4-1-20 CARES Act Impacts Employee Benefits in the Workplace

CARES ACT IMPACTS EMPLOYEE BENEFITS IN THE WORKPLACE

On March 27, 2020, the President signed into law a third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748). The CARES Act provides tax relief affecting employee benefits in the workplace, including the following:

High Deductible Health Plans and Changes to HSA/FSA/HRA Rules

An individual must satisfy certain requirements in order to deduct contributions to an HSA, including that the individual be covered under a high deductible health plan (HDHP) meeting certain minimum deductibles and maximum out-of-pocket expenses requirements. Pursuant to Notice 2020-15, the IRS has already provided that a HDHP will not lose its status merely because the plan provides medical care services and items purchased related to testing for and treatment of COVID-19 without requiring a deductible. The CARES Act expanded the flexibility for HDHPs—effective March 27, 2020, and continuing for plan years beginning on or before December 31, 2021, HDHPs may provide telehealth and other remote care services without requiring a deductible.

In addition, the CARES Act allows account-based plans to reimburse the costs of over-the-counter medication without a prescription. Expenses for menstrual care products have been added as a qualified medical expense eligible for reimbursement. For HSAs and Archer MSAs, the provision is effective for amounts paid after December 31, 2019. For FSAs and HRAs, the provision is effective for expenses incurred after December 31, 2019.

Temporary Waiver of RMDs

A retirement plan or IRA owner must take required minimum distributions (RMDs) annually once the owner reaches age 72. However, the CARES Act temporarily waives RMDs from 401(k) plans (as well as other defined contribution plans and IRAs) for participants who are required to receive such distributions in 2020. The waiver does not apply to required beginning dates in calendar years after 2020.

Waiver of 10% Excise Tax

Generally, a distribution from a qualified retirement plan such as a 401(k) plan or an IRA will be subject to a 10% excise tax for early distributions unless the distribution qualifies for an exception. The CARES Act provides that the excise tax does not apply to any coronavirus-related distribution.

A coronavirus-related distribution means any distribution made during 2020 from an employer qualified retirement plan or IRA to an individual:

Who is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention;
Whose spouse or dependent is diagnosed with such virus by such test; or
Who experiences adverse financial consequences as a result of being quarantined, being furloughed, laid off, having work hours reduced due to the virus, being unable to work due to lack of child care, or closing or reducing hours of a business owned or operated by the individual due to the virus.

The administrator may rely on an employee's certification that he or she satisfies these conditions. The aggregate amount of all coronavirus-related distributions from all plans maintained by an employer (including any member of the employer's controlled group) to an individual cannot exceed $100,000 in 2020. Coronavirus-related distributions from employer qualified retirement plans are not subject to required income tax withholding.

Unless they elect otherwise, individuals who receive a coronavirus-related distribution will include the amount of the distribution ratably in income in 2020, 2021 and 2022. Individuals may avoid this income recognition by repaying the distribution to the retirement plan within three years of receipt, which repayment will be treated as a tax-free transfer to the recipient plan. A coronavirus-related distribution cannot be rolled over tax-free to another employer qualified retirement plan or IRA.

Loans from Qualified Plans

Plans may increase the amount of loans available to and delay repayment of outstanding loans for employees who are eligible to receive coronavirus-related distributions. Specifically, the CARES Act provides that, during the 180-day period following March 27, 2020, such employees may receive plan loans that do not exceed the lesser of $100,000 (increased from $50,000) or 100% (increased from 50%) of the present value of the employee's nonforfeitable accrued benefit under the plan. The CARES Act also allows the due date for the repayment of any outstanding plan loans occurring between March 27, 2020, and December 31, 2020, to be delayed for one year. Plans adopting this provision must adjust subsequent repayments appropriately to reflect the delay in repayment and any interest accruing during the delay.

Executive Compensation

The CARES Act infused $500 billion into the Treasury Department’s Exchange Stabilization Fund for purposes of making loans, loan guarantees, and other investments to US businesses, states, and municipalities impacted by the coronavirus pandemic in 2020. In addition to other requirements, businesses that receive a loan or guarantee from the Fund under Section 4003 of the CARES Act must limit compensation for highly compensated employees from the date of the loan or guarantee agreement until one year after the loan has been repaid (the "Restricted Period").

Specifically, officers and employees with 2019 total compensation exceeding $425,000 may not receive compensation or termination pay that exceeds twice that amount during any consecutive 12 months in the Restricted Period. Officers and employees with 2019 compensation exceeding $3 million may not receive compensation of more than $3 million plus 50% of the amount his or her 2019 compensation exceeded $3 million during any consecutive 12 months in the Restricted Period. Total compensation includes salary, bonuses, awards of stock, and "other financial benefits" provided by a business to its officer or employee.

Further guidance will be needed to address many open questions, including the scope of "other financial benefits" in determining total compensation. For example, the CARES Act does not address whether compensation earned but not paid during the Restricted Period will be subject to this compensation limit. It remains to be seen whether deferring compensation will be a viable way to comply with the compensation limits; in such case, companies should consult their tax advisors regarding whether other laws apply, including but not limited to Section 409A of the Internal Revenue Code.

Note that companies that decide to take advantage of the coronavirus-related distribution and loan provisions must amend their plan documents by December 31, 2022 for calendar year plans. HSAs, FSAs and HRAs should similarly ensure that their plan documents allow the reimbursements now permitted by the CARES Act.

Please contact your Woods Oviatt attorney or the attorneys listed below regarding COVID-19 related issues.

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COVID-19 Multidisciplinary Crisis Group Co-Leaders