Many nonprofit organizations were forced to shutter or temporarily close their operations under a governmental order as a result of the coronavirus pandemic, while others were forced to severely limit their offerings.
One way to continue to pursue your organization’s objectives is to ensure that you are still able to function, even if only in a limited capacity. The government has supported nonprofits and the continuation of their services with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, which includes the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC). Under the CARES Act, organizations could take advantage of either the PPP or the ERC, but not both. In welcome news for nonprofit organizations, the Consolidated Appropriations Act, 2021 (Relief Act, signed by former President Trump on December 27, 2020) retroactively eliminates this limitation and extends and enhances the ERC through the first two quarters of 2021.
The ERC is one of the most beneficial provisions of the Relief Act relevant to nonprofit organizations. If you did not consider the ERC in 2020, or were not eligible to consider the ERC because you took a PPP loan, the retroactive ability to benefit from both PPP loans and the ERC is a powerful reason to consider the ERC for 2020. Looking ahead to 2021, the enhanced amount of the credit for wages paid during the first two quarters of 2021 provides another compelling reason to consider the ERC.
Can nonprofit organizations take advantage of the ERC?
Yes! Tax-exempt organizations are eligible for the ERC because they are deemed to be engaged in a trade or business regarding the entirety of their operations. Examples of nonprofit organizations that have already taken advantage of the credit are hospitals, schools, museums, performing arts centers and churches.
What is the ERC?
The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts. The ERC can be claimed quarterly to help offset the cost of retaining employees. Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits. Unlike the PPP, which was on a first-come first-serve basis, the ERC can be claimed up to three years from the date in which your quarterly payroll return was filed.
Who is eligible for the ERC?
To claim the ERC in any given calendar quarter, nonprofit organizations must meet one of the following criteria during that quarter:
- Operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19; or
- The organization experienced a significant decline in gross receipts during the calendar quarter compared to 2019. Specifically, for 2020, gross receipts for the 2020 quarter decline more than 50% when compared to the same 2019 quarter. Eligibility for the credit continues through the 2020 quarter in which gross receipts are greater than 80% of gross receipts in the same 2019 quarter.
- For 2021, the gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, and a safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
- Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
Can you claim the ERC if you receive a PPP loan?
Yes! As described above, one of the most favorable provisions in the new law allows taxpayers to receive PPP loans and claim the ERC. This overlap was not permitted when the CARES Act was originally enacted, and organizations in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERC. Importantly, the Relief Act makes the ability to claim the ERC and receive PPP loans retroactive to March 12, 2020. As a result, organizations that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERC credits for 2020 and 2021.
Which wages qualify for the ERC?
The answer depends on an organization’s employee count. Eligible organizations that are considered “Large Employers” can only claim the ERC for wages paid to employees for the time the employees are not providing services. This aligns with the purpose of the ERC, which is to encourage employers to retain and compensate employees during periods in which businesses are not fully operational.
Smaller eligible organizations may claim a credit for all wages paid to employees. The Relief Act increases the threshold used to determine Large Employer status for 2021 claims to an employee count of more than 500 (for 2020, it is more than 100). This favorable change broadens the number of eligible nonprofit organizations that can claim the ERC for all wages paid to employees, including wages paid to employees who are providing services. Importantly, qualified healthcare expenses count as wages.
Insight: If you furloughed your employees but continue to pay their health insurance, you can claim the ERC. Furloughed employees do not have to receive wages—health care expenses alone qualify as wages for purposes of the ERC.
How is the determination of Large Employer status made?
Large Employer status is determined by counting the average number of full-time employees employed during 2019.
For this purpose, “full-time employee” means an employee who, with respect to any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours in the month. This is the same definition used for purposes of the Affordable Care Act. Importantly, aggregation rules apply when determining the number of full-time employees. In general, all entities are considered a single employer if they are a controlled group of corporations, are under common control or are aggregated for benefit plan purposes.
Organizations that operated for the entire 2019 year compute the average number of full-time employees employed during 2019 by following the steps below:
Step 1: Count the number of full-time employees in each calendar month in 2019. Include only those employees that worked an average of at least 30 hours per week or 130 hours in the month.
