The new Coronavirus Aid, Relief, and Economic Security Act (CARES Act),
signed into law March 27, 2020, offers relief for employers and employees
enduring the financial pressures of the coronavirus pandemic.
Specific provisions make it easier for certain qualified retirement plan
participants to access their retirement funds; others suspend required
minimum distributions for 2020, delay employer contributions to
defined-benefit pension plans for 2020, provide for reimbursement of
certain over-the-counter medical products and establish other new group
health plan requirements, set annual compensation limits for certain highly
compensated employees of businesses who receive government financial
assistance, and enable employers to pay for employee student loans on a
McGuireWoods’ previous client alert in this series discusses “COVID-19 and Employee Benefits: The Impact on Group Health Plans.”
Read on for a summary of the CARES Act provisions relating to employee
benefit plans and compensation of certain employees.
Impact on Retirement Plans
The CARES Act eases distribution requirements for participant loans and
waives penalties for certain COVID-19-related withdrawals from qualified
defined contribution retirement plans. The CARES Act also suspends required
minimum distributions from 401(k) plans and employer contributions to
defined-benefit pension plans for 2020.
For the six-month period following the enactment of the CARES Act,
participants of qualified defined contribution retirement plans may secure
a loan up to the lesser of $100,000 or 100 percent of the participant’s
vested accrued benefit under the plan. This provision increases the maximum
plan loan amount from the lesser of $50,000 or 50 percent of the
participant’s vested accrued benefit. The CARES Act also permits repayment
of participant loans to be delayed for up to a year. Plans are not required
to permit these changes.
The CARES Act also provides for a “coronavirus-related distribution,” which
is a distribution of funds (up to $100,000 from all plans within a
“controlled group”) from an eligible retirement plan made during the 2020
calendar year to a “qualified individual.”
A “qualified individual” is a person: (i) who is diagnosed with the virus
SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease
Control and Prevention; (ii) whose spouse or dependent (as defined in
section 152 of the Code) is diagnosed with such virus or disease by such a
test; or (iii) who experiences adverse financial consequences as a result
of being quarantined or furloughed or laid off or having 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 Secretary of the Treasury (or its delegate).
Plan administrators may rely on an employee’s certification that he or she
meets one of the qualified situations to approve the coronavirus-related
distribution. Coronavirus-related distributions are exempt from the 10
percent early withdrawal penalty and the 20 percent withholding
requirement. Taxation of coronavirus-related distributions may be spread
out equally over three years, beginning in the 2020 tax year, and such
distributions can be repaid (in one or more installments) to any eligible
retirement plan in which the participant is a beneficiary at any time
during the three-year period beginning on the day after the participant
receives the distribution. Repayment of the coronavirus-related
distribution will be treated by the plan as a rollover contribution made
through a trustee-to-trustee transfer; therefore, such repayment will not
be subject to annual contribution limits.
Required Minimum Distributions (RMD) Waiver
Plan participants age 70-1/2 and older have said they face receiving
required minimum distributions in 2020 from defined contribution plans that
would be based on the value of their accounts at the end of 2019, but
distributed from balances decimated by recent market declines. To address
this situation, the CARES Act allows defined contribution plans described
in Internal Revenue Code section 403(a) and (b), as well as IRAs and Code
section 457 Plans, to suspend making required minimum distributions in
2020. The change does not appear to apply to defined benefit plans.
This suspension would also apply to participants who turned age 70-1/2 in
2019 and had not yet received their 2019 distribution. Amounts distributed
in 2020 that would have been required minimum distributions but for the
CARES Act will not be treated as eligible rollover distributions for
certain purposes. (For example, employers are not required to provide the
special tax notice under Code section 402(f) applicable to eligible
rollover distributions.) Whether participants who have already received
required minimum distributions for 2020 are able to roll over the
distributions in an indirect (60-day) rollover to another retirement plan
is unclear from the CARES Act but is likely to be addressed in future
guidance, along with other topics, such as whether the 60-day indirect
rollover deadline will be extended (as was done in 2009).
The suspension of required minimum distributions under the CARES Act is
similar to the suspension that applied in 2009 after the financial crisis
of 2008. If the new waiver rules apply the way similar rules applied in
2009, participants will be allowed to elect whether to receive required
minimum distributions in 2020.
Single Employer Pension Plan Funding Relief
Employers may delay until Jan. 1, 2021, required minimum contributions
under section 430(a) of the Internal Revenue Code to qualified,
defined-benefit pension plans that would otherwise be due during 2020. For
employers that make quarterly contributions, this includes quarterly
contributions during 2020 as well. In addition, employers may treat the
funding target attainment percentage calculated as of Dec. 31, 2019, for
purposes of applying any required benefit restrictions under Section 436 of
the Code for plan years that include 2020. These provisions should provide
welcome short-term relief for employers hit by the “double whammy” of
falling asset values and falling interest rates. However, they fall short
of additional relief that plan sponsors had been seeking and which Congress
and federal regulators have provided in connection with past financial
crises. Additional funding relief may be forthcoming in future legislation
or regulatory actions.
Impact on Group Health Plans
Group Health Plan Provisions Including Reimbursement of Certain
Over-the-Counter Medical Products
The CARES Act builds on the provisions of the Families First Coronavirus
Relief Act requirement that a group health plan provide access to COVID-19
testing, diagnosis and treatments in the following ways:
- It expands the COVID-19 testing requirement to certain types of
diagnostic testing, including those that may not yet be approved by the
Food and Drug Administration.
