This advisory summarizes key provisions in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) applying to employee benefit plans. We provide a summary of key items and more detailed FAQs relating to retirement plans, health and welfare plans, tax credits for employers retaining employees, and consequences of employer payments towards certain employee student loans. Please contact your DWT employee benefits attorney for more information.
CARES Act: Key takeaways for employee benefits
- The CARES Act provides optional expansions for withdrawals and loans up to $100,000 in retirement plans. Plan sponsors may utilize these provisions immediately, but a plan amendment will be required by December 31, 2022.
- The CARES Act provides temporary relief from required minimum distribution requirements by delaying required distributions from defined contribution plans and IRAs in 2020 for an additional year. Plan sponsors may utilize these provisions immediately, but a plan amendment will be required by December 31, 2022. This relief does not apply to defined benefit plans.
- There is limited relief for minimum funding contributions otherwise due in 2020 for single-employer pension plans, which can be delayed until January 1, 2021, with interest.
- The CARES Act expands the types of employers whose pension plans can qualify for treatment as cooperative and small employer charity plans.
Health and Welfare Plans
- Telehealth and other remote care can be covered without any deductible, but only for plan years beginning on or before December 31, 2021. This will require a plan amendment.
- Over the counter medicines and drugs can once again be paid for with health savings accounts (HSAs), health flexible spending accounts (HFSA), and health reimbursement arrangements (HRA). In addition, menstrual care products are now treated as a qualified medical expense and can also be paid for with HSA, HFSA and HRA dollars. This will require cafeteria plan amendments.
- Plans must cover all testing for COVID-19, without cost sharing, even for those tests that have not yet received an emergency use authorization from the FDA. In addition, plans must cover all qualifying preventive items, services or vaccines for COVID-19 once developed, without cost sharing.
Employer payroll tax credits and delayed payment
- The CARES Act provides a tax credit against taxes owed by certain employers in 2020 for 50 percent of wages paid to employees while operations were significantly impacted by COVID-19. The credit is available to employers: (1) whose operations were fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; or (2) whose gross receipts declined by more than 50 percent when compared to the same calendar quarter in the prior year.
- The CARES Act permits employers to delay depositing their Social Security taxes incurred between March 27, 2020, and January 1, 2021.
Employer payment of student loans
- The CARES Act permits nontaxable employer payments before January 1, 2021, towards a qualified education loan incurred by an employee for his or her education, subject to an annual cap of $5,250.
1. Are new withdrawals and loans available under the CARES Act for retirement plans?Yes, the CARES Act expands the distributions and loans that can be made available by a retirement plan for participants affected by coronavirus and the economic dislocation it has caused. This relief is optional and is similar to that previously provided for hurricane and wildfire disasters but is not limited to a particular geographic area.
During 2020, a plan may allow a participant to take a distribution, without the standard 10 percent early distribution penalty tax, of up to $100,000. (The provision is retroactive to January 1, 2020, so this may shelter participants who previously took hardship withdrawals from the 10 percent penalty.) To qualify, the participant (or spouse or dependent) must have been diagnosed with the illness, or have experienced adverse financial consequences as a result of a quarantine, furlough, layoff, reduction in hours, or inability to work due to lack of child care due to the virus. The owner of a business can also qualify if the business has had to close or reduce hours. The CARES Act provides that the plan can rely on the participant’s certification that he or she meets these conditions. Taxation of the withdrawal can be spread over three years, and the amounts distributed can also be repaid within three years and treated like a rollover into the plan.
A plan can also offer loans to the same class of individuals. During the 180 days after enactment, instead of the normal limit of the lesser of $50,000 or half of the participant’s vested accounts, the plan can offer loans up to the lesser of $100,000 or the full vested balance. The term of these loans and any existing loans to such participants that are outstanding can also be extended; any installment due from enactment until December 31, 2020, can be extended by one year, and subsequent payments are also pushed back. While interest will accrue, the delay is disregarded for purposes of the five-year limit on the term of plan loans.
As with the changes made under the SECURE Act, these changes can be put into effect in operation now , if the plan is amended retroactively to cover them by the end of 2022.
2. Is there any relief for required minimum distributions under IRAs and defined contribution plans?Yes, but the relief is temporary only.
As background, employer-provided qualified defined contribution plans (401(k), profit sharing, money purchase, and target benefit plans), 403(b) plans, governmental 457(b) plans, as well as IRAs, are subject to minimum distribution rules that require distributions to commence by a required beginning date (“RBD”).
Prior to the SECURE Act, the RBD was April 1 of the year following the later of attainment of age 70½ or retirement (except for a 5 percent owner in an employer-provided plan or for an IRA, the RBD date was April 1 of the year following age 70½). Where a spouse was a beneficiary, the spouse had the option of delaying the distribution to the RBD of the decedent, calculated as if the decedent had survived to his or her RBD. Death distributions not paid as an annuity had to be distributed within five years of the employee’s death.
