Benefit relief and implications under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act contains several forms of relief for plan sponsors and participants in employee benefit plans, as well a few additional plan obligations. Significant items in the CARES Act include the following.

Retirement plans

The CARES Act provides a number of relief provisions that allow participants in retirement plans and IRAs greater access to their retirement benefits, including waiver of the early withdrawal penalty and increased loan amounts.

Penalty relief for early withdrawals

In an effort to promote accessibility to participant funds in retirement plans, the CARES Act waives the 10 percent additional tax penalty that applies to “coronavirus-related distributions” of $100,000 or less taken from a retirement plan or an IRA by a participant who has not yet attained age 59 ½. The $100,000 limitation applies in the aggregate – so an individual is limited to a total of $100,000 from all plans maintained by the employer (and any member of the employer’s controlled group) combined.

A coronavirus-related distribution is defined as a distribution to an individual

1. who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the CDC;

2. whose spouse or dependent is diagnosed with such disease or virus by a test approved by the CDC; or

3. who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having to work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Treasury Department.

For purposes of determining whether an individual meets the coronavirus-related distribution definition, the plan administrator may rely on an employee’s certification that the employee satisfies the above conditions.

Importantly, this relief applies only to coronavirus-related distributions made on or after January 1, 2020, and before December 31, 2020. This means that participants who already took distributions earlier this year can benefit from the waiver of the early withdrawal penalty.  As noted, the distribution must be from an eligible retirement plan, which includes 401(k) plans, 403(b) plans, 457(b) plans, 401(a) plans and IRAs. Coronavirus-related distributions are treated as meeting the plan distribution requirements for these plans; thus, although somewhat unclear, it appears these distributions are a separate distribution category. In addition, these distributions are not treated as eligible rollover distributions for purposes of the plan trustee-to-trustee transfer and withholding rules.  Thus, these distributions are exempt from tax withholding and exempt from the rules that require plans to offer trustee-to-trustee transfers to participants taking distributions.

The CARES Act allows an individual who receives a coronavirus-related distribution to repay that distribution to an eligible retirement plan at any time during the three-year period beginning on the day after the date on which the distribution was received. The repayment can be made via one or more contributions and cannot exceed the amount of the coronavirus-related distribution. The eligible retirement plan to which the repayment can be made is one where the individual is a beneficiary and to which a rollover contribution is permitted. In this sense, such repayments are treated as direct rollovers when made to eligible qualified retirement plans.

The CARES Act provides additional relief by spreading out the income tax inclusion from a coronavirus-related distribution. If a participant does not repay the distribution, the coronavirus-related distribution will be included in the participant’s gross income ratably over the three-taxable-year period beginning with the year the distribution is received, unless the participant elects not to have the ratable inclusion.

Retirement plan loan relief

The CARES Act also increases the loan limit available under qualified plans for those participants who meet the same requirements as those covered by the above penalty-free withdrawal provisions. The loan limit is increased from $50,000 to $100,000. In addition, if the participant’s account balance is valued at less than $100,000, the participant may take a loan of his or her entire account balance. This increase is limited to a period of 180 days from March 27, 2020.

In addition, participants may delay the repayment date for existing loans, as well as loans made on or after March 27, 2020, for one year. The delay applies only to repayment dates from March 27, 2020, through December 31, 2020. Subsequent repayments are to be appropriately adjusted, and the one-year delay is not to be included in calculating the five-year period for loan terms.

Plan amendment requirements

Of course, plans will need to be amended to provide this relief. To meet these amendment obligations, the CARES Act does not require any amendment necessary to meet the terms of the Act or any underlying regulations to be adopted until the last day of the first plan year beginning on or after January 1, 2022. The Treasury Department can extend this deadline. For calendar year plans, this means plans must be amended by December 31, 2022. For governmental plans, the date is extended two years after the date that otherwise applies to non-governmental plans (thus, for calendar year plans, the last day to amend would be December 31, 2024).

In order for this amendment extension to apply, the plan must be operated during this time period as if the amendment were in effect, and the amendment, once adopted, must apply retroactively. Importantly, if these requirements are met, the retroactive effect of the amendment, once adopted, will be deemed not to violate the ERISA anti-cutback rules.

Waiver of required minimum distributions

Similar to the temporary waiver of the required minimum distribution rules in 2009, the CARES Act provides for the temporary waiver of required minimum distributions for 2020. This means that participants who would otherwise have to take a required minimum distribution in 2020 because of a required beginning date occurring during 2020, or because the distribution was not made before January 1, 2020, are not required to take the distribution. Thus, RMDs that would otherwise have to be taken by April 1, 2020, and 2020 RMDs, would not have to be taken. In addition, special rollover rules apply to any required minimum distributions that are taken.

