A Snapshot of Employee Benefits Under the CARES Act

March 30, 2020

The United States responded to the economic hardships brought by COVID-19 with the passing and signing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The $2 trillion law provides emergency relief to individuals and businesses that are impacted by COVID-19 and is Phase Three of the government’s response to the pandemic.

The CARES Act is massive legislation with numerous provisions, consisting of more than 800 pages. We are still reviewing the contents of the act and will provide updates as guidance on the implementation of the act’s provisions is issued.

Below is a summary of some of the act’s key provisions regarding employee benefits and executive compensation.

Retirement Plan Assistance

The retirement plan changes below are elective. Any provision that an employer wishes to adopt must be documented in a plan amendment by the last day of the plan year beginning on or after Jan. 1, 2022, or 2024 for governmental plans. Until the amendment is signed, the plan should be operated in compliance with any changes the plan sponsor intends to adopt.

  • COVID-19 Hardship Distributions. Qualifying participants in eligible retirement plans may receive distributions up to $100,000 from their account balances before Dec. 31, 2020. COVID-19 hardship distributions may be made from any vested account in an eligible retirement plan, including 401(k), 403(b), profit-sharing, governmental 457(b) plan or an IRA without regard to the usual restrictions on distributions, such as age or service. This distribution is only available to a participant who (a) has received a COVID-19 diagnosis for the participant, spouse or dependent or (b) has experienced adverse financial consequences resulting from a reduction in work hours, been laid off, quarantined, furloughed, unable to work due to lack of childcare on account of the COVID-19 or other factors as determined by the Treasury Secretary.  A COVID-19 hardship distribution is exempt from (i) the normal 20 percent federal income tax withholding and (ii) the 10 percent early distribution tax that otherwise applies to payments made before age 59 ½.  

Plan sponsors are allowed to rely on a certification from an employee that the distribution was a “COVID-19 hardship distribution.” Unless elected otherwise by the participant, the amount of any COVID-19 hardship distribution is recognized in income ratably over three years. The participant is also permitted to repay the amount of the distribution to an IRA or any retirement plan accepting rollovers within three years of the date of the distribution. Any such repayment is treated as a direct rollover.

  • Increased 401(k) plan loan limits. For 180 days after enactment, the loan limits on qualified plans are increased. A participant can borrow the lesser of up to $100,000 or 100 percent of his vested account balance (both amounts are double the normal limits). There is also greater flexibility in the repayment of these loans. Generally, participants can be allowed to delay repayment by up to one year.
  • Waiver of 2020 Required Minimum Distributions. Under existing law, participants who reach age 70 ½ before 2020 or 72 in 2020 (or a later year) must begin to receive “required minimum distributions” (RMDs) from a qualified plan. The CARES Act allows plans to suspend making RMDs for 2020 and 2019, provided those distributions have not been made yet. This RMD waiver applies to qualified retirement plans, defined contribution plans under Internal Revenue Code Section 403(a) or 403(b), and eligible deferred compensation plans under Internal Revenue Code Section 457(b) (excluding those maintained by tax-exempt entities).
  • Single-Employer Plan Funding Relief. Certain defined benefit plans may take advantage of funding relief under the CARES Act. Minimum required contributions to a single-employer-defined benefit plan, including any quarterly contribution, that would otherwise be due in 2020 will not be due until Jan. 1, 2021. However, the amount of any such minimum required contribution must be increased by the interest (at the effective rate of interest for the plan year) accruing between the original due date and the payment date.

Also, a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before Jan. 1, 2020, as the AFTAP for plan years that include 2020. This relief may help plans avoid the application of certain funding-based benefit restrictions, which would affect the ability to make lump-sum distributions.

Health and Welfare Benefits Plan Incentives

The CARES Act also provides some relief for impacted employer-sponsored group health plans:

  • COVID-19 Diagnostic Testing. The CARES Act amends the Families First Coronavirus Response Act to expand the types of COVID-19 tests that all group health plans and health insurance issuers are required to cover, without cost-sharing to the participant. In addition to FDA-approved tests, plans must also cover tests developed with authorization of an individual state and tests for which the developer requests or intends to request FDA approval.
  • COVID-19-Related Preventive Services. When a qualifying COVID-19 vaccine is developed, group health plans and health insurance issuers must cover it at no cost-sharing to the participant.
  • Over-the-Counter Products and Medications. Over-the-counter products and medications are now reimbursable through a Health Savings Account (HSA) or flexible spending account without a prescription from a physician. Plan sponsors electing to incorporate this broader definition of reimbursable expenses must amend their plans. Menstrual care products also appear to be reimbursable under an HSA or flexible spending account.
  • Telehealth. The CARES Act creates a safe harbor for telehealth services provided under a high-deductible health plan (HDHP). For plan years beginning on or before Dec. 31, 2021, an HDHP with an HSA can cover telehealth services and other remote care services before an HSA-eligible individual reaching the plan’s deductible.

Executive Compensation Limitations

The CARES Act imposes two limits on executive compensation paid by businesses that apply for and receive loans, loan assistance or other financial assistance under the U.S. Treasury's Exchange Stabilization Fund. (These limits do not apply to businesses employing less than 500 employees, as they are not eligible under the Exchange Stabilization Fund. Such “smaller” businesses may receive relief under programs established by the Small Business Administration. Please look for alerts from the Phelps business group on this and other provisions in the CARES Act with business and tax implications.)

As a condition of receiving a loan, loan assistance or other financial assistance, an eligible business must contractually agree to adhere to the following restrictions:

  • For any employee or officer who received total compensation of more than $425,000 in 2019, the company will not pay (i) compensation that exceeds the total compensation received by such employee or officer in 2019; or (ii) severance pay or other termination benefits that exceeds twice the employee’s or officer’s total 2019 compensation.
  • For any employee or officer who received total compensation of more than $3,000,000 in 2019, the company will not pay such employee or officer total compensation in any 12-month period that exceeds $3,000,000 plus 50 percent of all compensation over $3,000,000 the employee or officer received in 2019.

For purposes of these rules, total compensation includes salary, bonuses, awards of stock and other financial benefits provided by an eligible business.

Eligible businesses must agree to comply with the above rules beginning on the date the loan or guarantee agreement is entered into and ending one year after the loan or guarantee is no longer outstanding. (An extended compliance period applies to air carriers or contractors receiving financial relief.)

Fringe Benefits

  • Educational Assistance Programs. The CARES Act allows employers with written Educational Assistance Programs under Code Section 127 to provide payments to or on behalf of an employee on a tax-free basis for student loan debt expenses. More specifically, payments up to $5,250 made before Jan. 1, 2021, by an employer to either an employee or a lender of principal and/or interest on qualified education loans will not be taxable to the employee. Employees may not receive both a loan payment and a deduction on interest paid on such debt.

As businesses and individuals turn to the future, our Employee Benefits team at Phelps is here to provide legal assistance every step of the way.