Employer Considerations for CARES Act Benefit Plan Relief Provisions

John E. Rich, Jr.
Director & Chair, Tax Department
Published: McLane.com
March 30, 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law on March 27th provides several important temporary and permanent employee benefit plan changes to address individuals and employers impacted by the COVID-19 pandemic.  This article describes these changes and highlights considerations for employers.

Retirement Plan Withdrawals and Loans for COVID-19 Expenses (Section 2202)

Under the terms of the CARES Act, the normal 10% penalty tax levied on early plan distributions by the Internal Revenue Service is waived, as are the Tax Code rules restricting distributions from IRAs, 401(k), 403(b) and Section 457(b) Plans.  Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without the 10% early distribution penalty.  Furthermore, the individual taking the distribution can spread the reported income over three years for tax purposes, and the distribution also can be repaid within three years to avoid taxation.  Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution.

These special payments can be made available for an individual (1) who is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC, (2) whose spouse or dependent is so diagnosed, (3) who experiences adverse financial consequences as a result of the virus including being quarantined, being furloughed or laid off or having work hours reduced, being unable to work due to a lack of child care due to the virus, (4) who is required to close or reduce the hours of a business owned or operated by the individual, or for such other factors determined by Treasury Department.  Plan providers may accept an employee certification and other proof is not required.  The Act states that this is an optional provision for employers and that a plan amendment will be required no earlier than the end of the 2022 plan year (2024 for governmental plans) to allow such special payments.

The Act also makes it easier to borrow money from 401(k) accounts by raising the loan limit to $100,000 from $50,000 for the first 180 days after enactment, and the Act also extends the payment dates for any loans due during the rest of 2020 for a year.  Interest does continue to accrue, on such loans, but the postponement can extend the otherwise applicable 5-year limit on repayment.

From the employer perspective, employers will need to determine whether to authorize the special COVID-19 distributions, loan changes and the required minimum distribution relief described below, as all are optional provisions.  Some plan providers will implement the changes unless the employer opts out.  As the CARES Act itself has little in the way of definitions, if the employers desiring to authorize the change should exercise caution when responding to employee questions on the availability of distributions until guidance is issued.  Although given the circumstances of a national pandemic, one would expect that such terms as “quarantine” and “unable to work” would be liberally construed by regulators to benefit impacted workers, there are as of yet no guidelines.

2020 Retirement Plan Minimum Required Distributions (Section 2203)

The Act states that individuals do not have to take their 2020 required minimum distributions from their retirement funds.  This includes employer retirement plans and IRAs.  This will allow individuals who have suffered significant retirement plan account losses from losing further market value due to distributions and maximizes the potential gain as the market recovers.

Pension Plan Funding Contributions (Section 3608)

The CARES Act provides that any single-employer pension plan minimum required contributions that would otherwise be due during calendar year 2020 are instead due on January 1, 2021.  This provision applies to both quarterly contributions and the final contribution necessary to satisfy the annual minimum funding requirements, if the contribution is due to be paid in 2020.  Employers will need to pay interest on the delayed payments at the plan’s effective interest rate for the period between the original due date of the payment and the actual payment date.

Employer Payment of Student Loans in 2020 (Section 2206)

Employers can now pay for up to $5,250 of an employee’s student loans on a tax-free basis from the date of the CARES Act enactment through the end of 2020.  The Act amends Tax Code Section 127 to permit the employer to either pay the employee or to pay the lender directly.  If an employer wants to take advantage of this provision, a written plan or policy should be established.

Permitted use of Health Spending Accounts for Over-the-Counter Drugs (Section 3702)

The CARES Act permanently eliminates the Affordable Care Act (“ACA”) rule requiring that over-the-counter medicines and drugs (other than insulin) be prescribed in order to be eligible for reimbursement and payment by Health Savings Accounts, Flexible Spending Account, Health Reimbursement Account, and Archer Medical Savings Account dollars.  Use of these accounts for over-the-counter medicines has been an ever changing dynamic since they came into existence.  This new provision is effective for expenses incurred after December 31, 2019.  Although the Act itself is silent, presumably when the IRS issues guidance, it will prescribe a period for making retroactive amendments as the terms of any plan document including these accounts prohibits these expenditures due to pre-Act law.

Other Retirement Plan Issues

Although the CARES Act provides for individuals to access retirement funds on an emergency basis and provides for pension plan funding relief, employers with defined contribution plans such as 401(k) plans or 403(b) plans are still obligated to make 2020 required contributions.   normal rules for prospectively amending plans and notifying employees of such amendments remain in place.  As a result, if an employer knows that it will be unable to make employer contributions, it should consult with its ERISA attorney or plan professional to discuss the legal requirements involved with such a plan amendment as soon as possible.