CARES Act Provides Relief Through Employer Sponsored Benefit Plans
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2 trillion stimulus package aimed to benefit both individual taxpayers and businesses. This update provides a summary of those provisions of the CARES Act directly impacting employer sponsored health and welfare benefit plans, retirement plans and limitations on executive compensation.
Expansion of Telehealth Services
With very limited exceptions, prior to the CARES Act, a high deductible health plan (“HDHP”) that provided coverage below fair market value for services incurred prior to satisfying the plan’s minimum deductible would jeopardize a participant’s eligibility to make contributions to a health savings account (“HSA”). The CARES Act creates a safe harbor allowing an HDHP to provide free or discounted coverage of telehealth services prior to the participant otherwise satisfying the applicable minimum deductible and still allowing the HDHP participant to remain HSA eligible. Note, that although this safe harbor became effective immediately upon enactment of the CARES Act, it only applies for plan years beginning prior to December 31, 2021 and is not mandatory. This new safe harbor will be a critical component of employer sponsored medical plans as officials continue to advocate for the use of telehealth services in order to limit exposure to the coronavirus.
Reimbursement of Over-the-Counter Drugs and Products
The CARES Act once again makes over-the-counter drugs includable as qualified medical expenses for purposes of payment and/or reimbursements from HSAs, Flexible Spending Accounts, Health Reimbursement Accounts, and Archer Medical Savings Accounts. Not only does the CARES Act unwind this change that had been made by the Affordable Care Act in 2010 to exclude over-the-counter drugs as qualified medical expenses, but it goes one step further by adding that the costs for menstrual care products are likewise a qualified medical expense which is reimbursable. Under the CARES Act, this change as to what is included as a qualified medical expense is effective for expenses incurred after December 31, 2019.
Payment of Employee’s Student Loans
With respect to payments made by an employer (or holder of student loan) beginning on March 27, 2020 and ending December 31, 2020, the CARES Act amends Internal Revenue Code Section 127 to permit employers to contribute up to $5,250 toward the payment of certain employees’ student loans. This is an expansion of the otherwise qualified education expenses already permitted to be paid by an employer on a tax-favored basis under Code Section 127.
Penalty–Free Coronavirus Related Distributions. At any time during 2020, retirement plans and IRAs may permit distributions of up to $100,000, free of the otherwise applicable 10% early distribution penalty, for plan participants (1) who themselves have been diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control (CDC), (2) have a spouse or dependent who has been diagnosed by such a test, or (3) who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours, or who is unable to work due to lack of child care. The CARES Act allows a plan administrator to rely on a certification provided by the participant that he or she satisfies the above-described criteria.
Unlike typical hardship distributions, this special coronavirus-related distribution may be repaid to the plan, or contributed to another eligible retirement plan, at any time over the three-year period commencing on the date the distribution was received (and there is no requirement that the repayment occur in a single payment). Further, Federal income tax withholding is not required at the time of distribution, and the participant may spread the taxation of the amount distributed over a three-year period to the extent that he or she does not otherwise repay the amount to the plan during that three-year period.
Retirement Plans and IRAs are not required to permit coronavirus-related distributions, therefore plan amendments will be required in order to provide for such distributions. Under the CARES Act, such amendments will not be required any earlier than the end of the 2022 plan year.
Plan Loan Relief and Increases. The CARES Act increases the limit on new loans from eligible retirement plans and provides for an up to one-year extension on the repayment of existing loans. With respect to new loans, the current maximum dollar limit of $50,000 is replaced with $100,000, while the maximum loan percentage is increased from the current 50% account balance limit to 100% of the account balance. These optional loan provisions are applicable only to the same participants who are eligible for the coronavirus-related distributions described above, and are available for the 180 day period following enactment of the CARES Act.
With respect to loans already in repayment status, the CARES Act allows repayments otherwise due from the date of enactment through December 31, 2020 to be delayed for one year from the original due date. Subsequent loan repayments must be adjusted to reflect the delay in the 2020 repayment, including the accrual of any interest during that time. The individuals to whom this provision applies are the same as those covered by the provision permitting coronavirus-related distributions.
As with the coronavirus-related distributions, employer’s wishing to implement the loan relief provisions of the CARES Act will need to amend their plans accordingly, but no amendments are required to be adopted prior the end of the 2022 plan year.
Delayed Required Minimum Distributions. Employers with defined contribution plans (e.g., 401(k), 401(a), 403 (a) and (b), and 457(b) plans) may elect to implement a one-year delay on required minimum distributions (“RMDs”). Note, this optional delay does not apply to defined benefit plans. The delay applies to both 2019 RMDs that needed to be taken by April 1, 2020 and 2020 RMDs. Employers should begin working with their third party plan administrators as soon as possible in order to implement this optional delay with respect to any 2019 RMDs.
Delayed Minimum Funding Requirements. The CARES Act postpones the timing of minimum funding contributions for single-employer retirement plans that would otherwise become due during 2020. As a result, all quarterly payments due with respect to the 2020 plan year, as well as final payments for the 2019 plan year, are all due January 1, 2021. An Employer should take into consideration, when deciding whether to delay funding of its contributions, that interest will accrue from the original due date through the payment date of January 1, 2021.
Compensation Limits Tied to Government Loans
The CARES Act provides for loans and loan guarantees to business and nonprofit organization, and while those loans and loan guarantees are critically needed to provide liquidity to companies, they come with tight restrictions on compensation paid to certain officers and employees. Specifically, in order to receive such a loan, the company must agree to cap all compensation of employees receiving more than $425,000 per year to the amount of compensation paid in 2019, and any severance pay or other benefits payable upon termination cannot exceed twice the 2019 compensation amount. Further, any officers or employees receiving total compensation of $3 million or more cannot receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess over $3 million. For example, an officer who was paid $5 million in 2019 may only receive $4 million during the period in which the restrictions apply. Under the CARES Act, these restrictions remain in place until one year after the date the loan or loan guarantee is no longer outstanding. For air carriers or contractor that receives financial relief under the air carrier worker support provisions of the CARES Act, the same limits on compensation apply but such limits remain in effect during the two-year period beginning on March 24, 2020 and ending on March 24, 2022. Affected companies are also restricted from making stock repurchases and issuing dividends.
There are many unanswered questions related to what must be taken into account as “compensation” for purposes of the above restrictions, as well as whether amounts may be made-up once the restrictions lapse. Further guidance from the Treasury Secretary is anticipated and will guide decisions related to the affected employees’ compensation. In the meantime, organizations and businesses that intend to take advantage of the new loans programs should begin to identify employees and officer impacted by the compensation restrictions and plan accordingly.
In addition to the compensation restrictions discussed above, organizations and businesses that employ between 500 and 10,000 employees that receive loans or loan guarantees will be required to “make a good-faith certification that the business or organization will remain neutral in any union organizing effort for the term of the loan.” The CARES Act does not define “neutral” or provide guidance on what exactly is a “union organizing effort.” Neutrality agreements involving union organizing attempts typically require the employer to refrain from urging its employees to oppose union representation. Other neutrality agreements require employers to accept unionization of its employees without a secret ballot election.