On March 27, the House voted overwhelmingly to approve H.R. 748—the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)—a $2.2 trillion package with a stated purpose of providing emergency assistance and healthcare response for individuals, families and businesses affected by the COVID-19 pandemic. The CARES Act is part three of a wave of legislation to address the COVID-19 pandemic and follows the enactment of the Families First Coronavirus Response Act (FFCRA) and a multi-billion dollar emergency funding bill.
The CARES Act includes a host of provisions providing relief for both individuals and businesses with respect to retirement plans, health plans and other employee benefits, including expanded availability of hardship withdrawals and plan loans, along with relaxed rules regarding first-dollar coverage of treatments related to coronavirus and telehealth services under high deductible health insurance plans (HDHPs). The following describes the provisions of the CARES Act impacting employee benefits.
Special Rules for Retirement Plans
Plan Distributions and Plan Loans (Sections 2202)*
*Note: This portion of the article has been updated as of June 23, 2020, to reflect IRS Notice 2020-50, which provides additional guidance on coronavirus-related distributions and retirement plan loans.
The CARES Act creates a new coronavirus-related distribution option and expands the availability of plan loans from retirement plans. These options are available to qualified plans such as 401(k) and profit-sharing plans, 403(a) and (b) plans, 457 plans, and IRAs. Note, these changes are permissive, not mandatory for qualified plans, so employers will need to decide whether to implement the changes.
First, participants may take up to $100,000 in “coronavirus-related distributions” from their retirement plan. A “coronavirus-related distribution” is a distribution of funds from a plan, between January 1, 2020, and December 31, 2020, to a “qualified individual” (defined below).
UPDATED (June 23, 2020): A “qualified individual” is a person who meets the following criteria:
- They are diagnosed with COVID-19;
- They have a spouse or a dependent diagnosed with COVID-19;
- They experience adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household:
- Being quarantined;
- Being furloughed or laid off;
- Having work hours reduced;
- Being unable to work due to lack of childcare;
- Closing or reducing hours of a business that they own or operate;
- Having pay or self-employment income reduced; or
- Having a job offer rescinded or start date for a job delayed due to COVID-19.
In this context, a “member of the individual’s household” refers to someone who shares the qualified individual’s principal residence, which might include a roommate, another relative or significant other.
UPDATED (June 23, 2020): Plan administrators can rely on an employee’s certification that they meet one of these coronavirus-related situations to approve the distribution unless the plan administrator has “actual knowledge” to the contrary. IRS Notice 2020-50 clarifies that, in this context, “actual knowledge” means that the administrator “already possesses sufficient accurate information to determine the veracity of the employee’s certification.” The administrator has no duty to inquire further. IRS Notice 2020-50 also contains model self-certification language for a coronavirus-related distribution.
These coronavirus-related distributions are exempt from the 10% early withdrawal tax and instead of being subject to income tax upon receipt, taxation of these distributions may be spread out in equal parts over three years beginning in 2020, unless otherwise desired by the recipient. The distributions can be repaid over three years (in one or multiple installments) to any eligible retirement plan in which the participant is a beneficiary and will be treated as rollovers when repaid. (IRS Notice 2020-50 provides that distribution repayments will not count toward the one IRA rollover per year limit.)
UPDATED (June 23, 2020): IRS Notice 2020-50 contains additional details about the tax reporting and payment of coronavirus-related distributions. In general, a qualified individual may designate almost any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020—including required minimum distributions (RMDs) and qualified plan loan offsets—as a coronavirus-related distribution, regardless of whether the plan treated the distribution as a coronavirus-related distribution. Thus, a qualified individual’s designation of a coronavirus-related distribution might be different from the plan’s treatment of the distribution. IRS Notice 2020-50 also clarifies that amounts that are not eligible rollover distributions (e.g., excess deferral refunds, deemed distributions resulting from loan defaults, and permissible withdrawals from an eligible automatic contribution arrangement) cannot be treated as coronavirus-related distributions.
UPDATED (June 23, 2020): IRS Notice 2020-50 provides that an invalid recontribution will be treated as valid if the plan administrator takes the following actions:
- Reasonably concludes that the recontribution is eligible for direct rollover treatment; and
- Upon determining that the amount was an invalid rollover, distributes the invalid amount, plus earnings, to the employee.
Plan administrators may rely on an employee’s certification in determining recontribution eligibility unless the plan administrator has actual knowledge to the contrary.
Second, the maximum amount that may be taken as a plan loan by a “qualified individual” is increased from $50,000 to $100,000, beginning on the effective date of the CARES Act and ending 180 days later. During this period, participants can borrow up to the lesser of $100,000 or 100% of their accrued benefits. In addition to increasing the maximum loan amount, the CARES Act also provides payment relief for outstanding loans. Current plan loans for qualified individuals that call for payments to be made on or after the CARES Act enactment date through December 31, 2020, may be delayed for one year without penalty. However, interest continues to accrue during this period and repayment rates can be adjusted to reflect the interest and the later due date.
