The CARES Act provides significant assistance to individuals and businesses impacted by COVID-19. This alert is divided into two parts — one with a focus specifically on the CARES Act’s impact on
retirement plans
and the other outlining the impact on
health and welfare benefits and fringe benefits.
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CARES Act and Impact
on Retirement Plans
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Coronavirus Related Distributions
The CARES Act provides a special distribution option for specific individuals. This coronavirus-related distribution is exempt from the prohibition on premature distributions (i.e., prior to age 59 ½ or termination of employment), and thus is exempt from the 10% excise tax on such distributions. The distribution is limited to $100,000 from the plans of the sponsoring employer and any member of its controlled group. This coronavirus-related distribution is available to IRAs and plans described in Internal Revenue Code (the “Code”) sections 401(a), 401(k), 403(a), 403(b), and 457(b).
Only the following individuals are allowed to use this new coronavirus-related distribution:
- individuals who have been diagnosed with SARS-CoV-2 or coronavirus disease 2019 (i.e., COVID-19) by a test approved by the Centers for Disease Control,
- an individual whose spouse or dependent has been diagnosed with one of these viruses by the same approved test, or
- an individual who experiences adverse financial consequences as a result of quarantine, furlough, lay off, reduced working hours, closing or reducing hours of a business owned or operated by the individual, or who is unable to work due to lack of child care all as a result of such viruses or other factors determined by the Secretary of the Treasury.
The plan administrator is allowed to rely on a certification provided by the individual that they are a covered individual. Amounts distributed pursuant to the coronavirus-related distribution may be repaid at any time over the three-year period commencing on the date the distribution was received (and there is no requirement that the repayment occur at one time). Amounts can be paid back to any qualified plan or any IRA so long as the account being paid back is one to which a rollover contribution could be made under the Code. The income inclusion with respect to these coronavirus-related distributions will be included ratably over a three-year period beginning with the year in which the distribution was received, unless the participant elects to treat it all as income during the year of receipt. These distributions will be treated as exempt from tax withholding and exempt from the trustee-to-trustee transfer rules, which require a plan to offer a trustee-to-trustee transfer to participants taking distributions.
Retirement Plan Loans
In addition, the CARES Act increases the dollar amount available for loans from qualified plans from $50,000 to $100,000 and increases the percentage test limit for loans from 50% of the present value of the participant’s vested account/benefit to 100% of the present value of the participant’s vested account/benefit under the plan. Such increases are only for loans made 180 days from the date of the enactment of the CARES Act. Additionally, if any loan repayments are due between the enactment of the CARES Act and December 31, 2020, such repayments may be delayed for one year from the original due date. This delay applies to loans outstanding prior to the enactment of the CARES Act and to loans that are initiated after the CARES Act. After December 31, 2020, loan repayments must be adjusted to reflect the delay in the repayments and for any interest accrued during that delay.
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Employee Benefits Attorneys
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The five-year limit that typically applies to loan repayments disregards this one-year delay. The individuals allowed to take advantage of this delay in loan repayments are only those individuals discussed above who are allowed to take a coronavirus-related distribution.
Delay in Required Minimum Distributions
The CARES Act provides for a one-year delay of required minimum distributions (RMDs) for the following defined contribution plans:
- 401(a) plans (including 401(k) plans),
- 403(a) and 403(b) plans,
- 457(b) plans, and also
- IRAs.
This RMD delay does not apply to defined benefit plans. The delay applies to both 2019 RMDs that are required by April 1, 2020 and to 2020 RMDs. Similar to the 2009 waiver of RMDs, if all or a portion of a distribution for 2020 is an eligible rollover distribution because it is no longer an RMD the distribution is not treated as an eligible rollover distribution for purposes of the direct rollover requirement, the notice and written explanation of the direct rollover requirement, and the mandatory income tax withholding requirement.
Delay in Required Minimum Funding Contributions
The CARES Act delays minimum funding contributions for qualified plans, which mostly affects defined benefit plans, including any required quarterly contributions until January 1, 2021. The amount of any delayed minimum required contribution will be increased by interest accruing during the period from the original due date until the payment date using the effective rate of interest for the plan for the plan year in which the payment is made.
