Locke Lord QuickStudy: CARES Act Guide: Overview of Key Employee Benefits Provisions

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act”, into law. The CARES Act will provide significant financial relief to individuals and small businesses, especially those businesses in certain sectors of the U.S. economy that have been hit hardest by the COVID-19 pandemic, by providing $2 trillion in stimulus to the U.S. economy.

A significant portion of the CARES Act focuses on supporting American workers, families and businesses through a combination of unemployment provisions, tax rebates, retirement plan changes and modifications to the Internal Revenue Code of 1986, as amended (the “Code”). This Quick Study focuses on the Employee Benefits Changes included in the CARES Act. Please note that Locke Lord has separate Quick Studies that review the CARES Act’s provisions related to the Business Tax Changes, Executive Compensation Limits, Charitable Contributions, and Expanded Unemployment Benefits.

For more CARES Act information please see: Saving Our Small Businesses: CARES Act Expands Economic Injury Disaster Loan Program to Provide Additional Financial Relief to Small Businesses, Saving Our Small Businesses: Lender Considerations for Participating in the New Forgivable Paycheck Protection Program Loans to Small Businesses, Saving Our Small Businesses: Congress Reaches Agreement on New Forgivable Paycheck Protection Loans to Small Businesses, Saving Our Small Businesses: “Phase Three” Economic Recovery Proposal Includes New Forgivable SBA Loans for Small Businesses Impacted and Saving Our Small Businesses: SBA Disaster Assistance Loans for Small Businesses Impacted by COVID-19. 

Special Distributions from Retirement Plan

The CARES Act allows qualified retirement plans to provide a special distribution option to ‎individuals affected by COVID-19. Under Section 2202 of the CARES Act, a “qualified ‎individual” may receive “qualifying coronavirus-related distributions” or “CARES Act ‎Distributions” at any time during 2020. These distributions will be eligible for the following ‎special rules:‎

Expanded Funding Sources. CARES Act Distributions may be funded in the amount of up to ‎‎$100,000 in the aggregate (taking into account all distributions to the participant from all plans ‎sponsored by the employer and its controlled group members), and can be funded from all ‎contribution sources within a plan.‎

Penalty-Free Withdrawals. Under existing law, qualified plan participants who take a ‎withdrawal from the plan prior to attaining age 59-½ are subject to a 10% additional federal ‎income tax under the Code. The CARES Act waives this early withdrawal tax for a coronavirus-‎related distribution to a qualified individual.  ‎
Qualified Individuals.  A participant is a qualified individual if: (i) the participant, the ‎participant’s spouse or the participant’s dependent (as defined in Code Section 152) is diagnosed ‎with COVID-19 or (ii) the participant experiences adverse financial consequences as a result of:‎

• being quarantined;‎
• being furloughed or laid off or having work hours reduced due to COVID-19; ‎
• being unable to work due to lack of child care due to COVID-19;‎
• closing or reducing of hours of a business owned or operated by the individual ‎due to COVID-19; or‎
• or other factors as determined by the Secretary of the Treasury. ‎

Self-Certification. Under the CARES Act, a plan administrator may rely on the participant’s ‎certification that he or she meets the requirements for a CARES Act Distribution.‎

Additional Relief. In addition to waiving the 10% early withdrawal tax, the CARES Act ‎provides participants with additional tax relief, including the following:‎

• distributions will not be subject to the mandatory 20% withholding otherwise required of ‎eligible rollover distributions;‎
• participants may choose to have the distribution included in taxable income over a three-‎year period rather than all at once; and
• participants will have the ability to repay the distribution to the plan over a three-year ‎period, without such repayment counting against the annual limit on plan contributions.‎

Plan sponsors that adopt this change administratively will have until the last day of the plan year ‎beginning on or after January 1, 2022 to amend their plans to align with the plan’s operations.  ‎

NOTE:  It is fairly common for third party administrators to adopt this type of plan change ‎automatically for their clients that have adopted prototype plans or volume submitter plans by ‎sending a written notification to a plan sponsor with an election to “opt out” of the plan design ‎change.  We recommend plan sponsors contact their third party administrators regarding this ‎issue.  ‎

