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