Amendments for the CARES Act Provisions
The plan only needs to be operated as if the amendment was in place, and the actual amendment, which would be retroactive, is not required until the following:
- the last day of the plan year beginning on or after January 1, 2022; and
- for governmental plans, the last day of the plan year beginning on or after January 1, 2024.
Unless otherwise specified, these provisions apply for calendar years beginning after December 31, 2019, and this allows participants who may have already taken a distribution the benefit of the provisions.
Deadlines Extended
Finally, the CARES Act expands the circumstances under which the Secretary of Labor can postpone certain filing deadlines. There have been requests for the Secretary of Labor to postpone filing deadlines applicable to retirement plans, but as of March 29, 2020, there have not been any postponements. However, the IRS has extended the initial remedial amendment period for Section 403(b) plans from March 31, 2020, to June 30, 2020, and the deadline for employers to adopt or amend a pre-approved defined benefit plan and to submit a determination letter application from April 30, 2020 to July 31, 2020.
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CARES Act's Key Provisions Impact On Welfare and Fringe Benefits
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As a follow-up to the Families First Coronavirus Response Act (FFCRA), the CARES Act both clarifies and expands on the COVID-19 related coverage requirements applicable to group health plans (including grandfathered health plans) and health insurance issuers. The CARES Act includes key provisions impacting certain welfare and fringe benefits including HSA’s and educational assistance programs.
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COVID-19 Testing
– FFCRA previously established the requirement for group health plans and health insurance issuers to provide no cost coverage for COVID-19 testing (including administration of the test and the associated urgent care, emergency or health provider office visit). In recognition of the expanding need for additional testing processes, the CARES Act provides that, in addition to in-vitro diagnostic tests approved by the FDA, group health plans and health insurance issuers must also provide no cost coverage for testing 1) from a developer that requests or intends to request an emergency use authorization, 2) that is developed in a State that has notified the Secretary of Health and Human Services of its intention to review tests intended to diagnose COVID-19 or 3) any other test the Secretary determines is appropriate. Assuming such testing satisfies these requirements, the group health plan or health insurance issuer will be prohibited from applying any co-insurance, deductible, or copayment to the COVID-19 test, the administration of the test or the associated health care visit.
In connection with coverage for COVID-19 testing, the CARES Act addresses the reimbursement rate for such testing by requiring group health plans and health insurance issuers to reimburse the provider at the negotiated rate. If the plan or issuer has not negotiated a rate of reimbursement with the provider, the plan or issuer will be required to reimburse the provider at the cash price, which the provider is required to list on a public internet website. Alternatively, the plan or issuer may negotiate with the provider at less than the published cash price. In this regard, providers are required to publish the listed cash price for COVID-19 testing during the emergency period or be subject to civil monetary penalties of up to $300 per day.
Preventive Care
– In addition to mandatory coverage requirements in connection with COVID-19 testing, the CARES Act anticipates the need for comprehensive coverage for immunizations and treatment for coronavirus by expanding the definition of preventive health services under Section 2713(a) of the Public Health Services Act to include “qualifying coronavirus prevention service.” The intent of the law is to ensure that all plans and issuers currently required to cover 100% of the cost of preventive care services will also be required to cover any qualifying coronavirus prevention service once such services become available.
For this purpose, a qualifying coronavirus prevention service is defined to include an item, service, or immunization intended to prevent or mitigate coronavirus that either has an “A” or “B” recommendation by the United States Preventive Services Task Force or that is on the list of recommended immunizations published by Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention. Unlike the typical timeline for coverage of other preventive health services, group health plans and health insurance issuers will be required to provide coverage for the qualifying coronavirus prevention service within 15 business days following the date the recommendation is made.
Because qualifying coronavirus prevention service is considered preventive care, plans will be required to provide coverage for such service in the same manner as other types of preventive care services, which means that coverage must be covered 100% by the plan without applying any co-insurance, deductibles or co-payment. Because grandfathered health plans are technically exempt from the requirement to provide no-cost coverage of preventive care services, it remains to be seen whether clarifying guidance may be issued to ensure that there are no gaps in the plans required to cover 100% of the cost of immunizations and treatments to prevent or mitigate coronavirus.