UPDATED (June 23, 2020): IRS Notice 2020-50 contains a safe harbor for suspending and extending loan repayments due through the end of 2020. Under the safe harbor, all loan payments are suspended through 2020. Beginning with the first payment date in 2021, the loan (plus accrued interest) will be reamortized from January 1, 2021 through the date that is one year after the original loan repayment date.
UPDATED (June 23, 2020): IRS Notice 2020-50 clarifies that coronavirus-related distributions are not limited to amounts required to meet a qualified individual’s specific need for funds. Unlike traditional hardship distributions in defined contribution plans, coronavirus-related distributions may be in excess of the qualified individual’s financial need.
Plans may begin operating in accordance with the changes above, provided they are amended no later than the last day of the plan year beginning on or after January 1, 2022 (i.e., for calendar year plans, by December 31, 2022). The amendment deadline for governmental plans is extended by two years.
Temporary Waiver of Required Minimum Distributions (Section 2203)
The CARES Act temporarily waives required minimum distributions from retirement accounts for participants who were required to receive such distributions in 2020. Ordinarily, tax rules require that participants in 401(k) and profit-sharing plans, 403(a) and (b) plans, 457 plans, and IRAs begin taking minimum distributions from their plan accounts no later than April 1 of the year in which participants reach age 70-1/2. For participants who have already begun taking required minimum distributions or who reached age 70-1/2 in 2019 and were required to begin in 2020, their distributions are waived for 2020. It appears that plans would be permitted, but not required, to delay distributions. Plans may begin operating in accordance with this change, provided they are amended no later than the last day of the plan year beginning on or after January 1, 2022 (i.e., for calendar year plans, by December 31, 2022). The amendment deadline for governmental plans is extended by two years.
Rules Applicable to Pension Plans (Section 3608)
The CARES Act gives sponsors of single-employer defined benefit pension plans additional time to make minimum funding contributions that were due in 2020. Ordinarily, payment of any required minimum contributions due to a plan must be made by the plan sponsor no later than 8-1/2 months after the end of the plan year, and any funding shortfalls from prior years must be paid quarterly. Section 3608 of the CARES Act extends the deadline to pay minimum funding contributions that were due in 2020 until January 1, 2021, although plans sponsors will owe interest on the delayed contributions.
The CARES Act also allows plan sponsors to use their 2019 adjusted funding target attainment percentage (AFTAP) to determine whether their plans are subject to benefit reductions under Section 436 of the Internal Revenue Code (Code) for any plan years that take place during the calendar year 2020.
Rules Applicable to Group Health Plans and Health Insurance Issuers
Coverage for Coronavirus Preventive Services (Section 3203)
The CARES Act requires that group health plans and health insurance issuers cover “qualifying coronavirus preventive services” without any cost-sharing. A “qualifying coronavirus preventive service” is an item, service or immunization that is intended to prevent or mitigate coronavirus and that is either:
- An evidence-based item or service that is rated “A” or “B” by the United States Preventive Services Task Force; or
- An immunization that is recommended by the CDC’s Advisory Committee on Immunization Practices.
Health plans and policies must cover the qualifying coronavirus preventive service without cost-sharing within 15 days of the service becoming qualified.
Coverage for Coronavirus Testing (Section 3201 and 3202)
UPDATED (April 16, 2020): The FFCRA requires group health plans and health insurance to provide coverage for COVID-19 diagnostic testing, at no cost to covered individuals, and without prior authorization or other medical management requirements beginning March 18, 2020. COVID-19 diagnostic testing includes “in vitro diagnostic products,” items and services furnished to the individual during healthcare provider office visits (which include in-person visits and telehealth visits), urgent care center visits, and emergency room visits that result in an order for or administration of COVID-19 diagnostic testing products, but only to the extent such items or services relating to the COVID-19 diagnostic testing or the evaluations to determine if a COVID-19 test is needed. This means that there must be no cost to covered individuals, whether in the form of copayments, coinsurance or deductible, for the COVID-19 diagnostic testing and related services. All such costs must be covered by the plan.
In guidance issued on April 11 by the Departments of Labor, Health and Human Services and the Treasury (the tri-agency guidance), the agencies clarified (in Q4) that in vitro diagnostic tests do include serological tests used to detect antibodies for the virus. This tri-agency guidance also clarifies the extent of the related items and services that must be covered as including those that relate to the furnishing or administration of the test or the evaluation of the individual to determine the need for the test, as determined by the attending healthcare provider. This could include other tests (e.g., for influenza) if the attending healthcare provider deems them appropriate.
