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.