The Coronavirus, Aid, Relief, and Economic Security Act, or CARES Act, which passed the Senate last night, is Congress’s third legislative answer to the coronavirus pandemic. The CARES Act represents a heavily negotiated bipartisan effort that now moves to the House, where Speaker Nancy Pelosi has said she will seek swift approval.
The CARES Act follows the Families First Coronavirus Response Act (FFCRA), which was signed into law on March 18. The FFCRA creates new paid sick and family leave programs for certain employees of employers that have fewer than 500 employees. The FFCRA also eliminates typical health plan cost-sharing mechanisms for COVID-19 testing and related health care provider visits. The FFCRA followed the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, which provides more than $8 billion in funding to fight COVID-19 and relaxes restrictions on telehealth services provided to Medicare beneficiaries.
The CARES Act is the largest “phase” of the U.S. government’s response to the coronavirus, representing a $2 trillion stimulus package intended to flood the U.S. economy with cash. The CARES Act also includes several provisions that affect employee benefit plans. This article summarizes these provisions.
RETIREMENT SAVINGS PLAN PROVISIONS (Sections 2202 and 2203)
Penalty-Free Coronavirus-Related Distributions from Eligible Retirement Plans
The CARES Act permits employers and plan sponsors to allow participants in eligible retirement plans to receive Coronavirus-Related Distributions (CRDs) up to $100,000 without incurring the 10 percent early distribution penalty tax that would otherwise generally apply to payments made prior to age 59 ½. A CRD can only be made to a “qualified individual,” defined as an individual (or spouse or dependent of the individual) who (i) is diagnosed with COVID-19 or SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention; and (ii) has experienced adverse financial consequences as a result of being quarantined, furloughed or laid off or having a reduction in work hours due to the virus/disease, or is unable to work due to lack of childcare on account of the virus/disease, or other factors as determined by the Treasury Secretary. The plan administrator may rely on an employee’s certification that the distribution is a CRD. Eligible retirement plans include qualified defined contribution retirement plans, including 401(k), 403(b), and governmental 457(b) plans, and IRAs. CRDs would need to be made between January 1 and December 31, 2020.
Repayment of Coronavirus-Related Distributions
The CARES Act allows participants to repay a CRD to an eligible retirement plan during a three-year repayment period. Participants may repay these amounts to any eligible retirement plan or IRA in which they are a beneficiary and to which a rollover contribution of such distribution can be made. CRDs that are repaid within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
Income Inclusion Over Three Years for Coronavirus-Related Distributions
Under the CARES Act, CRDs will be included in a qualified individual’s taxable income ratably over a three-year period, unless the individual elects otherwise. CRDs will not be treated as eligible rollover distributions, thus the mandatory 20 percent withholding and direct rollover rules will not apply (though they are still eligible for rollover). Employers and other plan sponsors will need to revise their section 402(f) special tax notices to explain that CRDs are not subject to the mandatory 20 percent withholding rule.
Temporary Increase for Plan Loan Dollar Limits
The CARES Act temporarily increases the maximum amount that a qualified individual (defined as satisfying the COVID-19 or SARs-CoV-2 criteria described above) may borrow from a qualified retirement plan from $50,000 to $100,000. The CARES Act also temporarily allows qualified individuals to borrow up to the 100 percent of their vested account balance, rather than the 50 percent limit under current rules. Thus, qualified individuals may now borrow the lesser of $100,000 or 100 percent of their vested account balance starting on the date the CARES Act is enacted and ending 180 days later.
Extension for Loan Repayment Dates
The CARES Act provides qualified individuals with a one-year extension to repay qualified retirement plan loans if the due date occurs between the enactment of the CARES Act and December 31, 2020. Any subsequent repayments, plus applicable interest, will be reamortized over the extended repayment period.