Under the SECURE Act, for distributions required to be made after December 31, 2019, the RBD was changed from age 70½ to age 72. Thus distributions were already delayed for those who turned age 70½ or died after 2019.
The CARES Act delays any distributions required to be made by defined contribution plans and IRAs in 2020 for an additional year. Specifically, the CARES Act states that a RBD need not occur in 2020. Thus, if the RBD for a distribution is in 2020 (for someone who turned age 70½ in 2019), that date is now delayed to 2021. Also, 2020 is ignored for death distributions, extending the five-year period. Finally, for those currently required to take required minimum distributions, no distribution is required to be made for 2020. It is currently unclear whether delayed distribution will be required to be made up in 2021 by taking two distributions in that year.
Plans can operate in compliance with the new legislation now as long as the plan is amended by the last day of the plan year that begins on or after January 1, 2022, i.e., December 31, 2022, for calendar year plans.
3. Is there any relief for required minimum distributions under defined benefit plans?No, the CARES Act provides no relief for required minimum distributions from a defined benefit plan.
4. Is any relief provided from the funding rules for single-employer pension plans?Very limited relief is included in the CARES Act. Any minimum funding contribution that would otherwise be due in 2020 can be delayed until January 1, 2021, with interest. This helps employers with immediate cash flow problems but does not otherwise change the funding required. Plans can also freeze their funding status as of the end of the plan year before 2020 for plan years that include calendar year 2020. Plans whose funding status has deteriorated due to market conditions therefore will not have to place restrictions on non-annuity distributions this year.
5. What changes does the CARES Act make to Cooperative and Small Employer Charity (CSEC) Plan rules?The CARES Act provides that a pension plan will be considered a CSEC plan if, as of January 1, 2000 , the plan’s sponsoring employer: (1) is a tax-exempt entity under Code Section 501(c)(3); (2) has been in existence since at least 1938; (3) conducts medical research directly or indirectly through grant making; and (4) has as its primary exempt purpose providing services with respect to mothers and children. By way of background, the Cooperative and Small Employer Charity Pension Flexibility Act was enacted in 2014 and exempts pension plans sponsored by certain cooperatives and charities from the funding rules of ERISA and the Code. The CARES Act expands the types of employers whose pension plans can qualify for treatment as CSEC plans. This CARES Act provision is effective for plan years beginning after December 31, 2018.
6. Is telehealth now compatible with a HDHP/HSA?Yes, but only for a limited time. For plan years beginning on or before December 31, 2021, the CARES Act confirms that a high deductible health plan (HDHP) is not required to have a deductible for telehealth and other remote care services, and telehealth or other remote care is disregarded. Given the importance of telehealth in the COVID-19 crisis, this will come as a relief, enabling employers to temporarily remove safeguards put into place to ensure HDHP/HSA compatibility for telehealth, such as charging fair market value until participants meet the statutory minimum deductible. However, unless this relief is extended, for plan years beginning on or after January 1, 2022, employers will need to revert to their current safeguards.
7. Were any changes made to the rules on over-the-counter medical (OTC) products that can be reimbursed under an HSA, HFSA or HRA?Yes. The Cares Act removes the requirement that medicines and drugs (except insulin) must be prescribed to be paid for with an HSA, HFSA or HRA, which means OTC medicines and drugs can once again be paid for with these accounts. In addition, menstrual care products are now treated as a qualified medical expense and can be purchased with HSA, HFSA, or HRA dollars. This provision applies to purchases after December 31, 2019.
8. Are health plans required to cover diagnostic testing for COVID-19?Yes, the CARES Act builds on the Families First Coronavirus Response Act (FFCRA) (our advisories on this law can be found here) by requiring private insurance plans to cover all testing for COVID-19, without cost sharing, even for those tests that have not yet received an emergency use authorization from the FDA. Consistent with the FFCRA, diagnostic testing extends to any services or items provided during a medical visit—including in-person or telehealth visits to a doctor’s office, urgent care, or emergency room—that result in testing or screening for COVID-19.
9. What will plans pay for COVID-19 diagnostic testing?A group health plan or a health insurance issuer will pay the provider either the negotiated rate or, if no negotiated rate is in effect because the provider is out-of-network, the lesser of the cash price for the service as posted by the provider on a public website or a different negotiated rate. Any provider that attempts to charge more than these set costs is subject to civil monetary penalties of up to $300 per day.
10. Are health plans required to pay for preventive services and vaccines?Yes, private group and individual health insurance plans will be required to cover all qualifying preventive items, services or vaccines for COVID-19 once developed, without cost sharing, within 15 days after the service or vaccine has received a qualifying recommendation from either the United States Preventive Services Task Force or the Advisory Committee on Immunization Practices.