The CARES Act clarifies the COVID-19 diagnostic testing requirement of the FFCRA by expanding in vitro diagnostic products required to be covered to include certain tests that have not yet been approved under the Federal Food, Drug, and Cosmetic Act, unless and until approval is either denied or the developer fails to seek approval within a reasonable time.
The CARES Act also sets reimbursement rates that providers may receive for required COVID-19 diagnostic testing. If the rate applicable to a certain test was already negotiated by the health plan or issuer and the provider before the COVID-19 public health emergency, then the plan or issuer pays that rate. If there is no negotiated rate, then the plan or issuer pays the lesser of:
- The price of the service posted by the provider on a public website; or
- The rate negotiated by the parties.
While the COVID-19 public health emergency is in effect, healthcare providers are required to post the cost of their coronavirus testing on a public website and may be fined up to $300 per day by the Department of Health and Human Services (HHS) for failing to do so.
Expansion of Telehealth under HDHPs (Section 3701)
UPDATED (April 16, 2020): The CARES Act amends the rules applicable to high deductible health plans (HDHPs) for plan years beginning on or before December 31, 2021, to allow HDHPs to cover telehealth and other remote care services before the applicable deductible being met, further promoting social distancing directives. This allows HDHP participants to receive first dollar coverage for telehealth and other remote care services without disqualifying them from being eligible to contribute to a health savings account (HSA). This provision expands upon the relief provided by the IRS earlier this year (via IRS Notice 2020-15), which would only have covered telehealth services related to COVID-19 testing or treatment.
Over-the-Counter Products (Section 3702)
UPDATED (April 16, 2020): The CARES Act amends the rules applicable to HSAs, Archer MSAs, health reimbursement arrangements (HRAs) and health flexible spending accounts (health FSAs) to allow funds from these accounts to be used to reimburse the cost of over-the-counter drugs and medicine and menstrual products. Previously, a prescription was required for over-the-counter drugs and medicine to be eligible, and menstrual products were outside of the scope of expenses that may be reimbursed. This change is effective beginning January 1, 2020. Plan terms should be checked to confirm whether an amendment is required to permit HRAs and health FSAs to reimburse these expanded products.
DOL Authority to Postpone Deadlines (Section 3607)
Current law permits the U.S. Department of Labor to extend certain filing deadlines under ERISA by up to one year in the event of a federal disaster or a terroristic or military action. The CARES Act expands the circumstances under which filing deadline may be extended to include a public health emergency declared by the Secretary of HHS pursuant to the Public Health Service Act. Although President Trump has not yet declared the coronavirus pandemic a “federal disaster,” Secretary of HHS Alex Azar declared a public health emergency related to the pandemic on January 31, 2020.
Exclusion for Employer-Paid Student Loans (Section 2206)
The CARES Act amends Section 127(c) of the Code to exclude from an employee’s income any payments made by his or her employer before January 1, 2021, toward principal or interest on any qualified education loan incurred by the employee, whether paid to the employee or directly to the lender. This change does not increase the total amount of educational assistance that an employee may exclude from income under Section 127(c) or the other requirements that apply. The total exclusion is still capped at $5,250 per calendar year.
Limitation on Employee Compensation for Business Receiving Emergency Relief (Section 4404)
The CARES Act sets two limits on employee and officer compensation for eligible businesses that receive part of the $500 billion in loans and loan guarantees authorized by Section 4003 of the CARES Act, which will include air carriers, businesses maintaining national security and others. The limits last from the date a loan or loan guarantee is made until one year after the loan is no longer outstanding. Total compensation includes salary, bonuses, stock awards, and other financial benefits paid by the business to the employee or officer.
For any employee or officer who received total compensation of over $425,000 in 2019, loan-recipient companies are prohibited from doing the following:
- Paying such employee or officer total compensation in any 12-month period that exceeds the total compensation received by such employee or officer in 2019; or
- Paying severance pay or other termination benefits that exceed twice the employee or officer’s total 2019 compensation.
For any employee or officer who received total compensation of over $3,000,000 in 2019, loan-recipient companies are prohibited from paying such employee or officer total compensation in any 12-month period that exceeds $3,000,000 plus 50% of all compensation over $3,000,000 the employee or officer received in 2019.
Cancellation of Deferral Election under Nonqualified Deferred Compensation Plan
UPDATED (June 23, 2020): IRS Notice 2020-50 provides that nonqualified deferred compensation plans are permitted to treat coronavirus-related distributions as hardship distributions for purposes of determining whether employees or other service providers can cancel their deferral elections under Section 409A. Note, however, that the deferral election must be canceled, not merely postponed, to comply with Section 409A.