Employee Benefits Provisions of the CARES Act

On March 27, 2020, the Coronavirus, Aid, Relief and Economic Security Act (the “CARES” Act) was passed, making it the third federal law to address the coronavirus (COVID-19) public health pandemic.  The Act, designed to provide additional relief to those affected by the pandemic, contains multiple provisions that specifically implicate multiemployer plans as set forth more fully below.

Coronavirus Related Distribution

The Act allows defined contribution plans to adopt provisions allowing for early distributions, up to a maximum of $100,000, for qualified individuals who have been adversely affected by the coronavirus pandemic.  Qualified individuals include the following:

  • An individual diagnosed with COVID-19;
  • An individual whose spouse or dependent is diagnosed with COVID-19;
  • An individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of childcare, or closing or reducing hours of a business owned or operated by the individual, due to the virus.

The Act waives the ten percent (10%) early distribution penalty tax under these circumstances.  While distributions are still taxable, the Act allows Federal Income Taxes to be paid ratably over a three-year period.  It also permits participants to repay the distributed amount within a three-year period, beginning on the day immediately following the date on which such distribution was received, provided the individual is a participant of the plan and the plan accepts rollover distributions.

To qualify for this tax-favored treatment, the distribution must be made on or after January 1, 2020 and before December 31, 2020.  A participant need only submit a certification to the plan administrator attesting to the fact that the participant meets one of the three aforementioned conditions in order to qualify.

Waiver of 2020 Required Minimum Distributions

The Act waives the 2020 required minimum distributions (“RMDs”) from employer-sponsored defined contributions retirement accounts, including 401(k) plans or individual retirements accounts (IRAs).  This waiver includes RMDS due for 2019 by April 1, 2020, and any other RMD due for the 2020 calendar year.

Delay of Defined Benefit Contributions

The Act allows for the delay of defined benefit contributions until January 1, 2021.  However, interest, payable to the plan, will continue to accrue on any such delayed contribution.

Increase in Retirement Plan Loan Amounts

Under the Act, participant loan amounts, which are generally limited to the lesser of $50,000 or 50% of the participant’s vested balances, are doubled for qualified individuals (as defined above) to the lesser of $100,000 or 100% of the participant’s vested account in the plan.  This loan amount increase is available for 180 days after the enactment of the Act, or until September 23, 2020. Additionally, individuals with existing loans, due on or before December 31, 2020, can delay repayment for up to one year.

Adjusted Funding Target Attainment Percentage (“AFTAP”) Benefit Restriction Relief

Single employer defined benefit pension plans are required to impose restrictions on payments of certain types of benefits and plan distributions based on plan funding levels. Specifically, the restriction can apply when the plan’s “adjusted funding target attainment percentage” is below 80% or 60%, depending on the type of restriction.

Under the Act, a plan administrator may now treat the AFTAP applicable from the previous plan year, ending prior to January 1, 2020, as the AFTAP for the plan years, which include the calendar year 2020 for all purposes.  A plan with an AFTAP of at least 80% in its last plan year, prior to January 1, 2020, will avoid all IRC 436 restrictions at least through December 31, 2020. Off-calendar plan years may receive two plan years of relief.

Plan Amendments and Extension of Filing Deadlines

Plan amendments for all provisions will be required on or before the last day of the first plan year beginning on or after January 1, 2022, or such later date as may be prescribed by the Secretary of Treasury.

Additionally, the Act authorizes the Department of Labor to postpone certain filing deadlines under ERISA, such as Form 5500 filings.  The DOL is expected to issue additional guidance in this regard.

Health Care and Other Provisions

The CARES Act provides additional provisions affecting health care coverage, in general, including new testing-related requirements.  Specifically, the Act expands coverage of coronavirus testing to include coverage of coronavirus testing services provided in an out-of-network setting.  Under these circumstances, the plan must reimburse the provider the cash price for the service that is listed by the provider on its website, as required under the Act, or negotiate a lower rate.  It further requires coverage of COVID-19 preventative services, including vaccinations once available, at no cost to the participant. The CARES Act repeals the provision under the ACA requiring a prescription in order for account-based plans to pay for over-the-counter medications.  The Act also provides a safe harbor for telehealth services to be covered under a high deductible health plan before the deductible is met for plan years prior to December 31, 2021.

Additionally, employers are permitted to pay up to $5,250 per employee towards an employee’s student loans, on a tax-free basis, through December 31, 2020.  The payments may be made to the employee as a reimbursement or directly to the lender.

This alert is intended as an overview of the employee benefit provisions of the CARES Act.  Please contact our office if you have any questions or need specific guidance concerning how the CARES Act effects your plan.

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