The CARES Act Attempts to Cure Looming Employee Benefits Issues

Explanation of Provisions

Retirement Plan Provisions

COVID-19 Distributions and Special Rules for Loans (§2202)

The Act permits an individual affected by COVID-19 to take a distribution (including an in-service distribution) from his or her eligible retirement plan (including a 401(k) or 403(b) plan) in an amount not to exceed $100,000 without imposition of the 10 percent early withdrawal penalty. Such distributions generally may be made to individuals (i) who are diagnosed with COVID-19, (ii) whose spouse or dependent is diagnosed with COVID-19 or (iii) experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to COVID-19, or being unable to work due to lack of childcare resulting from the COVID-19 pandemic (qualified individual). The distribution must be made on or after January 1 and before December 31, 2020, and the $100,000 limit is applied on a controlled group basis. Similar rules apply to distributions from individual retirement arrangements.

Unless the qualified individual elects otherwise, income attributable to the distribution will be includable in the qualified individual’s gross income for federal tax purposes ratably over a three-year period beginning with the year of the distribution. The distributed amount may be repaid in one or more contributions to an eligible retirement plan that accepts rollover contributions, without regard to annual contribution limits, within three years of receipt of the distribution.

In addition, in the case of loans by qualified individuals from qualified employer plans during the 180-day period beginning with the Act’s enactment, the loan (when aggregated with other outstanding plan loans) cannot exceed the lesser of $100,000 and 100 percent of the participant’s vested account (as opposed to normal loan rules, which restrict the loan to the lesser of $50,000 and 50 percent of the participant’s vested account).

The Act also delays, for one year, the due date of repayments of plan loans by a qualified individual if such due date occurs during the period beginning on the Act’s enactment and ending on December 31, 2020. Interest will continue to accrue during the period of delay, and subsequent repayments will be adjusted to reflect the delayed payments. The period of delay will be disregarded for purposes of the five-year maximum term applicable to loans other than home loans.

Plan sponsors may rely on a participant’s self-certification that he or she is a qualified individual for purposes of the special distribution and loan treatment described above. Plan sponsors are required to adopt amendments giving effect to the above provisions no later than the last day of the first plan year beginning on or after January 1, 2022 (or such later date as the Secretary of the Treasury may prescribe) (governmental plans have a two-year extension). 

Waiver of Required Minimum Distributions for Defined Contribution Plans (§2203)

The Act allows plan sponsors to waive the minimum distribution requirements for 2020. Similar to the relief provided following the financial crisis in 2008, all 2020 required minimum distributions from defined contribution plans described in sections 401(a), 403(a) and 403(b) and governmental section 457(b) plans, including those required due to an individual’s required beginning date occurring in 2020, may be waived. Additionally, the five-year distribution period following a participant’s death applicable to certain beneficiaries is determined without regard to 2020. The temporary relief provides that amounts distributed in 2020 that would have been required minimum distributions but for the Act shall not be treated an “eligible rollover distributions” for certain purposes.

Relaxation of Single-Employer Defined Benefit Plan Funding Rules (§3608)

The Act delays minimum funding contributions (including quarterly installment payments) to single-employer defined benefit plans with a due date at any time during 2020 until January 1, 2021. The amount of any delayed contribution will be increased by interest accrued between the original due date and the new payment date. 

In addition, a plan sponsor may elect to treat its adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020, as the plan’s AFTAP for the plan year that includes 2020 for purposes of determining whether any benefit restrictions under section 436 of the Code apply.

Sponsors of single-employer defined benefit plans should consult with the plan’s actuaries regarding how the Act affects their funding obligations in 2020 and beyond.

Healthcare Plan Provisions

Expanded COVID-19 Testing Requirements (§3201 and §3202)

The Act expands on the COVID-19 testing requirements enacted by the Families First Coronavirus Response Act (Families First Act) (which generally requires group health plans and insurers to provide coverage of certain diagnostic COVID-19 testing and related services without cost sharing and without preauthorization) in two ways. First, it expands the categories of eligible COVID-19 testing to include not only tests approved by the Food and Drug Administration (FDA) but also tests for which the developer has requested, or intends to request, an emergency use authorization from the FDA (unless such request is denied or not timely submitted), tests developed in and authorized by a state that has notified the Secretary of Health and Human Services (HHS) of its intention to review tests intended to diagnose COVID-19 or other tests that the HHS Secretary determines are appropriate.