Health Savings Account
– The CARES Act also implements two key provisions affecting HSA eligibility and the expenses that may be reimbursed through an HSA. First, for plan years beginning before December 31, 2021, a plan’s status as a high deductible health plan for purposes of HSA eligibility will not be jeopardized solely because the plan does not apply a deductible to Telehealth or other remote services. This coverage relief is particularly important in light of the fact that all plans are required to provide no-cost coverage for healthcare provider visits in connection with COVID-19 testing and many providers have indicated that the lack of treatment codes will make it difficult to determine whether a particular Telehealth visit relates to COVID-19 testing.
The CARES Act also amends the definition of “qualifying medical expenses” for purposes of HSA reimbursements to treat the payment of over-the-counter medicine and drugs as well as menstrual care products as being paid for the purpose of medical care. This means that individuals will be permitted to pay for over-the-counter drugs and medicines as well as menstrual care products on a tax-advantaged basis through their HSA. Over-the-counter drugs and menstrual care products will also be treated as amounts paid for medical care in connection with health flexible spending accounts as well as health reimbursement arrangements and Archer MSA’s.
Exclusion for Employer Payments of Student Loans
The CARES Act allows employers to provide student loan repayment benefits to employees on a tax-free basis by amending Code Section 127(c) dealing with Educational Assistance Programs. For the period between the enactment of the CARES Act and before January 1, 2021, an employer may make payments up to $5,250 per calendar year, of the principal or interest, on any qualified education loan incurred by the employee for the education of the employee. The payments may be made to the employee or to the lender and such payments would be excluded from the employee’s gross income. The maximum amount of $5,250 applies to all educational assistance benefits currently provided, if any, in addition to this new student loan repayment provisions as well as all other applicable requirements of Section 127 of the Code.
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Jeremiah D. Wood
practices in the firm’s Employee Benefits and Executive Compensation Practice Group. His practice includes experience in the design, implementation, administration and termination of tax-qualified retirement plans (including traditional pension plans, cash balance plans, profit sharing plans, 401(k) plans, and ESOPs), 403(b) plans, nonqualified deferred compensation plans (including 457(b) and 457(f) plans and deferral compensation arrangements for executives) and health and welfare plans.
Alexandra A. Ifrah
is a partner in the Employee Benefits Practice Group of Friday, Eldredge & Clark and serves on the firm's Management Committee. Since joining the firm in 1999, Alexandra has concentrated her practice on the representation of employers from a myriad of industries in complex employee benefits, taxation and executive compensation matters.
Joshua M. Osborne
is a partner in the firm’s Employee Benefits and Executive Compensation Practice Group. His practice focuses on providing counsel to clients on all aspects of their welfare benefits, retirement plans and executive compensation arrangements.
Brian C. Smith
practices in the firm’s Employee Benefits and Executive Compensation Practice Group. His practice includes experience in the design, implementation and administration of tax-qualified retirement plans including defined benefit pension plans, profit sharing plans, 401(k) plans and ESOPs.
Disclaimer:
The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.
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Employee Benefits Practice Group
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Our firm has the largest and most experienced employee benefits practice in Arkansas, encompassing more than 1,000 separate benefits and compensation plans. We handle every legal aspect of employee benefits plans, from design, implementation, and administration to compliance audits and mergers and acquisitions.
All members of our practice group have Master of Laws in Taxation degrees. More importantly, while other firms may address this area of the law with employment lawyers who are not trained in the complexities of tax law, you have the assurance of knowing that our group focuses exclusively on the tax and ERISA (Employee Retirement and Income Security Act) concerns of your unique benefits plan and compensation needs.
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About the Firm
Friday, Eldredge & Clark, LLP is a full-service law firm representing businesses, non-profits, governmental and individual clients in Arkansas and across the United States. We are the largest law firm in Arkansas and one of the oldest — tracing our historical roots back almost 150 years. Our success stems from strong internal leadership and a continuously sharp focus on our clients' needs. We provide clients single-source convenience by offering a wide range of services in more than 50 areas of law. Although the firm is known for its rich history and vast scope of services, it is committed to further growth and development to serve our clients better and put them at the focus of our work - every day.
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