As COVID-19 expands across the nation, so too do the number of laws aimed at addressing the pandemic, some with particular respect to employee benefits. As a result, employers are taking stock of their situation and examining how their operations may be impacted.
While the particular answer to a specific employer’s question will depend on its workforce and the particular terms of its employee benefits plans, the following checklist is designed to provide a guide to essential actions every employer should consider when assessing both its needs and the needs of its employees in this rapidly changing environment. This guide takes into account current legislation as well as options previously available.
Financial Considerations for the Employer
1. Changes to 2019 Qualified Retirement Plan Contributions
Qualified retirement plan contributions are generally due by the deadline of the employer’s tax return, including extensions. Defined benefit plans are subject to minimum funding requirements that often require quarterly contributions.
With respect to 2019 defined contribution plan profit sharing contributions, an employer can generally delay the contribution to the due date of its financial return or, depending on the type of plan, may be able to reduce or eliminate the contribution that has not yet been made. A change in the funding of the contribution may free up additional cash.
2. Changes to 2020 Qualified Retirement Plan Contributions
Many employers sponsor 401(k) plans that require matching contributions. An employer may desire to suspend the matching contribution, or delay making the matching contribution until the due date of its 2020 tax return.
With respect to a “safe harbor” matching contribution, generally a 30-day advance notice to participants is required before changing the level of matching contributions. The CARES Act permits single employer defined benefit plans to delay 2020 funding to 2021, increased by interest.
3. Employer Payroll Credits and Delayed Payment of Payroll Taxes
The CARES Act provides a tax credit against the payroll (Medicare and Social Security) 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:
- (i) Whose operations were fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
- (ii) Whose gross receipts declined by more than 50 percent when compared to the same calendar quarter in the prior year.
Note that different rules apply to large employers (those with more than 100 full-time employees on average) as opposed to smaller employers (those with 100 or fewer full-time employees on average). The CARES Act also permits employers to delay depositing their Social Security taxes incurred from March 27, 2020 through January 1, 2021. It is further important to note that these tax credits may not be available to employers who have taken advantage of certain subsidized loans and loan forgiveness offered under the Act.
4. Lay Off or Furlough Workers
An employer may be forced to reduce expenses by laying off or furloughing workers. A furlough is an unpaid or low-paid leave of absence. The utilization of a furlough raises a number of additional employee benefit issues that the employer must consider:
- a. Continuation of health care coverage - Will the reduction in hours result in a loss of health care coverage? In addition, if your health plan uses a “look back” stability period for full-time employees under the ACA, such employee will nevertheless be entitled to coverage, despite the reduced hours. If there is a loss of coverage, does the employer desire to continue coverage in any event? If the health plan is insured, the insurance carrier may limit the options available to the employer. Self-funded plans will have more flexibility to extend coverage.
- b. Payment of employee insurance premiums - Employee premiums are generally paid by payroll deductions. How will such premiums be handled during the layoff or furlough? Will the employee be required to pay through an ACH account, or will the employer pay, subject to recoupment when the employee returns to employment?
- c. COBRA - If there is a loss of health care coverage, a COBRA notice must be provided. Does the employer desire to subsidize all or a portion of such coverage? If coverage is elected, it will affect the timing of the employee’s ability to enroll in ACA marketplace coverage. Generally, the employee can only enroll on the annual open enrollment date, unless the employee exhausts the entire COBRA period and no further coverage option exists under COBRA. However, some states have opened up new general enrollment periods for their marketplaces.
- d. Federal paid sick leave and federal paid family leave - An individual who is laid off or on an unpaid leave of absence is generally not eligible for the new federal paid sick leave or paid family leave. An individual on a reduced schedule, who is unable to work due to COVID-19, will generally be eligible for such benefits.
- e. Interaction of employee leave policies and those policies under state law - An employer should examine its own vacation, sick leave, and PTO policies and determine how such policies may be utilized by furloughed workers. In addition, the employer should examine state and local laws on this issue.
- f. Partial termination of retirement plans - If there is a reduction of 20 percent or more in the workforce, IRS rules on partial termination may require 100 percent vesting of all employees who were affected by such reduction. If the employees return to work before year-end, partial termination will not be an issue. An analysis of whether a partial plan termination has occurred should generally be delayed until after the end of the plan year.
- g. Multiemployer plan withdrawal liability - A partial withdrawal from a multiemployer plan will occur if there is a 70 percent decline in contributions over a three-year period. If employees are temporarily furloughed, there will generally be no permanent cessation of contributions for this work force that would trigger withdrawal liability. However, a permanent reduction in the number of workers could result in liability for a partial withdrawal.
5. Enhanced Early Retirement Packages
An employer may wish to consider enhancements to its retirement plans, COBRA benefits, and severance pay plans to encourage employees to terminate during a specified window.
6. Supplemental Unemployment Benefits
Employers wishing to supplement unemployment benefits should consider doing so under rules similar to those under 501(c)(17) to order to avoid FICA and FUTA payments on such benefits.
7. Federal Paid Sick Leave and Paid Family Leave
Effective April 1, 2020, employers with fewer than 500 employees, including full-time, part-time and temporary employees, must provide Emergency Paid Sick Leave, up to a maximum of 80 hours, capped at a rate of $511 per day. Similarly, such employers must provide up to 12 weeks of Emergency Family and Medical Leave, the first two weeks of which are unpaid. The remaining 10 weeks are paid at two-thirds of compensation subject to a cap of $200 per day.
