On March 27, 2020, the president signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) as part of the $2 Trillion stimulus package intended to stabilize the economy during the devastating coronavirus pandemic. The CARES Act is far-reaching and provides economic relief to several industry sectors while aiding individuals who have been impacted by the coronavirus pandemic. This Benefits Alert describes the CARES Act’s employee benefits-related provisions, including, among other things, expanded participant access to retirement plan funds, telehealth access, and coverage of testing procedures and vaccines.
The CARES Act contains several provisions designed to help retirement plan sponsors and participants under financial distress due to the pandemic. These provisions include the following:
Plan administrators may rely on a participant’s self-certification that he or she satisfies one of the conditions noted above.
Coronavirus-related distributions are exempt from the 10% early withdrawal penalty, are not subject to the standard 20% income tax withholding applied to indirect eligible rollover distributions (i.e., distributions made to individuals instead of directly to the employer-sponsored retirement plan or individual retirement account custodian), and are not required (or permitted) to be deposited into an eligible retirement plan within 60 days to avoid taxation. A participant who receives a coronavirus-related distribution is permitted to repay the distribution to the plan over a 3-year period starting on the date the distribution is received. To ensure that repaid distributions remain tax-neutral, they are treated as direct trustee-to-trustee rollovers made within 60 days of the distribution. Finally, if a participant chooses not to repay the distribution, the distribution will be subject to income tax ratably over the 3-year period beginning with the tax year in which the distribution was received (though a participant could elect to be taxed all at once).
Plans are permitted to implement coronavirus-related distributions immediately. The deadline to amend plans to include language permitting these distributions is the last day of the plan year beginning on or after January 1, 2022.
Plan Loans. During the 180-day period following the enactment of the CARES Act, plans may permit a “qualified individual” to obtain a loan from the plan in an amount up to the lesser of $100,000 or 100% of the individual’s vested account (compare this to the standard limitation of up to the lesser of $50,000 or 50% of the individual’s vested account). For this purpose, a “qualified individual” is any person who satisfies one of the three eligibility criteria described above for a coronavirus-related distribution.
In addition to this higher maximum loan amount, loan repayments for any outstanding loan (whether obtained before or after enactment of the CARES Act) held by a qualified individual will be suspended for one year. The suspension applies to any repayments due between the CARE Act’s enactment and December 31, 2020. The suspension period is not counted when determining the maximum permitted loan period (five years for a general loan and usually longer for loans used to purchase a primary residence).
Plans are permitted to implement the enhanced loan provisions immediately. The deadline to amend plans to include language for this loan relief is the last day of the plan year beginning on or after January 1, 2022.
Temporary RMD waiver for certain plans. The CARES Act also provides for a waiver of required minimum distributions that would otherwise be payable in 2020 for defined contribution plans subject to Section 401(a), 403(a) and 403(b), governmental IRC Section 457(b) defined contribution plans, and individual retirement plans. For purposes of the 5-year death distribution rules, the 2020 year will be disregarded.
Note that the CARES Act also provides a special waiver specifically applicable for required minimum distributions that were required to start in the 2020 calendar year, and were not yet made as of January 1, 2020. In other words, the special waiver applies to those individuals whose initial required minimum distribution was originally due to be made by their required beginning date of April 1, 2020 (because they either attained the later of age 70½ or retirement in 2019, or were a 5% owner who attained age 70½ in 2019), and who did not take that distribution on or before December 31, 2019. These individuals will not be required to take their initial distribution by their April 1, 2020 required beginning date. Plan sponsors will need to review any initial required minimum distributions made after January 1, 2020, with respect to 2019, and coordinate with the affected individuals to determine whether the individuals wish to retain these distributions or wish to either roll them over or redeposit them.
Several provisions contained in the CARES Act impact design and administration of health and welfare benefits. A summary of these provisions is provided below.
Coronavirus and COVID-19 testing coverage. The CARES Act amends the Families First Coronavirus Response Act’s requirement that group and individual health plans cover without cost-sharing testing for coronavirus detection or COVID-19 diagnosis. The amendment is intended to define the type of tests for which no cost-sharing would apply. To be covered without cost-sharing, a test must (1) be approved, cleared, or authorized under the Federal Food, Drug, and Cosmetic Act; (2) be subject to a request (or a stated intent to request) by the developer for emergency use authorization unless and until such request is denied or the request is not submitted within a reasonable amount of time; (3) be developed in and authorized by a state that has notified the Department of Health and Human Services (HHS) that it will review the tests; or (4) be another test determined appropriate by HHS.
In addition to defining diagnostic tests subject to no cost-sharing, the CARES Act also contains rules regarding reimbursement rates to providers of the items and services related to the testing. If a group health plan has a negotiated rate with a provider, the reimbursement rate will be the negotiated rate. If there is no negotiated rate (e.g., the provider is out-of-network), the reimbursement rate is either the cash price listed on a public internet website, or such lower price negotiated by the plan. As a corollary, during the emergency period (currently through December 31, 2020), all providers of diagnostic testing for COVID-19 must publish the cash price on their public websites or potentially be subject to a civil penalty.
Although many of the CARES Act’s benefits-related provisions are temporary efforts to provide relief during the coronavirus pandemic, employers and plan sponsors may nevertheless want to consider adopting the changes so that employees can have access to much-needed financial resources. Several of the CARES Act provisions are effective immediately, so third-party administrators should be contacted as soon as possible to get the changes implemented quickly. Employers and plan sponsors seeking to make these changes and communicate the relief with their employees and plan participants should consult with their legal advisors to ensure compliance with relevant laws and regulations.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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