CARES Act Provides Employee Benefit Plan Relief to Help Employers and Employees Affected by COVID-19 Pandemic
Key employee benefit plan-related provisions of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) include:
- Temporary changes for retirement plans: including waiver of 10% penalty for early withdrawals and increase in loan limits for individuals affected by COVID-19; waiver of required minimum distributions in 2020; and extension of the contribution deadline for defined benefit plans.
- Changes for group health plans: including flexible spending account plan coverage of over-the-counter medications; clarifications regarding high-deductible health plan (HDHP) deductibles and telehealth services; and coverage mandates for diagnostic testing and preventive services for COVID-19-related conditions.
- Employer contributions of up to $5,250 toward repayment of an employee’s student loan (for higher education) tax-free to the employee.
- An expansion of the Department of Labor’s (DOL) authority to extend ERISA-mandated filing deadlines due to a public health emergency.
Each of these provisions is explained in greater detail below.
Retirement Plan Provisions
Temporary Waiver of 10% Early Withdrawal Penalty
(CARES Act Section 2202)
A 10% early withdrawal penalty applies to qualified plan distributions made before the participant or beneficiary attains age 59½ (subject to limited exceptions, such as in the case of disability, death, or separation from service after attaining age 55). Under the CARES Act, the 10% penalty is waived for “coronavirus-related distributions” of up to $100,000 (for all plans of the controlled group):
- A “coronavirus-related distribution” is a distribution made on or after January 1, 2020, and before December 31, 2020, to an individual (1) who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC); (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.
- The individual may at any time within three years of the coronavirus-related distribution recontribute the amount to a qualified plan or IRA as a rollover.
- Unless the individual elects otherwise (or timely recontributes the amount), the income attributable to the coronavirus-related distribution is taxed ratably over three years commencing with the year of distribution.
- The administrator of a retirement plan may rely on an employee’s certification that the employee satisfies the requirements for a coronavirus-related distribution.
Temporary Increase in Plan Loan Limits
(CARES Act Section 2202)
Generally, a loan from a qualified plan cannot exceed the lesser of (i) $50,000 (as reduced by the excess of the highest outstanding loan balance during the previous year over the outstanding loan balance on the date of the loan) or (ii) 50% of the participant’s vested account balance (or, if greater, $10,000). With respect to any plan loans taken by a qualified individual within 180 days of March 27, 2020, the CARES Act increases the above dollar limit from $50,000 to $100,000 and increases the above vested account balance percentage limit from 50% to 100%. Qualified individuals are the same individuals listed in the first bullet above who are eligible for the 10% penalty waiver.
For any plan loan of a qualified individual that is outstanding on or after March 27, 2020, and that has a due date for any payment of the loan during the period from March 27, 2020 to December 31, 2020, the due date of such payment is extended for one year (with subsequent payments adjusted to reflect the delay in the due date and any interest accrued during such delay).
Waiver of Required Minimum Distributions for 2020
(CARES Act 2203)
For defined contribution plans (e.g., 401(k), 403(b), and governmental 457(b) plans) and IRAs, the CARES Act waives any required minimum distributions (RMDs) for calendar year 2020, meaning that any individual otherwise required to take an RMD from those types of plans is not required to withdraw any amount in 2020. The waiver applies to 2019 RMDs (where the individual was permitted to delay payment until April 1, 2020) and 2020 RMDs. Any amount withdrawn in 2020 that absent this waiver would not have been eligible to be rolled over on account of being an RMD may be rolled over.
Generally (and unless extended by the Secretary of the Treasury), the deadline for plan sponsors to adopt plan amendments to reflect the changes described above is December 31, 2022, for a plan that operates on a January 1–December 31 plan year. Otherwise, the deadline is the last day of the plan year that begins in 2022. For a government plan, the deadline is the last day of the first plan year beginning on or after January 1, 2024.
