The President recently signed into law the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act.” The CARES Act is primarily a stimulus package that addresses the current coronavirus crisis, and it includes several provisions relating to employee benefit plans.
- Penalty-free coronavirus-related distributions — The 10% early withdrawal penalty under Internal Revenue Code (Code) Section 72(t) is waived for “coronavirus-related distributions” of up to $100,000. In addition, the 20% withholding requirement on these distributions does not apply. A coronavirus-related distribution is a distribution made in 2020 from a qualified retirement plan (including a 401(k) plan, 403(b) plan, 457(b) plan, individual retirement account, or individual retirement annuity) to a “qualified individual” (see the definition of a qualified individual below). A plan administrator may rely on an employee’s certification that the distribution is a coronavirus-related distribution. A coronavirus-related distribution is not treated as an eligible rollover distribution and may not be contributed as a rollover contribution to an individual retirement account or another employer retirement plan.
- Qualified individual — An individual (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
Amounts required to be included in an individual’s income because of a coronavirus-related distribution will be included ratably over the individual’s 2020, 2021, and 2022 taxable years. However, an individual may choose to opt out of this special income tax treatment. Furthermore, an individual who receives a coronavirus-related distribution may repay the distribution in one or more payments at any time during a three-year period beginning on the day after the distribution was received. The repayment is to be treated by the plan as a rollover contribution made through a trustee-to-trustee transfer and is therefore not subject to annual contribution limitations.
Practice Pointer: Even if a participant is not a qualified individual, he or she may be eligible to receive a hardship distribution from a retirement plan that permits hardship distributions on account of a federally-declared disaster to a participant who lives or works in a disaster area as declared by the Federal Emergency Management Agency (FEMA), in accordance with the safe harbor hardship distribution regulations. To date, FEMA has declared all of California, Florida, Iowa, Louisiana, New Jersey, New York, and Texas to be disaster areas as a result of the COVID-19 epidemic. A current list of locations declared to be disaster areas by FEMA may be found here.
- Increased loan amounts — For a period of 180 days beginning on the date of the enactment of the CARES Act, the limitations on loans from tax-qualified retirement plans (including 401(k) plans) and 403(b) plans to “qualified individuals” (see the definition of qualified individual above) are increased from the lesser of $50,000 or 50% of the participant’s vested balance to the lesser of $100,000 or 100% of the participant’s vested balance. Loan repayment due dates for qualified participants under qualified retirement plans and 403(b) plans occurring from the date of enactment of the CARES Act through December 31, 2020 are delayed for 1 year. The delay period is not considered for applying the five-year maximum repayment term applicable to plan loans.
- Temporary waiver of required minimum distributions — Required minimum distributions from defined contribution plans (including 401(k) plans, 403(b) plans, governmental 457(b) plans, individual retirement annuities, and individual retirement accounts) due in 2020 are waived. It is important to note that this waiver does not apply to defined benefit plans.
- Delayed minimum requirement contributions — The due date for any minimum required contribution for a single-employer defined benefit plan due in 2020 is delayed until January 1, 2021. Each minimum required contribution that is delayed will be increased to include interest accrued during the delay period at the effective rate of interest applying in the plan year of the original due date for the contribution.
- Carry forward of funding target — A sponsor of a single-employer defined benefit plan may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020, as the adjusted funding target attainment percentage for plan years that include calendar year 2020.
Practice Pointer: Plan administrators may begin operating plans to reflect the above changes immediately. Plan documents and/or separate loan policies will eventually need to be amended or revised to reflect any changes that are implemented. The CARES Act provides that retroactive amendments for these purposes generally must be made by the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans) for non-governmental plans and by the last day of the first plan year beginning on or after January 1, 2024 for governmental plans.
- Coverage of diagnostic testing for COVID-19 — The Families First Coronavirus Response Act is revised to clarify that all testing for COVID-19 must be covered by group health plans without cost sharing, including those tests without an emergency use authorization by the Food and Drug Administration.
- Pricing of diagnostic testing — For COVID-19 testing that is covered with no cost to participants, group health plans must pay either the rate specified in a contract between the provider and the plan, or, if there is no contract, a cash price published by the provider on a public internet site. A provider who does not publish a cash price for testing may be subject to a penalty of $300 for each day of noncompliance.
- Rapid coverage of preventive services and vaccines for the coronavirus — Group health plans must provide free coverage without cost-sharing for a COVID-19 vaccine that has in effect a rating of “A” or “B” in the current recommendations of the United States Preventive Services Task Force or a recommendation from the Advisory Committee on Immunization Practices (ACIP). The coverage must be provided within 15 days of any such recommendation; the usual one-year delay on implementation does not apply.
- HSAs for telehealth services — High-deductible health plans (HDHPs) with health savings accounts (HSAs) may cover telehealth services without requiring that the minimum deductibles otherwise applicable to HDHPs be met.
- HSAs and FSAs used to purchase over-the-counter drugs and menstrual care products — Health savings accounts (HSAs) and flexible spending accounts (FSAs) may be used to purchase over-the-counter drugs without a physician’s prescription. They may also be used to purchase menstrual care products including tampons, pads, liners, cups, sponges, and similar products.
- DOL authority to postpone certain deadlines expanded — Section 518 of the Employee Retirement Income Security Act (ERISA) is amended to provide the Department of Labor (DOL) the ability to postpone certain ERISA filing deadlines for a period of up to one year in the case of a public health emergency. This applies to both retirement and health plans. The DOL could potentially extend the time for filing documents such as the annual return on Form 5500.
- Exclusion from income for employer-paid student loan assistance — Up to $5,250 of student loan repayment assistance paid by an employer after the date of enactment of the CARES Act through December 31, 2020, to or on behalf of an employee may be excluded from the employee’s income under Code Section 127. The repayment assistance may be paid to a lender or directly to the employee, must be for the principal or interest on a qualified education loan incurred by the employee for his or her own education, and is combined with other employer provided-education assistance for purposes of applying the $5,250 annual exclusion limit for such payments under Code Section 127.
Congress and the Administration are already working on at least one additional stimulus package, Stimulus Four, and it is expected include corrections and clarifications to the CARES Act and previous stimulus efforts. Bradley’s Employee Benefits and Executive Compensation Group and Governmental Affairs Group are actively monitoring and engaging with Congress and the Administration on these issues.