Step 2: Add up each month’s employee count from Step 1 and divide by 12.
Insight: Part-time employees that work, on average, less than 30 hours per week are not counted in the determination of Large Employer status. Omitting part-time employees from the computation should result in more nonprofit organizations having 500 or fewer full-time employees and, therefore, being able to claim the ERC for all wages paid to employees in the first two quarters of 2021 (assuming eligibility criteria are met).
Can the same wages be used for the computation of both the ERC and the amount of PPP loan forgiveness?
No. Simply put, there is no double dipping. Wages used to claim the ERC cannot also be counted as “payroll costs” for purposes of determining the amount of PPP loan forgiveness, and organizations that want to benefit from the ERC and have their PPP loans fully forgiven will need to have sufficient wages to cover both. To the extent an organization does not have sufficient wages, strategic planning will be needed to generate maximum benefits.
|Summary of ERC Changes||Prior Law: |
3/13/20 – 12/31/20
|New Law: |
3/13/20 – 12/31/20
|New Law: |
|Interplay with PPP Loan||No ERC if a forgiven PPP loan was received||Taxpayers that receive a PPP loan can claim the ERC, but double dipping is not allowed|
|Maximum Creditable Wages per Employee||$10,000 per year||$10,000 per year||$10,000 per quarter|
|Maximum Credit||50% of eligible wages, up to $5,000 per employee||50% of eligible wages, up to $5,000 per employee||70% of eligible wages, up to $14,000 per employee|
|Threshold to be Considered a “Large Employer” (based on average full-time employees in 2019 and considering aggregation rules)||More than 100||More than 100||More than 500|
Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. This rule previously was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer.
Guidance and legislation continues to develop, but we are monitoring the latest information and will provide updates as they become available. If you have questions about your nonprofit organization, please contact the professionals at BSB. We understand that each situation is unique and we can work with you to develop a plan.
By Carolyn Smith Driscoll, Gabe Rubio, Brad Poris of BDO USA, LLP.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (February 2021). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com.
Congress approved and the President signed the next round of COVID-19 relief, which is reflected in the 2021 Consolidated Appropriations Act (the Act). The Act includes another round of COVID-19 stimulus funding and additional relief for taxpayers affected by the COVID-19 pandemic. Here are some of the tax-related highlights:
Paycheck Protection Program – The Act contains several provisions related to the Paycheck Protection Program (PPP), including a second round of PPP loans for eligible borrowers.
Deductibility of Expenses Paid with PPP Loan Proceeds – The Treasury and the IRS have taken the position that expenses paid with forgiven PPP loan proceeds are not deductible. This was contrary to the original intent of lawmakers. The new tax Act fixes this and specifically provides that expenses paid with PPP loan proceeds are 100 percent deductible. This applies to all PPP loans, even if the loans were already forgiven at the date this legislation is enacted. The legislation also provides that owners of pass-through entities receive a basis step-up in their stock/partnership interest for any tax-exempt income from a forgiven PPP loan, which will ensure that there is not a catch-up in subsequent years when the owners leave the business.
Four additional categories were added for nonpayroll costs eligible for use of the PPP loan proceeds including: covered operations expenditures, covered property damage, covered supplier costs, and covered worker protection equipment. There is still an overall limitation on the forgiveness requiring that 60 percent of the loan must be used for payroll costs.
Simplified Forgiveness Application for Loans of $150,000 and Less – For any loan up to $150,000, the amount will be forgiven if the borrower submits a one-page form listing the loan amount, the number of employees retained, and the amount of the loan spent on payroll.
EIDL Advance Reduction to Forgiveness Amount – Repealed – Under current law, a borrower was required to reduce the amount of the PPP loan otherwise forgiven by any Economic Injury Disaster Loan (EIDL) advance received. The new Act repeals this provision.
PPP Second Draw Loans – The second round of loans target hard-hit businesses that employ 300 or fewer employees. The business must demonstrate at least a 25% reduction in revenues in at least one quarter in 2020 when compared to a previous quarter, and also show that the original PPP loan has been spent as allowed.
The forgiveness of the second draw loans follows the rules set for the first round of loans.
