Benefit Plan Implications of the CARES Act

April 8, 2020

People wearing masks

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “Act”) was signed by President Trump. The Act provides significant relief for employee benefit plan participants and includes both required and discretionary changes. Plan sponsors should immediately review their benefit plans to ensure that amendments are properly and timely implemented to ensure that their plans continue to operate in accordance with applicable law.

Retirement Plans

Coronavirus-Related Distributions 

The Act allows tax-qualified retirement plans to provide Coronavirus-related distributions (“CRDs”) during calendar year 2020. Qualifying participants may withdraw up to $100,000 from their defined contribution plan accounts. To lessen the immediate financial implications of such withdrawals, (i) the Internal Revenue Service (“IRS”) has waived the potential 10 percent early withdrawal penalty, and (ii) recipient participants may elect to take into income the withdrawn amount for income tax purposes in 2020 or ratably over 2020, 2021 and 2022. Participants are also permitted to recontribute such withdrawn amounts to their plan accounts at any time before the third anniversary of the withdrawal date, and the IRS will treat the deposits as rollover contributions rather than annual contributions.

For defined contribution plans that already permit in-service and/or hardship withdrawals, the CRDs are intended to supplement the existing provisions. Please note that plan documents are not required to be amended for a qualifying plan participant to be exempt from the early withdrawal tax penalty.

Under the Act, participants qualify for CRDs if they:

  • Have been diagnosed with COVID-19;
  • Have a spouse or dependent that has been diagnosed with COVID-19; or
  • Have experienced an adverse financial consequence due to the impact of COVID-19. The Act provides that an adverse financial consequence includes:
    • layoff, furlough or reduction in hours,
    • inability to work due to childcare responsibilities,
    • inability to work due to a quarantine,
    • closing or reducing hours of a business owned by the qualifying individual, or
    • other facts determined by the Secretary of Treasury.

To ease the administrative burdens associated with the CRD changes, the Act allows plan sponsors to rely on participant self-certifications to verify that the requesting plan participant is eligible for a CRD.

Plan sponsors should contact their Dykema attorney to discuss the CRD provisions, including: 

  • Whether and how to permit such distributions;
  • Coordination of any changes (or, the absence of changes) with their third-party administrator (please note that Dykema has noticed a significant difference among third-party administrators and their related plan default provisions); and
  • Timely communicating any changes (and related procedures) to the plan’s participants.

Increase in Plan Loan Amount and Delay in Loan Repayments

Defined contribution retirement plans may provide increased access to plan loans to qualified individuals through September 22, 2020. During this limited window, loans are permitted up to the lesser of $100,000 or 100 percent of a participant’s vested account balance, increased from the normal rule of the lesser of $50,000 or 50 percent of the vested account balance.

The Act also provides participants with the ability to forego existing loan repayments through December 31, 2020 (and grants an extension of the normal five year repayment period). As the loan rules are complicated and additional guidance is still required from the IRS, it is recommended that you timely contact your Dykema attorney or third-party administrator to discuss the loan provisions and how they impact your plan’s operations.

Delay of Required Minimum Distributions for 2020

The Act suspends required minimum distributions (“RMDs”) from defined contribution plans in 2020. However, it currently is unclear whether the RMD suspensions are optional or mandatory. We will update this communication as additional IRS guidance is made available. In the meantime, we recommend that you discuss this matter with your third-party administrator. Importantly, the RMD relief does not apply to defined benefit pension plans.

The RMD changes must also be coordinated with the SECURE Act (as enacted on December 20, 2019), which delayed the required beginning date for participants that had not yet attained age 70-and-a-half by December 31, to April 1 of the year after they attain age 72. Plan sponsors should coordinate these changes with their third-party administrator.

Changes for Defined Benefit Funding

Funding requirements for defined benefit pension plans have been deferred to January 1, 2021. Quarterly contributions are extended to the same deadline if a plan sponsor chooses to defer 2020 payments. Delayed payments, however, will continue to accrue interest.

Extension of Certain Deadlines on the Horizon

The Department of Labor (“DOL”) is granted authority by the Act to extend certain benefit-related deadlines, such as Form 5500 filings and other participant notices and disclosures. Plan sponsors should be on the lookout for further DOL guidance.

Health and Welfare Plans

COVID-19 Evaluations and Testing at No Charge to Participants

The Families First Coronavirus Response Act (“FFCRA”) requires insured and self-funded health plans to provide coverage, at no cost to enrollees, for COVID-19 and SARS-CoV-2 testing and evaluations, including in-person or telehealth visits, urgent care center visits, and emergency room visits. The CARES Act expands the list of COVID-19 testing and screenings, including costs incurred in the non-network setting. Neither FFCRA nor the CARES Act requires health plans to pay for the medical expenses related to the treatment of COVID-19 once diagnosed, but some plans are opting to cover treatment costs as well.

Eligible Individual Status for HSA Contributions 

FFCRA and the CARES Act require plans to cover all costs, with no cost-sharing to enrollees, related to COVID-19 testing and evaluations. In Notice 2020-15, the IRS confirmed that a high deductible health plan with a health savings account feature (“HDHP-HSA”) may cover coronavirus testing and treatment without the enrollee first satisfying the plan deductible. 

Optional Telehealth Services

The CARES Act permits an HDHP-HSA to pay for all telehealth services or other remote care, regardless of the reason for services, prior to the enrollee meeting his or her minimum deductible requirement. This provision, however, sunsets on December 31, 2021; after that date, individuals must pay for telehealth services (other than for COVID-19 testing and evaluations) until their minimum deductible is met.

COVID-19 Vaccine Costs

Once developed, the CARES Act requires non-grandfathered health plans to cover COVID-19 vaccinations at no cost within 15 business days of the date the recommendation is released.

Optional Over-the-Counter Products

Effective January 1, 2020, over-the-counter drugs (“OTC”), including menstrual care products, are eligible medical expenses that can be reimbursed from HSA, Archer MSA, FSA and HRAs. Employers who want OTC to be considered eligible medical expenses under their health FSAs and/or HRA may need to change any plan terms that currently exclude OTC costs.

Please contact a member of Dykema’s Employee Benefits Group for additional guidance, assistance in interpreting the CARES Act and/or amending your plan documents should you choose to implement some of these changes into your plan.

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