As the number of employers and employees impacted by the
novel coronavirus (COVID-19) grows each day, employers with workplace retirement
plans may find that employees may be looking to those plans now more than ever
to help cover financial hardships they are experiencing. The Coronavirus Aid,
Relief, and Economic Security Act (CARES Act) (H.R. 748) includes several relief provisions for
tax-qualified retirement plans, expands health care flexible spending accounts
so funds can be used for over-the-counter items, clarifies some health insurance
plan questions, and, through year-end, allows employers to reimburse employees
for student loan payments tax-free. This alert explains those items. Further
guidance will be needed from the IRS and DOL to answer many open questions
about how these relief provisions are intended to work.
Although it is not clear, based on past practices, the IRS may require employers to make an election to use the provisions described below. Plan amendments memorializing those elections would be needed by January 1, 2022.
Funding Relief. Many employers who sponsor defined benefit (DB) retirement plans (including cash balance plans) are facing large contribution requirements due to very low interest rates and a volatile stock market. The CARES Act provides short-term relief for single-employer DB plans. Specifically, employers have until January 1, 2021, to make any minimum required contributions that were originally due during 2020. The relief applies to quarterly contributions and any year-end contributions, regardless of plan year. When paid, contributions will need to include interest for the late payment.
AFTAP Relief. Also, when determining whether Internal Revenue Code (IRC) Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year, sponsors can (but are not required to) choose to use the plan’s adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019. This could help employers avoid freezing benefits and continue offering lump sums and other accelerated payment forms in 2020, even if the plan’s funded status significantly declined due to COVID-19.
RMDs Not Waived for DB Plans. DB plans are not eligible for 2020 RMD waivers (that relief is only available for defined contribution plans (see below)).
Coronavirus-Related Distributions and Expanded Plan Loans. Employers who have DC plans — like a 401(k) plan or 403(b) plan — can let participants take up to $100,000 in “coronavirus-related distributions” by December 31, 2020. The distributions would be exempt from the 10% early withdrawal penalty and taxable over three years. Participants can take up to three years to repay all or any part of those distributions (and the repayment would be treated as a tax-free rollover when repaid to the plan).
From March 27 to September 23, 2020 (i.e., for 180 days after the CARES Act became law), “qualified individuals” can borrow up to the lesser of $100,000 (instead of just $50,000) or 100% of their entire vested account balance (instead of just 50%). For all new or existing plan loans to an affected participant, repayments due before December 31, 2020, may be delayed one year (but interest is charged during the delay). Also, the one-year delay would not count toward the maximum five-year repayment period for plan loans.
These special “coronavirus-related distributions” and expanded plan loan provisions are available to “qualified individuals,” which means any participant who self-certifies that he or she:
Insight: When former employees no longer have payments made via payroll deductions the loans frequently go into default, resulting in taxable income for the participant at the end of the calendar quarter following the default date and a Form 1099-R would be issued showing the loan balance as taxable income for the year. However, the CARES Act appears to provide a one-year grace period for any loans that were outstanding on or after March 27, 2020. It seems that this one-year extension could delay the income inclusion for one year if a participant with an outstanding loan would otherwise default on the loan due to nonpayment including loss of employment due to a COVID-19 related business closure. To prevent such loan defaults, employers may want to amend the loan documents and/or loan policy so that affected participants can take advantage of the one-year delay even if the participant’s employment is terminated or if the participant is laid off.
Participants that don’t qualify for “coronavirus-related distributions” may qualify for a regular “hardship” withdrawal due to an immediate and heavy financial need, if the plan allows. There are many situations that qualify a participant for regular hardship withdrawals, including expenses or loss of income incurred due to a disaster declared by the Federal Emergency Management Agency, also known as FEMA. Regular hardship withdrawals cannot be repaid to the plan, must be taken into income in the year distributed, and are subject to the 10% early withdrawal penalty (although they are not subject to 20% withholding). Generally, DC plans may also allow in-service distributions for participants who are over age 59½ and may allow vested employer contributions to be withdrawn under a “5 year” or “2 year” rule, so long as the plan document allows it (or is amended to allow it).
