Employee Benefit Provisions in The Cares Act
To confront the COVID-19 pandemic, Congress passed the CORNAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES ACT) on March 27, 2020. It expands access to retirement funds and suspends required minimum distributions from retirement plans and IRAs in 2020. Further, the CARES Act loosens a few rules applicable to health plans so that employees can access treatment and testing for COVID-19 without worrying about deductibles and cost sharing. There are also provisions that defer employer payroll taxes, provide an employee retention tax credit for employers subject to COVID-19 related hardships, and limit compensation and severance payments to executives of companies that receive emergency loans and loan guarantees under the CARES Act. Finally, the CARES Act includes labor provisions that amend the Families First Coronavirus Response Act (FFCRA). The significant benefits provisions included in the CARES ACT are summarized below.
Retirement Plan Provisions
- Defined contribution plans may permit in-service withdrawals of coronavirus-related distributions.
- Coronavirus-related distributions are distributions up to $100,000 per individual (this includes all distributions from all employer plans and IRAs) made in 2020 to individuals affected by the coronavirus.
- Plan sponsors may rely upon a participant’s certification that the distribution is a coronavirus-related distribution.
- Coronavirus-related distributions can be repaid within three years to any employer plan or IRA that accepts rollover contributions, and such repayments will be treated as rollover contributions to the receiving plan.
Waiver of 10% early distribution penalty tax and three-year tax averaging
- A waiver of the 10% early distribution penalty tax for coronavirus-related distributions to individuals under age 59-1/2 from employer retirement plans and IRAs is granted.
- Distribution can be taxed ratably over three years or be repaid to the plan over three years.
Loans from Retirement Plans
- Participants affected by the coronavirus can receive loans from employer retirement plans for the lesser of $100,000 or 100% of their vested accounts in the 180 days after enactment. The limit is currently $50,000 or half the account’s vested value.
- Retirement plan loan payments due in 2020 would have an extra year to repay them, and subsequent loan repayments will be re-amortized to reflect the delayed due date and any interest accrued during such delay.
Required Minimum Distributions for 2020 Waived
- Required minimum distributions (RMDs) otherwise required to be made from defined contribution plans (including 401(k) plans) and IRAs in 2020 are waived.
- Distributions made in 2020 that would have been treated as 2020 RMDs will not be treated as eligible rollover distributions.
- Plan amendments required by the foregoing provisions of the Act will not need to be made until the last day of the 2022 plan year.
The DOL May Waive ERISA Imposed Deadlines up to 1 Year
- The DOL is given the authority to delay various retirement plan deadlines due to public health emergencies such as coronavirus for up to one year. This could include contribution and distribution deadlines and participant communications.
Funding of Defined Benefit Plans
- Contributions due in 2020 can be delayed until January 2021.
- Plans can use their 2019 funding target percentages for 2020.
- Although not in this Act, additional funding relief is being discussed in Congress to be included in future legislation.
Health and Welfare Plan Provisions
High Deductible Health Plans – Safe Harbor for Absence of Deductible for Telehealth Services
- For plan years beginning on or before December 31, 2021, a plan shall not fail to be treated as a high deductible health plan by reason of failing to impose a deductible for telehealth and other remote care services. This means that employees with high deductible health plans can access remote care for COVID-19 prior to satisfaction of the plan deductible.
Treatment of Over-the-Counter Medical Medicines/Products as Qualified Medical Care under the Internal Revenue Code
- For periods after December 31, 2019, individuals may use their Health Savings Accounts, Health Flexible Spending Accounts, Archer Medical Savings Accounts or Health Reimbursement Accounts to pay for over-the-counter medical products without a prescription. This provision repeals the rule in the Affordable Care Act that prohibited non-prescribed medicines other than insulin from being treated as qualified medical expenses under the Internal Revenue Code.
- The provision also adds over-the-counter menstrual products to the definition of qualified medical expenses in the Internal Revenue Code.
Employer Payroll Tax Breaks and Compensation Limitations
Employee Retention Tax Credit
- Eligible employers are allowed a refundable tax credit against their 6.2% employer portion of Social Security taxes equal to 50% of an employee’s qualified wages (up to $10,000 in wages). Eligible employers are employers: (i) who were operating a business during 2020 and whose operations were fully or partially suspended because of a COVID-19 related shutdown order, or (ii) whose gross receipts decreased by more than 50% in comparison to the same quarter in 2019, and until their gross receipts are greater than 80% of their gross receipts in comparison to the same quarter in 2019.
Deferral of Employer Payroll Taxes
- The 6.2% employer portion of Social Security taxes for the period from enactment through January 1, 2021 will not be due until December 31, 2021, when 50% of the deferred amount is due, and December 31, 2022 when the remaining 50% of the deferred amount is due. Businesses that receive loan forgiveness under the new business loan program created by the CARES ACT are not eligible to receive this deferral.
Compensation Limitations on Company Emergency Loan Recipients
- The CARES ACT authorizes the Treasury Department to make emergency loans or guarantee loans to eligible businesses up to an aggregate of $500 billion. However, to receive such loans or loan guarantees, eligible businesses must contractually agree to place limitations on employee compensation that exist until one year after they fully repay such loans. Below are the applicable limitations:
- Employees whose aggregate compensation exceeded $425,000 in 2019 are not allowed to receive: (i) more aggregate compensation over any annual period than they received in 2019; or (ii) severance pay or other benefits upon termination of employment that exceeds twice their aggregate compensation in 2019.
- Employees whose aggregate compensation exceeded $3 million in 2019 may not receive over any annual period aggregate compensation that exceeds the sum of (i) $3 million plus (ii) 50% of the amount such employee’s aggregate compensation exceeded $3 million in 2019.
Amendments to the FFRCA
Limitation on Emergency FMLA Leave
- Limits the amount of emergency Family and Medical Leave Act (FMLA) leave pay (as added by the FFRCA) to no more than $200 per day and $10,000 in the aggregate for each employee.
Limitation on Sick Leave
- Limits the amount of sick leave an employer has to pay under the FFCRA to no more than $511 per day and $5,110 in the aggregate for each employee and $200 per day and $2,000 in the aggregate for a quarantined employee.
Rehired Employees are Eligible for Emergency FMLA Leave
- Permits an employee who was laid off by an employer on March 1, 2020 or later to be eligible to receive emergency FMLA leave under the FFRCA, if they had worked for the employer for not less than 30 of the last 60 calendar days prior to the employee’s layoff and were rehired by the employer. Prior to the CARES Act, only employees who were employed for at least 30 calendar days were eligible to receive emergency FMLA leave under the FFRCA.
Advanced Tax Credits
- Permits employers who are required under the FFCRA to provide emergency FMLA or paid sick leave to receive an advanced tax credit against their 6.2% employer portion of Social Security taxes instead of having to wait to be reimbursed after the calendar quarter ends. Treasury regulations or other IRS guidance on the advancement of such credits still needs to be issued. Further, any penalties for failing to pay the employer portion of Social Security taxes is eliminated if the Treasury determines such failure was due to the anticipation of a credit being allowed under the FFCRA.