Extended Contribution Deadline for Single Employer Plans
(CARES Act Section 3608)
The CARES Act extends the due date of defined benefit plan minimum required contributions otherwise due in 2020 (pursuant to IRC § 430) to January 1, 2021. The amount of the contribution is increased by interest accruing from the original due date to the payment date at the effective interest rate for the plan for the plan year of the payment date. In addition, for purposes of the benefit restrictions under IRC § 436 applicable to certain underfunded plans (i.e., restrictions on benefit accruals and optional forms of benefits), a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending prior to January 1, 2020, as the AFTAP for plan years that include calendar year 2020. This will allow plan sponsors to avoid the restrictions of IRC § 436 where a plan’s funding status has declined due to the COVID-19 pandemic.
Group Health Plan Provisions
Restrictions Lifted on Coverage for Over-the-Counter Medical Products
(CARES Act Section 3702)
Under the CARES Act, expenses incurred for non-prescribed over-the-counter medicine and medical supplies are covered expenses that can be reimbursed under health savings accounts, health flexible spending accounts, and health reimbursement arrangements. This change repeals the Affordable Care Act’s prohibition on reimbursement of such expenses under those arrangements. The CARES Act also includes menstrual products as covered expenses that can be reimbursed under those arrangements.
HDHP Deductibles for Telehealth and Remote Care Services
(CARES Section 3701)
The CARES Act provides that for plan years beginning on or before December 31, 2021, a plan will not fail to be considered an HDHP if no deductible applies to telehealth and remote care health services.
Mandates Regarding Testing and Preventive Services
(CARES Act Sections 3201, 3202, and 3203)
The CARES Act includes various mandates for group health plans (health insurance issuers) regarding COVID-19-related testing and preventive services, including:
- Plans must cover, without cost-sharing, certain in vitro diagnostic testing for COVID-19.
- Plans must reimburse diagnostic testing providers on the basis of negotiated rates in effect prior to the COVID-19 pandemic being declared a public health emergency or, where there were no such pre-negotiated rates, in an amount that equals the cash price for the service as listed by the provider on a public internet website (or the plan can negotiate for a lower rate).
- Plans must cover, without cost-sharing, qualifying coronavirus preventive services, which includes any item, service, or immunization that is intended to prevent or mitigate COVID-19 and that is (1) an evidence-based item or service that has in effect a rating of “A” or “B” in the current recommendations of the U.S. Preventive Services Task Force or (2) an immunization that has in effect a recommendation from the Advisory Committee on Immunization Practices of the CDC with respect to the individual involved.
Income Exclusion for Employer Payments of Student Loans
(CARES Act Section 2206)
The CARES Act enables an employer to contribute up to $5,250 toward repayment of an employee’s student loan (for higher education) tax-free to the employee, provided that the payment is made on or after March 27, 2020, and before January 1, 2021. The employer’s payment (including principal or interest) can be made directly to the lender or to the employee. The $5,250 annual cap applies to both the new student loan repayment benefit and other tax-free education assistance (such as expenses for tuition, books, and supplies) an employer provides pursuant to IRC § 127. As part of this provision, the interest portion of the payment is not deductible by the employee under IRC § 221.
Expansion of DOL Authority to Extend Filing Deadlines
(CARES Act Section 3607)
Under ERISA § 518, the Secretary of Labor has the authority to extend any filing or other deadlines applicable to employee benefit plans, sponsors, administrators, participants, or beneficiaries for up to one year if the President has declared a “disaster” under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or if there has been a terroristic or military action. The CARES Act amends this provision to also permit the Secretary of Labor to extend deadlines by up to one year if the Secretary of the Department of Health and Human Services (HHS) declares a “public health emergency” pursuant to Section 319 of the Public Health Service Act. The HHS Secretary already has declared a public health emergency in connection with the COVID-19 pandemic. Plan sponsors should be on the lookout for separate guidance on extensions of ERISA-mandated deadlines, which may include, among other things, deadlines applicable to health plan special enrollment, election of COBRA continuation coverage, and claims procedures.
For more information on any of these provisions, please reach out to John Brescher, Kevin Brown, Mark Daniele, Joel Horowitz, Jane Kimball, and Meredith Walsh.