Grants for Shuttered Venue Operators – The bill sets aside $15 billion to provide grants to shuttered live event venues, independent theaters, and museums that have experienced revenue losses due to the pandemic.
Temporary Business Meal Deductions – Currently, taxpayers generally may deduct only 50 percent of client-related business meals. The Act includes a provision for 100 percent deductibility of business meals for 2021 and 2022, but only for meals purchased at a restaurant. This does NOT include entertainment costs, and this provision is not retroactive to the 2020 tax year.
Other Tax Provisions – In addition to the provisions above, the Act includes the extension of several tax provisions that previously expired or were set to expire on December 31, 2020. These provisions include:
- 7.5% threshold for out-of-pocket medical costs
- Energy-efficient commercial building deduction
- Reduced excise tax rate on beer, wine, and distillers
- New Markets Tax Credit
- Employer payroll tax credit for paid family and medical leave
- Exclusion from employee income for certain employer payments of student loans
- The charitable deduction of $300 for Individual taxpayers who do not itemize is extended to the 2021 tax year, and joint filers may deduct up to $600 in 2021
- Suspension of limitations on qualifying charitable contributions through 2021
- Extension of various energy-related tax credits (through December 31, 2021)
- Enhancements to the low-income housing tax credit
- Depreciation of certain residential rental property over a 30-year period for taxpayers who made the real property trade or business election for purposes of the interest expense limitation under Internal Revenue Code §163(j)
Other Stimulus Provisions
The Act also includes additional funding and assistance to taxpayers including:
- Direct payments– A second round of Economic Impact Payments of $600 for individuals making up to $75,000 per year and $1,200 for MFJ making up $150,000 per year, as well as a $600 payment for each dependent child. This means a family of four could receive $2,400 in direct payments.
- Unemployment insurance – The federal unemployment insurance benefits provided by the CARES Act, which expired in July, are renewed to provide an additional $300 per week for all workers receiving unemployment benefits through March 14, 2021.
The professionals at BSB closely follow the latest developments to provide the most up-to-date information available. Every situation is different, but we are here to help.
As the Internal Revenue Service (IRS) continues to catch up from a backlog of unopened mail that resulted from limited staff during the COVID-19 pandemic, the agency announced that it would stop mailing overdue notices to taxpayers who sent paper returns. The temporary suspension of notices is intended to help avoid confusion for taxpayers who have already mailed in checks that have not yet been processed. The issue has affected many individuals, but specifically estates and trusts that filed income tax returns using Form 1041.
If you filed and paid by mail and received a notice of unpaid taxes, the IRS advises the following steps:
- Promptly respond to the notice.
- Ensure that funds remain available.
- Don’t cancel checks for tax payments that haven’t posted.
- Try to avoid calling the IRS due to unusually high call volume as staff continues to process mail buildup.
The IRS also announced that payments will be posted as of the date the payment was received instead of the date the payment was processed. As long as checks arrived before the deadline and funds are available, taxpayers will not be charged penalties or interest. According to the IRS, bad check fees will not be charged for dishonored checks received between March 1 and July 15 due to delays in processing.
For more information about making payments, visit irs.gov/payments.
The tax professionals at BSB have been following the latest COVID-19 developments to provide the most up-to-date information available. Every situation is different, but we are here to help. If you received an overdue notice or have other tax questions, contact us today.
Like other businesses, nonprofits have been affected by the COVID-19 pandemic. Despite the challenges, these organizations are still committed to fulfilling missions, engaging with communities, and caring for employees. In the midst of a crisis, these steps can help your nonprofit organization survive and continue your important work.
- Gather a crisis management team. While crisis management may not usually be a major part of a nonprofit organization, it is necessary in certain situations. In the middle of a vulnerable time, it is crucial to gather and prepare a crisis management team. The team may consist of communications, legal, human resources, finance, and operations personnel, depending on the organization. These individuals can be staff members, board members, or volunteers, but will need the skills and experience necessary to maintain operations critical to the organization’s mission.
- Assess your risk. During a crisis, nonprofits are more vulnerable to lawsuits, so this is a good time to ensure your organization is complying with all necessary regulations. Review your risk profile and take extra precautions to comply with procedures such as Occupational Safety and Health Administration (OSHA) guidelines and the Health Insurance Portability and Accountability Act (HIPAA) regulations to protect your organization.