Special Rules for Plan Loans

For participants wanting another option for accessing their qualified retirement plan funds, the ‎CARES Act also creates special rules for plan loans. Under Section 2202 of the CARES Act, a ‎plan sponsor can make two significant changes to the qualified retirement plan’s loan rules, both ‎of which will apply only to qualified individuals (as described above).  ‎

First, the CARES Act doubles the maximum amount of a participant’s account balance that may ‎be taken as a plan loan.  For loans taken during the 180-day period beginning on the date of ‎enactment of the CARES Act, the maximum permissible loan amount is increased from the lesser ‎of $50,000 or 50% of a participant’s vested account balance to the lesser of $100,000 or 100% of ‎the participant’s vested balance.   ‎

Second, the CARES Act also permits the deferral of scheduled repayments on outstanding loans, ‎including loans taken following enactment of the CARES Act, that otherwise would be due this ‎year, for an additional year.  In addition to delaying the repayment dates by one year, the ‎repayment schedule for remaining amounts due will be adjusted appropriately.   ‎
Plan sponsors that adopt this change administratively will have until the last day of the plan year ‎beginning on or after January 1, 2022 to amend their plans to align with the plan’s operations.  ‎
NOTE:  It is fairly common for third party administrators to adopt this type of plan change ‎automatically for their clients that have adopted prototype plans or volume submitter plans by ‎sending a written notification to a plan sponsor with an election to “opt out” of the plan design ‎change.  We recommend plan sponsors contact their third party administrators regarding this ‎issue.  ‎

Temporary Waiver of Required Minimum Distributions from Retirement Plans and IRAs

Under ‎current law, individuals must take a required minimum distribution (“RMD”) from their ‎retirement ‎plans beginning at age 72 (or age 70-½ for those individuals who turned 70 1/2 on or ‎before December 31, 2019)‎.  Section 2203 of the CARES Act temporarily waives, for the 2020 ‎calendar year, RMDs from certain ‎defined contribution plans, including 401(k) plans, 403(b) ‎plans and governmental 457(b) and ‎Individual Retirement Accounts (“IRAs”).  This waiver ‎applies to both 2019 RMDs that need to be taken ‎by April 1, 2020 (where the individual attained ‎age 70-½ in 2019) and 2020 RMDs.  The Act ‎also adds a special rollover rule, similar to the one ‎enacted in 2009, allowing amounts subject to ‎the RMD rules in 2020 to be rolled over to IRAs or ‎other eligible retirement plans.  Plan sponsors that adopt this change administratively will have ‎until the last day of the plan year beginning on or after January 1, 2022 to amend their plans to ‎align with the plan’s operations.‎

Delayed Funding for Single Employer Pension Plans

In general, employers that sponsor defined benefit pension plans must make minimum required ‎contributions to those plans either annually or quarterly. Section 3608 of the CARES Act allows ‎plan sponsors to delay making required minimum contributions that would otherwise be due from ‎the date of enactment of the CARES Act through December 31, 2020. Instead, such ‎contributions must be paid to the plan by January 1, 2021. Employers that take advantage of the ‎delay will be required to increase the amount of the contribution by an interest accrual amount to ‎ensure the plan does not suffer a loss due to the delay.‎

Student Loan Payments by Employers  ‎

Section 2206 of the CARES Act expands the list of educational assistance programs that an ‎‎employee can exclude from income to include payments made by an employer prior to January 1, ‎‎‎2021 to pay for an employee’s principal or interest on qualified educational loans.  The total ‎‎amount of payments from an educational assistance program, which is limited to $5,250 per year, ‎‎applies to both student loan repayment and educational assistance to cover tuition, fees and ‎books.  ‎

Flexible Spending Accounts/Health Savings Accounts ‎

Section 4401 of the CARES Act clarifies that for plan ‎years beginning on or before December ‎‎31, 2021, a major medical health plan will not fail to be a high deductible ‎health plan (HDHP) by ‎failing to have a deductible for telehealth and other remote care services.‎

In addition, Section 4402 of the CARES Act repeals the rule enacted in the Affordable Care Act ‎that prohibited ‎over-the-counter medicines from being “qualified medical expenses” eligible for ‎reimbursement ‎under a health flexible spending account, health savings account, or medical ‎savings account.  The ‎provision also adds menstrual products to the definition of qualified ‎medical expenses.‎

Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.