Employee Benefits and Executive Compensation Provisions of the CARES Act

March 31, 2020 - On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted into law.  This e-alert summarizes some of the significant employee benefits and executive compensation provisions in the CARES Act.

I.  Qualified Retirement Plans

    A.  Coronavirus-Related Distributions

Special tax treatment is provided for “coronavirus-related distributions” from   qualified plans and 403(b) plans.  The maximum amount of distributions a participant can treat as “coronavirus-related distributions” (from all plans) is limited to $100,000 for any tax year.  These distributions are exempt from the 10% early withdrawal penalty and 20% mandatory withholding, and federal income taxes on these distributions are payable ratably over the three-year period beginning with the year of the distribution unless the participant elects immediate taxation.  Also, a participant can elect to roll over these distributions to an eligible retirement plan, in one or more payments, at any time during the three-year period beginning on the day after the date of distribution.  (Presumably there will be a process for participants to claim a refund where such rollover is made after income taxes have already been paid on the distribution).

A “coronavirus-related distribution” is a distribution made on or after January 1, 2020 and before December 31, 2020 to a “qualified individual.”  A “qualified individual” is an individual who (i) is diagnosed with (or whose spouse or dependent is diagnosed with) the coronavirus or coronavirus disease by a test approved by the Centers for Disease Control and Prevention, or (ii) experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the virus or disease, being unable to work due to a lack of child care due to the virus or disease, closing or reducing hours of a business owned or operated by the individual due to the virus or disease, or other factors determined by the Treasury Department.  A plan administrator may rely on a participant’s certification that he or she is a “qualified individual.”

A 401(k) or 403(b) plan can provide for “coronavirus-related distributions” for participants who would not otherwise qualify for a distribution.  However, it does not appear that plans are required to provide for such distributions.

     B.  Plan Loans

For loans made from qualified plans and 403(b) plans to a “qualified individual” (as described above) during the 180-day period beginning on March 27, 2020, the maximum loan amount is increased from (i) the lesser of $50,000 and 50% of the participant’s plan balance to (ii) the lesser of $100,000 and 100% of the participant’s plan balance.  It appears that plans can (but are not required to) provide for this temporary increased loan limit.

In the case of a “qualified individual” (as described above) who has an outstanding loan from a qualified plan or 403(b) plan on or after March 27, 2020:  (i) the due date for any loan payment otherwise due during the period beginning March 27, 2020 and ending December 31, 2020 is delayed one year; (ii) any subsequent payments are to be appropriately adjusted to reflect the delay and any interest accruing during such delay; and (iii) the period of the delay is disregarded in determining the maximum term of the loan.  It appears that these provisions are mandatory although an employer will not necessarily know which of its plan participants are “qualified individuals.” These changes therefore might only be required where one or more participants identify themselves as  “qualified individuals” and request the delay.

     C.  Waiver of 2020 Defined Contribution Plan Required Minimum Distributions

Qualified and 403(b) plans are required to make required minimum distributions (“RMDs”) for participants age 70½ or older.  The requirement to make RMDs in 2020 is waived for qualified and 403(b) defined contribution plans.  If these RMDs are paid in 2020, they not eligible for rollover.

     D.  Deadline for Plan Amendments

Employers have until the end of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for a calendar year plan) to amend their plans to incorporate any of the above changes. However, plans must be operated in compliance with these changes (to the extent applicable) from their respective effective dates.

     E.  Single-Employer Defined Benefit Pension Plans

For single-employer defined benefit pension plans, the IRS deadline for making minimum required contributions (including quarterly contributions) otherwise due in 2020 is deferred until January 1, 2021.  If payment is deferred, the amount due is increased by interest for the period from the original due date to the date the contribution is actually made at the plan’s effective rate of interest for the plan year in which the contribution is actually made.