The employer recoups the payments by reducing its payroll taxes by the amount of such payments. Eligible employees are those who:
- (i) Are subject to federal state local quarantine or isolation;
- (ii) Have been advised by a health care provider to self-quarantine;
- (iii) Are experiencing symptoms of COVID-19;
- (iv) Are caring for an individual subject to self-quarantine or isolation;
- (v) Are caring for a child whose school or place of care has been closed; or
- (vi) Are experiencing substantially similar conditions.
8. Examine the Definition of Compensation in Your Benefit Plans
If you are providing additional compensation or permitting the cashout of compensation, make sure that such compensation is properly accounted for under your benefit plans. If you want such compensation excluded, make sure that your benefit plans so provide.
Benefit Changes that the Employer Should Consider or are Required to Provide to Assist Employees (Plan Amendments may be Required)
1. Unrestricted Profit Sharing Distributions
Discretionary profit sharing contributions, and the earnings thereon, can be distributed, for any reason, after they have been in the plan for at least two years.
2. Age 59½ Distributions
Defined contribution plans can generally permit distributions after age 59½, for any reason, without penalty. Under the SECURE act, such distributions are now permitted from defined benefit plans.
3. Hardship Distributions
For states that have been declared national disasters, amounts can be distributed from retirement plans for hardship and not subject to the 10 percent penalty. However, most participants will find the $100,000 CARES Act provision more beneficial.
4. $100,000 CARES Distribution
CARES permits distributions from retirement plans of $100,000, without the standard 10 percent penalty or 20 percent tax withholding during 2020. To qualify, the participant, spouse, or dependent must have either 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 childcare due to the virus.
Taxation of the withdrawal can be spread over three years and the amount can be repaid within three years and treated as a rollover.
5. $100,000 CARES Loan
CARES permits loans from retirement plans in the amount of up to the lesser of $100,000 or 100 percent of vested account balance, to the classification of individuals described above. The loan’s repayment can be delayed until 2021, but interest will accrue on the delayed payment, and the repayment period can be extended for one year--i.e., six years instead of five.
6. Delay of Repayment of Existing Loans
Existing loan repayments on all retirement plan loans can be delayed in 2020. Interest will accrue, but the repayment period can be extended by one year.
7. Cashout of PTO
Employer may wish to permit cashout of accrued vacation, sick leave, or PTO, without a penalty, due to unforeseeable emergencies caused by COVID 19, as an exception to the constructive receipt rule.
8. PTO Leave Sharing and Medical Emergency Programs
An employee who has accrued a large amount of leave may donate a portion of that leave to another person pursuant to a “medical emergency leave” sharing program or a “disaster leave sharing” program. If the requirements of these programs are satisfied, the donor is not taxed on the donated leave, but the recipient is taxed on the leave when taken.
9. RMD Waiver
Participants in defined contribution plans or IRAs can delay any required minimum distribution due in 2020 to the following year. In addition, if a required beginning date for a distribution from a defined contribution plan or IRA is 2020, such distribution can be delayed until 2021.
10. Health Plan and Telehealth COVID-19 Testing and Vaccines
All medical plans are required to cover COVID-19 diagnostic testing and vaccines, including telehealth, without deductibles and co-pays, and such coverage will not disqualify an HSA or FSA medical account. Treatment is not always treated the same way.
11. Reimbursement of Over-the-Counter Medicines Without a Prescription
With respect to purchases after December 31, 2019, HSAs, FSAs, or HRAs can reimburse over-the-counter medicines that were obtained without a prescription. Menstrual products can also be reimbursed.
12. Employer Repayment of Student Loans
Before January 1, 2021, an employer can make payments with respect to qualified education loans, up to a maximum amount of $5,250, without triggering taxable income to the employee.
13. Deadline for HSA and IRA Contributions Extended
The deadline for making IRA and HSA contributions has been extended to July 15.
14. Qualified Disaster Relief Payment
For those states that have been declared major disaster areas, IRC Section 139 allows the employer to make tax-free payments to the employee to cover reasonable and necessary personal, family, living, or funeral expenses incurred as a result of the qualified disaster.
15. Section 125 Cafeteria Plan Changes
Changes in employment status will generally allow for changes in cafeteria plan elections, including changes in dependent care provisions under such plans, now that dependents are out of school and other dependent coverage must be arranged.
16. Special Medical Plan Enrollment Window
Some state health care exchanges and some self-insured health plans have added special open enrollment periods for individuals to sign up for coverage. Self-insured plans should inform its stop-loss carrier of the change.
17. Short-Term Disability Plans
Some short-term disability plans are approving benefits for a period--30 to 90 days--without medical certification. Insured plans would require carrier action.
18. Rollover Accounts
Rollover accounts within a plan can be distributed at any time without restriction. If your plan restricts such distributions, the plan could be amended to allow employees access to such funds.
19. Expand Sick Leave Accruals
Employers may wish to expand sick leave accruals in 2020. Expanding sick leave is generally more favorable than expanding PTO or vacation, because such accruals are often subject to cash out rules upon termination of employment in some states.
A review of these changes will enable an employer to better respond to the rapidly changing rules and regulations governing its obligations under employee benefits plans.
For more information, please see our advisory COVID-19: Benefits FAQs for Health and Welfare Plans.
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.