It appears this waiver applies only to defined contribution plans (for example, 401(k) plans, 403(b) plans, 457(b) plans and IRAs), not defined benefit plans. The amendment for this provision is similarly due by December 31, 2022, for calendar year non-governmental plans and December 31, 2024, for calendar year governmental plans.

Health plans

The CARES Act adds obligations to health plans and insurers by expanding the types of testing for which cost-sharing is not permitted. On the other side, however, there are clarifications to Health Savings Account coverage as well as a repeal of the Affordable Care Act’s exclusion of over-the-counter medicines from coverage under Health Savings Accounts and similar arrangements.

Cost-sharing limitations

Coverage for diagnostic testing under the CARES Act has been expanded to include not only testing approved, cleared, or authorized by the Food and Drug Administration, but also testing for which the developer has requested, or intends to request, emergency use authorization from the FDA (until the emergency use authorization request is denied or the developer does not submit the request within a reasonable time), or that a state develops and authorizes, provided the state has notified the Secretary of Health and Human Services of its intention to review the tests for COVID-19 diagnoses. Other tests may be included under further regulatory guidance. These tests will be covered by health plans and insurers with no cost-sharing.

The CARES Act also addresses provider reimbursement for the diagnostic testing. If there is an existing negotiated price between the provider and the health plan or the insurer (in existence before January 27, 2020), the negotiated rate will continue to apply throughout the COVID-19-related public health emergency period (which will be determined by HHS). If there is no existing negotiated rate, the health plan or insurer is required to reimburse the cost listed by the provider on its public website, or the health plan/insurer can negotiate for a lesser amount. Providers of COVID-19 diagnostic testing are required to publicize that price on a publicly available website. If a provider does not publicize the price of the COVID-19 diagnostic testing, and does not otherwise correct the failure, HHS may impose a penalty on the provider of up to $300 per day for ongoing violations.

In addition to diagnostic testing, health plans and insurers will be required to cover, with no cost sharing, any vaccinations for COVID-19 once developed. These vaccinations fall under “qualifying coronavirus preventive services” which are now addressed by the CARES Act.  A “qualifying coronavirus preventive service” is defined in the CARES Act as an “item, service, or immunization” intended to prevent or mitigate the COVID-19 disease. An item or service must meet certain criteria recommended by the United States Preventive Services Task Force to qualify. Immunizations must have a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved to qualify. Coverage will then begin 15 days after the date on which the recommendation is made. All of these qualifying coronavirus preventive services must be covered by health plans and insurers with no cost-sharing requirements.

Health Savings Account requirements

The CARES Act clarifies that, for plan years beginning on or before December 31, 2021, a plan that does not have a deductible for telehealth and other remote care services will not fail to be treated as a high-deductible health plan.

Qualified medical expenses

As many may recall, the Affordable Care Act prohibited over-the-counter medicines (other than insulin) from being “qualified medical expenses,” and, thus, HSAs, Archer MSAs, and health FSAs and HRAs could no longer cover these expenses. The CARES Act repeals this rule. As a result, participants in these arrangements will be able to use those funds to pay the cost of over-the-counter medicines with no prescription requirement.

As an aside, the definition of “qualified medical expenses” was amended to include menstrual products. “Menstrual products” is defined as tampons, pads, liners, cups, sponges, or similar products used with respect to menstruation or other genital-tract secretions.

These changes to the definition of “qualified medical expenses” apply to amounts paid or expenses incurred for these items after December 31, 2019.

Miscellaneous provisions

A few miscellaneous changes from the CARES Act help employers with funding and reporting obligations.

Ability of Secretary of Labor to postpone deadlines

The CARES Act provides an additional basis for the Secretary of Labor to postpone certain filing deadlines. Filing deadlines can be postponed if the Secretary of Health and Human Services declares a “public health emergency” under Section 319 of the Public Health Service Act. Filing deadlines can also be postponed if the President has declared a “disaster” under the Stafford Act, or if there has been a terroristic or military action. Notably, a public health emergency was declared on January 27, 2020, by the HHS Secretary, meaning that the Department of Labor can extend deadlines. The extension may not be for more than one year.

Minimum funding requirements

Minimum funding contributions for qualified plans, including quarterly contributions, are delayed under the CARES Act until January 1, 2021, subject to an increase for accrued interest that takes into account the delay. Defined benefit plan sponsors may also treat the plan’s adjusted funding target attainment percentage for the 2019 plan year as the adjusted funding target attainment percentage for the 2020 plan year.

In addition to these employee benefit provisions, the CARES Act addresses various tax, employment, and other matters relevant to employers.

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