For purposes of applying the various IRS funding-based benefit restrictions under IRC § 436, an employer may elect to treat the plan’s funded percentage (or “AFTAP”) for the last plan year ending before January 1, 2020 as the plan’s funded percentage for plan years which include calendar year 2020.

II.  Limits on Executive Compensation of Businesses Receiving Financial Assistance

Businesses that receive a loan or loan guarantee from the federal government under the CARES Act must agree to certain restrictions on executive compensation for the period beginning on the date the loan or guarantee agreement is executed and ending one year after the date on which the loan or guarantee is no longer outstanding.  Specifically:

• No officer or employee of the business whose total compensation exceeded $425,000 in calendar year 2019, may receive from the business (i) total compensation which exceeds, during any 12-consecutive months of such period, the total compensation received by the officer or employee from the business in calendar year 2019, or (ii) severance pay or other benefits upon termination of employment which exceeds twice the maximum total compensation received by the officer or employee from the business in calendar year 2019; and
• No officer or employee of the business whose total compensation exceeded $3 million in calendar year 2019, may receive from the business, during any 12-consecutive months of such period, total compensation in excess of the sum of (i) $3 million, and (ii) 50% of the excess over $3 million of the total compensation received by the officer or employee in calendar year 2019.

For this purpose, “total compensation” includes salary, bonuses, awards of stock, and other financial benefits.

Air carriers and contractors that receive payroll support or other financial assistance under the CARES Act are subject to these restrictions on executive compensation for the two-year period beginning March 24, 2020 and ending March 24, 2022.  If an air carrier or contractor receives a federal loan or guarantee, these restrictions might apply for the longer of the two restriction periods.

III.  Group Health Plans/Fringe Benefits

     A.  Preventive Services and Coronavirus Testing

Group health plans and health insurers must cover (without cost-sharing to the participant) certain qualifying coronavirus preventive services (including certain approved items, services and immunizations that are intended to mitigate the coronavirus).  This requirement takes effect within 15 business days after the date the qualifying coronavirus preventive service receives a certain recommendation from the U.S. Preventive Services Task Force or the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention. 

The Families First Coronavirus Response Act (the “FFCRA”), which was signed into law on March 18, 2020, required group health plans and health insurers to cover (without cost-sharing to the participant) FDA-approved diagnostic tests for coronavirus.  The CARES Act expands the definition of covered diagnostic tests.  It also specifies that group health plans and health insurers must reimburse health providers of coronavirus diagnostic testing at the in-network provider negotiated price or, if none, at an amount no more than the price for such testing published by the provider on a public internet site (or at a lower negotiated rate).   Providers will be required to publish this information on a public internet site (or face civil monetary penalties of not more than $300 per day).

     B.  Qualified Medical Expenses for Healthcare FSAs, HSAs and HRAs

Effective for expenses incurred after December 31, 2019, the following expenses can be treated as qualified medical expenses and reimbursable under health care flexible spending accounts (FSAs), health savings accounts (HSAs), and health reimbursement accounts (HRAs): medicine and drugs, whether or not prescribed, and certain menstrual care products.  This means that individuals do not need a prescription to obtain reimbursement from, for example, a health care flexible spending account (FSA) for over-the-counter medication.

     C.  Telehealth Services under HDHP/HSA Plans

A high-deductible health plan (HDHP) with a health savings account (HSA) can offer telehealth and other remote care services without a deductible and still be HSA-eligible.  This provision is effective upon enactment and for plan years beginning before January 1, 2022.

     D.  Student Loan Payments

Effective from March 27, 2020 through December 31, 2020, employers can pay up to $5,250 of an employee’s student loan debt on a tax-free basis.  These payments can be made directly to the employee or to the lender.  They must be made pursuant to an IRC § 127 educational assistance plan (which requires, among other things, a written plan document and compliance with certain non-discrimination rules).  The $5,250 maximum amount is reduced by any other payments made to the employee under the employer’s IRC § 127 educational assistance plan.   

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