Second, the Act requires a group health plan or insurer that provides COVID-19 diagnostic testing and related services in accordance with the Families First Act to reimburse a provider for such testing at either (1) the negotiated rate with such provider agreed on prior to the COVID-19 pandemic or (2) if no such negotiated rate exists, a rate not greater than a rate posted by the provider on a public website.

Required Coverage of COVID-19 Vaccines and Other Preventive Treatments (§3203)

The Act generally requires group health plans and insurers to cover, without cost sharing, the cost of qualifying COVID-19 preventive services. Qualifying COVID-19 preventive services include (1) an immunization that has in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved or (2) an evidence-based item of service that has in effect a rating of “A” or “B” in the current recommendations of the United States Preventive Services Task Force. The coverage must be effective within 15 business days after the date on which the applicable recommendation is made.

Expanded Coverage of Telehealth Services by HDHPs (§3701)

The Act permits a high deductible health plan (HDHP) to cover telehealth services, with no or reduced cost-sharing, prior to the participant’s satisfaction of the minimum deductible without disqualifying the plan’s HDHP status or jeopardizing health savings account (HSA) contributions. This change is effective for plan years beginning on or before December 31, 2021.

Expanded Use of HSA, Healthcare FSA, Archer MSA and HRA Funds (§3702)

The Act permits individuals who contribute to HSAs, healthcare flexible spending accounts (healthcare FSAs) or Archer medical savings accounts (Archer MSAs), or who participate in employer funded health reimbursement accounts (HRAs), to use applicable funds for the reimbursement of (1) over-the-counter drugs without a prescription (previously allowed only if prescribed drugs or insulin) and (2) certain menstrual care products. This is effective for amounts paid (in the case of HSAs and Archer MSAs) and expenses incurred (in the case of healthcare FSAs and HRAs) after December 31, 2019.

Fringe Benefit Provisions

Employer Repayment of Student Loans (§2206)

Employers are currently permitted to maintain written educational assistance plans for the benefit of their employees, allowing participants to exclude from income employer payments or reimbursements for eligible educational expenses, subject to an annual cap of $5,250 per employee. The Act expands the definition of eligible educational assistance under these plans to include an employer’s payment (to the employee or the lender) of principal or interest on qualified education loans to the extent made after the date of enactment but before January 1, 2021.

Compensation Provisions Applicable to Businesses Receiving Government Assistance

Limits on Compensation and Employee Retention Obligations (§4004 and §4116)

The Act creates a program (§4003) whereby the Treasury Department may provide loans and loan guarantees in an aggregate amount of $500 billion to certain businesses, states and municipalities. The terms of the loan and loan guarantee agreements must provide that during the period beginning on the date on which the agreement is executed and ending one year after the date on which the loan or guarantee is no longer outstanding, the employer who receives the loan or loan guarantee will be subject to certain restrictions on the compensation payable to its highly compensated employees. First, no employee or officer whose total compensation exceeded $425,000 in 2019 (other than an employee whose compensation is determined pursuant to an existing collective bargaining agreement) may receive, in any 12-month period, compensation in excess of the amount of compensation the employee received in 2019 or severance benefits that exceed two times the employee’s total compensation earned during 2019. In addition, no employee or officer who received over $3 million in total compensation during 2019 may receive total compensation in any 12-month period that is greater than the sum of $3 million and 50 percent of the amount over $3 million received during 2019.

In addition, a midsize business (with between 500 and 10,000 employees) receiving a loan will be required to make a good-faith certification that it will, among other things, (1) retain at least 90 percent of its workforce, with full compensation and benefits, until at least September 30, 2020, and (2) restore not less than 90 percent of its workforce that existed as of February 1, 2020, and restore all compensation and benefits to its workers no later than four months after the HHS Secretary declares the end of the COVID-19 pandemic. Other obligations also apply, such as a commitment not to outsource or offshore jobs for two years after loan repayment and to remain neutral in any union organizing effort during the term of the loan.

The Act also authorizes financial assistance for certain air carriers and related contractors to be used to pay wages, salaries and benefits to their employees (other than corporate officers). Compensation limitations similar to those described above for businesses receiving loans and loan guarantees also apply to compensation paid to employees of the air carrier or contractor during the period from March 24, 2020, through March 24, 2022. The recipient of assistance also must agree to refrain from conducting involuntary furloughs or reducing pay rates and benefits until September 30, 2020.