Temporary Waiver of 2020 Required Minimum Distributions
Recent market declines precipitated by the COVID-19 pandemic have meant that participants age 70 ½ and older are receiving required minimum distributions (RMDs) from severely impacted IRAs and defined contribution plan accounts. The CARES Act provides relief to these participants by allowing defined contribution plans and IRAs to waive RMDs in 2020. This waiver also applies to participants who attained age 70 ½ in 2019 but had not yet received their 2019 RMD. Amounts distributed in 2020 that would have been RMDs but for the CARES Act will not be treated as eligible rollover distributions, and thus plan administrators would not need to provide section 402(f) special tax notices to participants. The CARES Act RMD waiver does not implicate the delayed age RMD requirement of the Setting Every Community Up for Retirement Enhancement (SECURE) Act which became law on December 20, 2019, and which increased the age at which RMDs must begin to 72 for individuals who had not attained age 70½ by the end of 2019.
Plans need to be amended to reflect these new rules under the CARES Act by the last day of the plan year beginning on or after January 1, 2022 (i.e., for calendar-year plans, by December 31, 2022), governmental plans need to be amended by the last day of the plan year beginning on or after January 1, 2024, or a later date if prescribed by the Treasury Secretary.
EDUCATIONAL ASSISTANCE PROGRAM PROVISION (Section 2206)
Exclusion for Employer Payments of Student Loans
For the period between the enactment of the CARES Act and January 1, 2021, employer payments of principal or interest on any qualified education loan of an employee will not be included in the gross income of that employee. These payments may be made to the employee or to a lender. This provision of the CARES Act amends Code Section 127(c), which pertains to Educational Assistance Programs. The excluded payments are still capped at $5,250 per calendar year per employee, and all other requirements applicable to such plans are still effective.
COVID-19 TESTING, PREVENTATIVE SERVICES AND PROVIDER AND HEALTH PLAN PROVISIONS (Sections 3201, 3202, 3203, 3221, 3224, 3701, and 3702)
Telehealth Services Exemption
For plan years beginning on or before December 31, 2021, the CARES Act creates a safe harbor for telehealth services provided under a high deductible health plan (HDHP). Under the safe harbor, an HDHP may provide coverage for all telehealth and other remote care services before the plan’s deductible is satisfied without disqualifying a participant from participating in a health savings account (HSA). The CARES Act expands upon previous guidance from the IRS which had limited this HDHP telehealth exception to COVID-19 testing and treatment.
Rapid Coverage of Preventive Services and Vaccines for Coronavirus
The CARES Act requires group health plans and health insurance issuers to cover without cost-sharing any qualifying coronavirus preventive services such as an item, service or immunization that is intended to prevent or mitigate COVID-19 and that is: (a) an evidence-based item or service that has been given an “A” or “B” recommendation by the US Preventive Services Task Force, or (b) an immunization that is recommended by CDC’s Advisory Committee on Immunization Practices. The requirements with respect to a qualifying coronavirus preventive service would take effect 15 business days after the date on which a recommendation is made relating to such preventive service.
Coverage of COVID-19 Diagnostic Testing
The FFCRA requires group health plans and health insurance issuers to provide coverage without imposing cost-sharing (deductibles, copayments, and coinsurance), prior authorization, or other medical management requirements for FDA-approved COVID-19 “in vitro diagnostic testing products,” as well as items and services furnished during a provider visit (in-person office, telehealth, urgent care, and emergency room), to the extent those items and services relate to the furnishing or administration of the testing product or the evaluation of the individual’s need for the testing product. The requirement to cover COVID-19 testing costs started on March 18, 2020, (the date of enactment for the FFCRA) and continues until the Health and Human Services (HHS) Secretary determines that the public health emergency has expired.
The CARES Act changes the definition of COVID-19 “in vitro diagnostic products” to “in vitro diagnostic test” and expands what is covered to include certain tests that have not yet received approval under the Federal Food, Drug, and Cosmetic Act. Where a rate for such services has previously been negotiated, the CARES Act directs group health plans and health insurance issuers to reimburse the diagnostic testing provider the full negotiated rate. In the absence of a previously negotiated rate, the plan or issuer may newly undertake to negotiate with the provider, but absent agreement, must pay the cash price for the service listed by the provider on a public website. The CARES Act requires that each provider post a cash price for COVID-19 diagnostic testing on a publicly available website during the emergency period. Failure to make such information available on a public website could result in civil monetary penalties, in an amount not to exceed $300 per day for ongoing violations.