- It provides that a group health plan must reimburse a COVID-19 testing
provider at the negotiated rate for such testing if the plan has a
negotiated rate with the provider already in effect. If the plan does not
have a negotiated rate with the provider, the reimbursement must be at the
cash price or the plan may negotiate a rate that is less than the cash
price for such testing.
- Group health plans and health insurance issuers are required to cover,
without cost-sharing, “qualifying coronavirus preventive services”
(including vaccines), where the list of “preventive services” is determined
by certain agencies identified in the CARES Act.
- It enacts a safe harbor, effective as of the date of enactment, which
allows high-deductible health plans with health savings accounts to cover
telehealth services prior to a participant reaching the deductible, even
where telehealth services do not relate to COVID-19.
Additionally, the CARES Act amended certain limitations that had been in
effect as a result of the Patient Protection and Affordable Care Act. The
CARES Act eliminates certain restrictions on pre-tax reimbursement of
medications and products not prescribed by a physician, and permits
reimbursement of over-the-counter medications and products from pre-tax
accounts, such as health savings accounts, Archer medical savings accounts,
healthcare flexible spending accounts and health reimbursement accounts. In
addition, the CARES Act specifically includes menstrual care products as
“qualified medical expenses” that are reimbursable by pre-tax accounts. The
CARES Act changes are permanent and apply for expenses incurred after Dec.
Impact on Executive Compensation
Compensation Limits for Certain Employees of Businesses That Receive
Federal Government Financial Assistance
Sections 4004 and 4016 of the CARES Act impose limits on compensation paid
by businesses that receive loans, loan assistance or other financial
assistance under Title IV of the CARES Act.
For the period beginning on the date the loan or guarantee agreement is
entered into, through the date ending one year after the loan or guarantee
is no longer outstanding (the covered period), the business must comply
with the following conditions.
For any officer or employee of the business who in 2019 received
aggregate base salary, bonuses, awards of stock and other financial
benefits (total compensation) in excess of $425,000, the business may
not pay to such officer or employee:
total compensation from the business exceeding his or her 2019
total compensation for any consecutive 12 months during the covered
severance benefits exceeding more than two times his or her 2019
For any officer or employee of the business with total compensation
from the business in excess of $3 million in 2019, the business may not
pay to such officer or employee during any consecutive 12 months of the
covered period total compensation in excess of the sum of:
$3 million, plus
50 percent of the excess over $3 million of the total compensation
received by the officer or employee in calendar year 2019.
For example, if an employee received $5 million in total compensation in
2019, the employee may not receive more than $4 million during any 12
consecutive months during the covered period — $3 million plus the product
of (50 percent multiplied by the difference of ($5 million minus $3
Notwithstanding the foregoing, the covered period for air carriers or
contractors receiving support under subtitle B of Title IV limits
compensation payments during the entire two-year period beginning March 24,
2020, and ending March 24, 2022.
Please note that additional guidance is necessary to understand the
definition of “Total Compensation” under the CARES Act. For example, it is
unclear how compensation that is subject to a vesting schedule should be
considered in determining total compensation for a 12-month period. In
addition, it’s unclear how the limits apply with respect to an employee who
began employment in 2019 or worked only a portion of 2019.
Impact on Fringe Benefits
Temporary Exclusion for Certain Employer Payments of Student Loans
The CARES Act contains a temporary provision that provides tax-free status
to employer-paid student loan repayment programs by expanding the
definition of “educational assistance” under Code §127. As a result,
employers may provide each employee with up to $5,250 per year in tax-free
assistance for student loan repayments and expenses incurred for tuition,
fees, books, supplies and equipment, provided the requirements of Code §127
are satisfied. Employers may make loan repayments of principal and/or
interest to the employee or to a lender, but the CARES Act disallows an
employee’s deduction for any employer-paid interest on the student loan.
This provision is effective for payments made after March 27, 2020, and
before January 1, 2021.
Now that the CARES Act has been signed into law, employers must take
affirmative steps to effectuate the provisions regarding plan loans,
coronavirus-related distributions and RMD waivers, as these changes are
optional. Employers who wish to implement these changes under the CARES Act
have until the last day of the plan year beginning on or after Jan. 1, 2022
(i.e., for calendar year plan years, by Dec. 31, 2022). In the case of
governmental plans, the date is the last day of the plan year beginning on
or after Jan. 1, 2024. However, employers may immediately coordinate such
operational changes with retirement plan record-keepers to permit plan
participants to take advantage of these distribution options and RMD
waivers as soon as possible.
Employers who sponsor single-employer defined-benefit pension plans should
consider whether to take advantage of the 2020 funding relief provided by
the CARES Act. For plans that make quarterly contributions, the first
contribution is due in mid-April, so affected employers will need to decide
Employer group health plan sponsors should (i) review the terms of their
plan documents to assess whether amendments are necessary to provide
COVID-19 testing, telehealth services and reimbursement of those medical
expenses that are now qualified medical expenses; and (ii) discuss coverage
of these items with the plan insurer or third-party claims administrator to
ensure proper administration of the group health plan.
Businesses wishing to take part in the CARES Act’s loan and financial
support provisions under Title IV should identify the existing employment
agreements, severance and deferred compensation arrangements that may need
to be modified in order to limit annual compensation for affected employees
in accordance with the CARES Act.
Additional Guidance and Other Issues
McGuireWoods will continue to monitor COVID-19-related legislation and
guidance. For additional guidance on how the CARES Act may impact your
business or other issues related to the administration and operation of
employee benefit plans during the COVID-19 crisis, employers can contact
the authors of this article or any other member of the McGuireWoods
employee benefits team.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.