- Protect your organization’s finances. The financial impact of COVID-19 can’t be ignored, but now is the time to protect your nonprofit organization’s finances. Identify the immediate impact and cost of different programs and postpone or stop anything that isn’t critical to your mission. If possible, have six months of financial reserves available. Take advantage of any additional financial assistance available and consider reaching out to current donors for support.
- Support your people. Employees and volunteers are essential to a nonprofit’s mission, so it is important to protect them. Make sure teams have tools needed to continue work, including technology for working remotely and protective gear if needed.
- Keep communication open. Quick and clear communication is essential during a crisis. Be transparent and communicate more than necessary to make sure all stakeholders stay informed. Messages should be appropriately tailored for each constituency, including employees, donors, beneficiaries, and board members.
- Make sure your infrastructure is secure. Nonprofits must operate strategically to continue to fulfill their missions, and proper infrastructure is necessary. A crisis provides an opportunity to assess your organization’s technological resources and cybersecurity efforts, to ensure private information is protected.
- Stay adaptable. During challenging and uncertain times, organizations must stay adaptable. Pause and stay focused on the purpose and priorities of the organization. Listen to constituents to determine what is needed. Make sure your efforts are supporting the organization’s mission. If you didn’t already have crisis management tools in place, this is the time to create a contingency plan to help your organization moving forward.
Nonprofits are uniquely equipped to solve problems in a way that other organizations aren’t. Staying focused on mission and applying these best practices can help your organization weather a crisis.
Every situation is different, but we are monitoring the most recent developments and will provide updated COVID-19 information as it becomes available. Please contact the professionals at BSB with questions. We are here to help.
While the CARES Act provided unemployment payment accommodations to keep state and local governments financially afloat during the COVID-19 pandemic, nonprofits have not had the same benefits. To combat a nonprofit financial crisis, Congress passed and the President signed the “Protecting Nonprofits from Catastrophic Cash Flow Strain Act of 2020” into law. The law provides an update to emergency unemployment relief for nonprofit organizations and governmental entities.
The new legislation ensures that nonprofit organizations, state and local governments, and federally-recognized tribes can receive unemployment relief through the CARES Act without facing a serious reduction in cash flow.
Under state unemployment programs, nonprofit organizations, state governments, and local governments have the option to reimburse employees, which means they can make payments instead of contributions for their unemployment benefits. Most states will then periodically bill employers for benefits paid to former employees during that period. That means the employers utilizing that payment method are not required to pay unemployment insurance payroll taxes.
The CARES Act provided federal financing for 50% of the unemployment insurance (UI) obligations for those employees for the period from March 13, 2020 to December 31, 2020, but the policy created a potential financial crisis because reimbursing employers were required to pay their bill in full before receiving reimbursements. The resulting financial impact increased the risk of reductions in services, additional layoffs, and closures.
The new law allows states to provide the 50% emergency unemployment relief to nonprofit organizations without the full bill payment requirements. Now the reimbursing employer will be responsible for half of the bill and the federal government will finance the other half. This is great news for nonprofits and other entities that would otherwise face a cash flow crisis.
COVID-19 guidance and legislation continues to develop, but we are monitoring the latest information and will provide updates as they become available. If you have questions about this new law and how it will affect your nonprofit organization, please contact the professionals at BSB. We understand that each situation is unique and we can work with you to develop a plan.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided many types of relief during the COVID-19 pandemic. One of the areas it has addressed is retirement plans. Not only has the CARES Act provided greater flexibility and access to retirement assets, it has also created changes to the way plans are managed. Recently released IRS guidance expands on CARES Act changes and provides further clarification for individuals, employers, and eligible plans.
Here are some of the changes that may affect retirement planning and distributions. This is not a complete list of all the new rules, but will give you a starting point for planning.
Special Tax Exceptions for Coronavirus-Related Distributions
The CARES Act provides special tax treatment for coronavirus-related distributions (CRDs) from a retirement plan for qualified individuals.
- Distributions subject to the special treatment must be made from eligible retirement plans between January 1, 2020 and December 31, 2020.