The CARES Act requires the HHS Secretary to issue guidance about sharing patients’ protected health information (PHI) during the COVID-19 public health and national emergencies. The guidance is to be issued within 180 days of the enactment of the CARES Act and will include information about how to comply with the Health Insurance Portability and Accountability Act (HIPAA) regulations and any policies that become effective during these emergencies.
Possibly in response to special confidentiality requirements that took effect earlier this year for information originating in federally subsidized substance use disorder treatment centers, the CARES Act provides that, once a patient at one of these centers has given written consent, covered entities and business associates under HIPAA may use and disclose information relating to that patient in accordance with the rules applicable under HIPAA. These rules may relieve those subject to HIPAA, including health plans and many health care providers, from the need to meet additional notice and other requirements.
The CARES Act eliminates provisions in the Internal Revenue Code that prohibited health plans, HSAs and Archer MSAs from reimbursing expenses for over-the-counter drugs other than insulin without a prescription. As a result, individuals do not need a prescription to obtain reimbursement from, for example, a health FSA for over-the-counter medication.
FUNDING AND FILING RELIEF (Sections 3607 and 3608)
Delayed Payment of Minimum Required Contributions
The Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA) establish minimum funding rules for defined benefit pension plans. The CARES Act delays any minimum funding contributions that would otherwise be due during calendar year 2020 (including quarterly contributions due for the 2020 plan year and any final contribution due for the 2019 plan year) to January 1, 2021. The amount of the minimum required contribution, however, will be increased by any interest that accrues between the original due date and the payment date at the effective rate of interest for the plan year.
The CARES Act also permits a plan sponsor to elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020 as the AFTAP for calendar year 2020. This may help a defined benefit pension plan avoid becoming subject to the funding-based benefit restrictions which, among other things, would restrict the plan’s ability to pay lump sum benefits.
The CARES Act amends ERISA by adding public health emergency to the circumstances under which the U.S. Department of Labor (DOL) may postpone an ERISA filing deadline for a period of up to one year. The CARES Act does not address specific filings, such as the Form 5500 (an ERISA plan’s annual information filing), but it may signal forthcoming DOL guidance.
EXECUTIVE COMPENSATION RESTRICTION PROVISIONS (Sections 4004 and 4116)
The CARES Act authorizes the Treasury Secretary to make or guarantee loans up to an aggregate of $500 billion to distressed businesses severely impacted by the coronavirus pandemic (eligible businesses), provided that such eligible businesses contractually agree to certain restrictions on executive compensation. Specifically, with respect to any officer or employee whose total compensation exceeded $425,000 in 2019, loan-recipient companies must agree not to pay increased compensation that exceeds the officer/employee’s 2019 compensation or to pay severance or other employment termination benefits that exceeds twice the officer/employee’s maximum total 2019 compensation. In addition, with respect to any officer or employee whose total compensation exceeded $3 million in 2019, loan-recipient companies agree not pay increased compensation that exceeds the sum of $3 million and 50 percent of the excess over $3 million received by the officer/employee in 2019. The CARES Act defines total compensation as salary, bonuses, awards of stock, and other financial benefits provided by an eligible business. These compensation restrictions apply to distressed businesses from the date the loan agreement is executed until one year after the loan or loan guarantee is no longer outstanding.
The employee benefit plan provisions of the CARES Act address immediate health care needs related to COVID-19 testing and treatment. These provisions also address less obvious but often urgent issues that arise during a public health emergency, including whether and how individuals may access their retirement savings, how protected health information may be shared, and how employers may meet their funding and filing requirements under ERISA and the Code. In these respects, the CARES Act should provide welcome relief to employers and plan sponsors.