11. Are there any provisions for coverage of COVID-19-related supplies under Medicare Part B?Yes, the CARES Act provides that COVID-19 vaccines (when available) will be covered under Medicare Part B without cost-sharing. In addition, the CARES Act clarifies a provision added by the FFCRA that all tests for the diagnosis of COVID-19 are covered under Medicare Part B without cost-sharing.
12. Does the CARES Act provide tax credits to employers for retaining employees during the COVID-19 pandemic?Yes, under Section 2301 of the Act eligible employers are entitled to a tax credit against applicable employment taxes (generally the employer’s portion of Social Security taxes) with respect to 50 percent of qualified wages paid during 2020. The full scope of the provision hinges on a number of sometimes convoluted defined terms.
An “eligible employer” includes and entity conducting business (1) whose operations were fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; or (2) whose gross receipts during a calendar quarter declined by more than 50 percent when compared to the same quarter in the prior year (in this case status as an “eligible employer” continues until the calendar quarter in which gross receipts increase to 80 percent or more when compared to the prior year’s same quarter).
The “qualified wages” prong has two variations, one for employers with more than 100 full-time employees, another for employers with 100 or fewer full-time employees. (Note that for these purposes the determination of the average number of full-time employees follows the same analysis used for compliance with the Affordable Care Act—see Internal Revenue Code Section 4980H.) For the employers with over 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For employers with 100 or fewer full-time employees, qualified wages include all employee wages paid while the employer is experiencing the COVID-19 related circumstances described above (whether the employer is operating or not). Qualified wages also includes qualified health plan expenses, including expenses for maintaining a group health plan, to the extent the expense can be allocated to other qualified wages. What this seems to mean is that health plan expenses eligible for the tax credit are to be pro-rated and limited to the expenses incurred during the same period of time that other payments to employees constitute qualified wages. (The law anticipates that regulations may be needed to clarify this pro ration process.)
There are a few other noteworthy limitations. First, these tax credits are available to tax-exempt employers but not governmental employers. Second, the maximum amount of the credit is limited to $10,000 per employee, and the credit is limited to wages received between March 13, 2020, and December 31, 2020. Third, an employer that takes advantage of a SBA loan under the Paycheck Protection Program of the CARES Act is not eligible to take advantage of these tax credits. Finally, the credit is reduced by any credits received under the FFCRA, as well as other available credits under Code Sections 3111(e) and (f) (regarding credits available for employment of veterans and for research expenditures of qualified small businesses, respectively).
13. Does the CARES Act permit employers to delay the payment of payroll taxes?Yes. Section 2302 of the Act permits employers to delay payment of the employer’s portion of Social Security taxes (referred to “applicable employment taxes”) until the “applicable date.” Effectively, an employer can delay depositing 50 percent of the taxes owed until December 31, 2021, and the other 50 percent until December 31, 2022. This deferral opportunity applies during the “payroll tax deferral period,” which begins on the date of the enactment of the CARES Act and ends before January 1, 2021.
The deferred payment of applicable employment taxes is not available to an employer that has had debt forgiveness under the Paycheck Protection Program of the CARES Act.
14. If an employer makes one or more payments on an employee’s student loan, what are the consequences (taxable and otherwise) to the employee?Under the CARES Act, an employer may make one or more payments on a qualified education loan incurred by the employee for his or her education, subject to an annual cap of $5,250, before January 1, 2021, and such payments (whether directly to the lender or to the employee) will be nontaxable to the employee. When applying the annual $5,250 cap, the employer must also take into account other education assistance (such as tuition, fees and books) that the employer is already providing to the employee under current law in addition to the student loan payment(s).
For this purpose, a “qualified education loan” means indebtedness incurred by the employee solely to pay qualified higher education expenses which (i) are incurred on behalf of the employee as of the time the indebtedness was incurred, (ii) are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and (iii) are attributable to education furnished while the employee was an eligible student. (Note this term also includes indebtedness used to refinance qualified education loan indebtedness.)
“Qualified higher education expenses” are the costs of attending an eligible educational institution (i.e., a public, nonprofit or privately owned for-profit school offering higher education beyond high school, including any institution with an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital or a health care facility which offers post-graduate training). And, an “eligible student” is one who meets the requirements of Section 484(a)(1) of the Higher Education Act of 1965 and is carrying at least half the normal full-time workload for the course of study the student is pursuing. Given the detailed nature of these definitions, please take care in analyzing whether an employee’s loan meets the requirements of a “qualified education loan” so that the employer-paid loan payment will be nontaxable.
On a related note, the CARES Act also suspends repayments on federal student loans for six months and provides that interest accrued during that time will be waived. For credit reporting purposes, any suspended repayment will be treated as if it had been timely paid by the borrower.
Between this suspension and an employer’s ability to make nontaxable payments on an employee’s student loan this year, there is meaningful student loan relief for employees for the rest of 2020.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.