- CRD exceptions are limited to $100,000 total distributions from all qualified plans by qualified individuals.
- The 10% penalty that is usually assessed for early distributions from IRAs or other qualified plans is waived for CRDs.
- Early distributions can be included in taxable income over a three-year period.
- Instead of being treated as taxable income, distributions can be treated as direct rollovers to an eligible retirement plan as long as the distributions are recontributed to eligible plans within the allocated three-year period after the distribution was received.
Changes to Qualified Individuals
To be eligible for the CARES Act exemption, an individual must be qualified, which means they must meet the following requirements:
- The individual, spouse, or dependent has been diagnosed with COVID-19.
- The individual has experienced financial hardship resulting from COVID-19, including layoff or furlough, reduced work hours due to lack of childcare, or reduced hours due to a business closing or reducing hours.
Changes to Retirement Plan Loans
There are also some changes to retirement plan loans taken between March 27 and December 1, 2020.
- Retirement plan loans typically limited to $50,000 or 50% of vested balance have been increased to a limit of $100,000 or 100% of vested balance.
- Payments can be delayed for up to one year. Loan term will also increase by one year and any applicable interest will still accrue.
Changes for Employers
There are some implications for employers or plan distributors.
- The new guidance does not change the rules for when plan distributions are permitted to be made from employer retirement plans.
- Plans are not required to offer direct rollovers to qualified individuals.
- Under typical circumstances, plan administrators are required to withhold an amount equal to 20% of the distribution, but the withholding will not be required for CRDs.
- Employers may choose when to treat distributions as CRDs regarding changes to loan provisions or repayment schedules. Regardless of the procedures used to identify CRDs, plans must be consistent with similar distributions.
- The $100,000 CRD limit must be taken into consideration in distributions.
- For distributions that are not treated as CRDs by employers, qualified individuals can still treat distributions that meet the requirements as CRDs for income tax purposes.
These are just a few of the changes that have resulted from the CARES Act. If you have questions about your specific situation, please contact the professionals at BSB. We will help you address and plan for any changes that may impact you or your business.
Prior to 2020, anyone over the age of 70 ½ was required to withdraw a certain amount from their traditional IRAs and 401(k) plans each year. With the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, that age limit was raised to 72.
When the COVID-19 pandemic created economic and financial uncertainty earlier this year, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act which eliminated required minimum distributions (RMDs) for 2020. This was intended to allow retirees extra time to recover lost value from retirement account investments. The Act allowed anyone who had taken a withdrawal between February 1 to May 15 to return the distribution to their IRA by July 15 to avoid taxation on that withdrawal. Since then, updates to the Act now allow rollovers from all distributions from January 1 to May 15. The due date for those rollovers has been extended to August 31.
Additionally, repayment of RMDs under the CARES Act is not subject to the one rollover per 12-month period. The Act also allows for repayment of RMDs from inherited IRAs.
If you have already taken an RMD for 2020, there is time to return it and avoid paying 2020 taxes on that distribution. If you have already spent that money and choose not to roll it back into the account, beware that it will be subject to taxation.
The tax professionals at BSB can help you determine the best plan to make the most of your unique situation. We are staying updated on the latest developments and will continue to provide information as it becomes available. Please contact us today.
By now, working from home has become a new normal for some employees. Even as some offices reopen, many individuals hope to continue working from home indefinitely. But before adjusting to a permanent work-from-home environment, both employees and employers should be aware of possible SALT (state and local tax) implications.
State tax issues are complex and changing. If you are working from home from a temporary residence for a company in another state, you could potentially be liable for taxes in both your state of primary residence and the state you are temporarily living in. Your company may also need to pay tax in the state where you are doing work from a home office.
Many factors affect taxability of income, including days in the home office, location of the company, and type of organization. While states have different guidelines, nearly all states require income taxes from workers who are temporarily employed in the state. For almost half of states, these taxes apply to even one day of work.
Due to COVID-19, 13 states and Washington, DC have agreed not to enforce tax rules. Additionally, some states, including Maryland, Virginia, and DC have agreements with neighboring areas. However, many states including New York and California, will still tax remote workers for 2020.
In some situations, remote workers receive credits for taxes paid in other states. But when the state taxes are higher in the state where the remote work was performed these credits may not be enough to cover taxes owed.
Businesses must also be aware of tax implications since employees working remotely could trigger nexus rules that raise the business’s state taxes.
Now is the time to meet with a tax professional. Contact us today to discuss the specifics of your situation and determine what you need to do to protect yourself or your company from an unpleasant tax surprise.
Congress has passed and the President has signed a second round of stimulus relief that will provide additional funding to the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL). Like the first round, many banks are warning that the new funds are expected to be quickly depleted.
If you have not already applied for PPP and would like to take advantage of the program, don’t delay! If you are not familiar with the program, PPP provides loans to small businesses, non-profit organizations, sole proprietorships, and independent contractors. The loans are intended to cover the costs of payroll, rent or mortgage, and utilities and are capped at either 2.5 times the average monthly payroll cost from 2019 or $10 million. Employees who retain employees during a specified eight-week period may be eligible for loan forgiveness as long as the funds are utilized for the indicated expenses
NOTE: the regulations on the loan forgiveness have not yet been published, so there are no guarantees that your business will be eligible. It is important to document and carefully account for the use of these funds to ensure that you retain your rights to any potential loan forgiveness.
PPP applications can only be submitted once. If you have already submitted an application to your bank, contact them to make sure they still have your application and request that it be submitted to the U.S. Small Business Administration (SBA) as soon as additional funds become available. Applications will be accepted again beginning Monday, April 27. Loans will be approved on a first come, first-served basis, so act quickly.
The latest legislation will also reopen applications for Economic Injury Disaster Loans (EIDL), which have been temporarily suspended awaiting Congressional approval. Business owners who are ineligible for PPP may want to consider this program instead. The EIDL option includes a possible advance sum of $10,000 that can be accepted and forgiven, even if the EIDL application is not accepted.
For more information on SBA resources and updates, visit SBA.gov.
If you have additional questions or need assistance in applying for either of these programs, please contact us. We are here to help.
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.
Defined Benefit (DB) Retirement Plans
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)).
Defined Contribution (DC) Retirement Plans
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:
- Has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention);
- Has a spouse or dependent who has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention); or
- Has experienced adverse financial consequences from being quarantined, furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; closing or reducing the hours of a business owned or operated by the individual; or from other factors, as determined by the Treasury Secretary.
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
What Should Retirement Plan Sponsors Do Now?
Employers who sponsor workplace retirement plans should review plan procedures to determine if any changes are needed to implement the CARES Act. For example:
- For DC plans that will allow “coronavirus-related distributions” in 2020, a new distribution code would be needed, so that those distributions are not subject to the 10% early distribution penalty tax or the mandatory 20% withholding that would otherwise apply. If employers have more than one DC plan in their controlled group, procedures are needed so that the amount of such distributions made to any individual does not exceed a total of $100,000. These procedures would be similar to those for plans that made qualified disaster distributions over the past few years for certain hurricanes, floods or wildfires. If the DC plan will allow coronavirus-related distributions to be repaid to the plan, procedures are needed to treat those as rollover contributions and to limit the amount of such repayments to the amount of coronavirus-related distributions that the employee took from all DC plans in the controlled group.
- If a DC plan sponsor wants to increase the maximum plan loan amounts available under the plans during 2020, existing plan loan procedures would need to be updated to allow for that increase. Plan sponsors who limit how many outstanding loans a participant can have at any time may want to increase that limit to allow participants to use the increased loan limits. Permissible one-year delays in loan repayments should be documented (such as updating amortization schedules), so that loans will not go into default. DC plans that do not currently allow participant plan loans could be amended to add them.
- DC plan sponsors will need to update their plan operation immediately for the waived 2020 RMD distributions. Plans would use similar procedures as were used when 2009 RMD payments were waived after the 2008 economic crisis.
- The plan’s definitions of covered compensation should be reviewed to ensure it is aligned with the sponsor’s intent, especially with regard to determining if employee assistance and paid leave will be subject to employees’ deferral elections and employer contributions.
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.
Health Care Services
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.
Tax-Free Student Loan Repayments
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.
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