2020 Required Minimum Distributions (RMDs) Suspended. The CARES Act waives all 2020 RMDs from DC plans (and IRAs). That waiver includes initial payments to participants who turned age 70½ in 2019 and who did not take their initial RMD last year because they had a grace period until April 1, 2020. The RMD relief does not apply to DB plan participants.
Plan Amendments. Employers can immediately implement the provisions provided by the CARES Act but generally have until the end of the first plan year beginning on or after January 1, 2022, to amend their DC plans for this relief. Amendments to adopt provisions that are not included in the CARES Act require amendment by December 31, 2020.
Insight: This deadline appears to be the same for individually designed DC plans and for IRS pre-approved DC plans
Employers who sponsor workplace retirement plans should review plan procedures to determine if any changes are needed to implement the CARES Act. For example:
Employers may also want to remind participants that they can
change elective deferral amounts at any time in accordance with the plan document
and to inform them how to take advantage of any changes in plan operations or
procedures due to the CARES Act.
Tax-Free Over-the-Counter Products. The CARES Act allows employees to use funds in health care flexible savings accounts (FSAs) to purchase over-the-counter (OTC) medical products, including those needed in quarantine and social distancing, without a prescription. This change also applies to Health Savings Accounts (HSAs). Employers must generally have a “high deductible health plan” (HDHP) to have an HSA for their employees. Several years ago, the Affordable Care Act (ACA) eliminated the ability to use health care FSAs for OTC products, so the CARES Act rolls back that prohibition. The CARES Act also provides that menstrual products qualify as OTC products that can be purchased with health care FSA or HSA funds.
Insight: Employers may want to consult with their vendors to ensure that debit cards or other service delivery mechanisms are updated to accommodate this change in the law, so that employees may begin using health care FSAs or HSAs immediately to purchase COVID-19 related OTC items, such as pain relievers, hand sanitizers, cleaning products, etc.
Insight: Employers may want to remind employees of change in family circumstance requirements that might allow them to change their health care elections including pretax contributions to medical FSAs. Likewise, plan administrators should prepare for an increased number of requests for change.
The CARES Act requires employer-sponsored group health plans (and health insurers) to address several health care services related to COVID-19, including the following.
COVID-19 Testing. Group health plans and insurers are required to cover approved diagnostic testing for COVID-19, including in vitro diagnostic testing, without any cost-sharing to participants, at their in-network negotiated rate (or if no negotiated in-network rate, an amount that equals the cash price for such tests as publicly listed by the provider).
COVID-19 Prevention. Group health plans and insurers are required to cover any qualifying preventative services related to COVID-19 without cost-sharing to participants. Plans are required to cover these services within 15 days after the date that a recommendation is made regarding the preventative service. Preventative services includes (1) any item, service, or immunization that is intended to prevent or mitigate COVID-19 and is evidence-based with an “A” or “B” rating in the U.S. Preventive Services Task Force’s recommendations or (2) an immunization with a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention.
Expanded Telehealth. Effective March 27, 2020, for plan years beginning on or before December 31, 2021, employers with a HDHP and an accompanying HSA can provide coverage for telehealth services before participants reach their deductible without disqualifying them from being eligible to contribute to their HSA. For calendar year plans, this provision would generally apply for 2020 and 2021. This is consistent with the IRS’s previous announcement that an HDHP will not fail to be an HDHP solely because it provides coverage for COVID-19 related diagnostic testing and services prior to participants satisfying their deductible.
From March 27 until December 31, 2020, employers can contribute up to $5,250 towards an employee’s student loans and such amount will be excluded from the employee’s taxable income. The employer could either pay the amount to the lender or to the employee. The amount could be applied to principal or interest for “qualified education loans” defined in IRC Section 221(d)(1). The $5,250 limit applies in the aggregate to both the new student loan repayment benefit and other employer-provided, tax-free educational assistance (e.g., tuition, fees, books).
Insight: This appears to be the first time an employer’s payment of an employee’s student loan debt can be made tax-free to employees.
Contact our Employee Benefit Plan team today: