the opportunity before you. Having a will/trust, a financial durable power of attorney, and a healthcare power of attorney can certainly contribute to a healthy state of mind.

I hope that by taking these steps, you are able to ease anxiety and find solace in knowing that you have planned ahead and addressed your risks and concerns. If you have any questions or concerns about your estate planning affairs, please contact me (azucco@dickinsonwright.com) or any other member of the Dickinson Wright Estate Planning Practice Group.

Internal Revenue Service Publishes Regulations Clarifying Business Meal and Entertainment Expenses

Although the 2017 Tax Cuts and Jobs Act (TCJA) suspended the 2% of AGI miscellaneous deductions for individuals beginning in 2018, certain taxpayers may still claim deductions for unreimbursed business expenses, including sole proprietors, certain government officials, Armed Forces reservists and partners in flow-through entities who are regarded as self-employed individuals. Such individuals who incur business expenses that are not reimbursed by their employer or business entity may still claim deductions in calculating their taxable income.

The TCJA, perhaps in order to offset costs of the Act’s general tax cut provisions by “closing loopholes” or enacting revenue raising provisions, eliminated the deduction for entertainment, amusement and recreation and associated expenses. However, exceptions from the entertainment expense disallowance apply to certain categories of expenses, including meal expenses (which in most cases are still subject to a 50% deduction limitation).

The IRS provided temporary guidance in late 2018 in the form of Notice 2018-76 describing when meal expenses incurred before, after or during entertainment-related activities may still qualify for deduction. Now, the IRS has just published proposed regulations (which may be relied on by taxpayers until final regulations are published). The proposed regulations further clarify the circumstances under which meals remain deductible. In addition to IRS guidance on these issues, taxpayers are reminded that such expenses may not be “lavish or extravagant” under the circumstances, and remain subject to the substantiation and other requirements of Internal Revenue Code Section 274.

For more information, please contact Tom Hammerschmidt in the Firm’s Ann Arbor office at (734) 623-1602 or any of the Firm’s tax specialists located in our Dickinson Wright U.S. offices.