On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed the Senate and House and was signed into law. In addition to spending $2 trillion to support individuals and businesses in response to the Coronavirus (COVID-19) pandemic, the CARES Act includes a number of changes that impact employee benefits and employers.
This alert will not address the loans available to a number of businesses that are coupled with government oversight or the potential executive compensation limitations. There are a number of significant provisions designed to assist businesses and employers in assisting their employees.
Changes to the Families First Coronavirus Response Act
The CARES Act makes a number of changes to the Families First Coronavirus Response Act (FFCRA), which was enacted on March 18. The changes are primarily conforming changes to the Emergency Family and Medical Leave Expansion Act (EFMLAEA) and the Emergency Paid Sick Leave Act (EPSLA) as well as the related tax credit provisions. The significant change in the EFMLAEA includes providing a rule for rehired employees.
The rehired employee rule applies to an employee to make the employee eligible for the paid leaves if (1) the individual was laid off by the employer no earlier than March 1, (2) had worked for that employer for not less than 30 of the last 60 calendar days prior to their layoff, and (3) was then rehired by the employer. This means that if an employee was laid off after March 1, had worked 30 days prior to being laid off, and is then rehired at any time prior to the termination of the EFMLAEA, such individual will immediately be an eligible employee who can claim EFMLAEA benefits, if eligible to make such a claim, and the employer would be entitled to claim the related tax credit, if such employee receives EFMLAEA benefits. The maximum amount paid by an employer for one employee is clarified to be $200 per day and $10,000 in the aggregate for the EFMLEA.
The EPSLA was modified to add a new provision limiting the reimbursement for emergency paid sick leave to $511 per day or up to $5,110 in the aggregate for an employee who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, who is advised by a healthcare provider to self-quarantine due to concerns related to COVID-19, or who is experiencing symptoms of COVID-19 and is seeking a medical diagnosis. The Act included a maximum limit of $200 per day and $2,000 in the aggregate for emergency paid sick leave for purposes of leaves for:
- caring for an individual who is subject to a quarantine or isolation order from a federal, state, or local government;
- caring for a son or daughter because their school or childcare provider has been closed; and
- for other debt conditions designated by the Secretary of Health and Human Services (HHS) that are substantially similar.
The Act clarified that the anti-retaliation provision prohibits employers from discharging, disciplining, or in any other manner discriminating against an employee who either:
- takes a leave under the EPSLA, or
- files a complaint, institutes – or causes to be instituted – any proceedings under or related to the EPSLA, or testifies in any such proceeding.
Previously, the prohibition required that the individual be described in both (1) and (2) above. Thus, the correction expands the protection.
The tax credit provisions for the EPSLA leaves and EFMLAEA were also amended to conform and provide for the advanced credit offset against payroll taxes. The CARES Act also clarifies that the two credits under the FFCRA are refundable.
Pension Plan Required Contribution Delay
While the CARES Act did not change any of the requirements for a pension plan’s document, it did delay the due date of the required minimum funding contribution, which would have been due in calendar year 2020. The minimum funding contribution that was due for calendar year 2020 will now be due on January 1, 2021, but this also means the amount of such minimum required contribution must be increased by the interest accruing between the original due date of the contribution and the actual payment date at the effective rate of interest for the plan for the plan year, including the payment date.
The plan sponsor may elect to treat the plan’s AFTAP for the last plan year before January 1, 2020, as the AFTAP for the plan year(s) which include the year 2020. There’s also a slight change to certain small charities pension funding requirements. The AFTAP relief permits the use of an AFTAP that may have been calculated when plan asset values were higher and thus there was a higher funded percentage. This may permit a plan to use a higher AFTAP value and avoid benefit restrictions that are triggered when the AFTAP drops below the specified percentages.
New Coronavirus-Related Retirement Plan Distribution
The CARES Act added a new Coronavirus-related distribution that is not subject to the early distribution additional tax under Code section 72(t). This is a distribution from a defined contribution retirement plan of up to $100,000 per taxable year in total per individual. This dollar limit applies for all Coronavirus distributions from all plans maintained by an employer, counting all plans within the employer’s controlled group. The individual must be eligible to repay the Coronavirus distribution within three years in one or more payments.
A distribution is a Coronavirus-related distribution if:
- the distribution is paid to the individual between January 1, 2020, and December 31, 2020, and
- it is paid to an individual who
- is diagnosed with SARS-CoV-2 or with a coronavirus disease by an approved test;
- has a spouse or dependent child (as defined under Code section 152) who was so diagnosed with the virus or disease; or
- is an employee who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off, having work hours reduced due to such a virus or disease, being unable to work due to lack of childcare due to the virus or disease, or other factors determined by the Secretary of the Treasury.
An employer can rely on an employee’s certification that he or she is eligible for the Coronavirus-related distribution. The income inclusion from the Coronavirus-related distribution is spread over three years unless the individual elects to include all of the distribution in one tax year. There is no automatic 20% withholding for the Coronavirus-related distribution, and the distribution cannot be rolled over.
The Coronavirus-related distribution is treated as meeting the plan’s distribution requirements for a 401(k) plan, 403(b)(7) or (9) plans, or a governmental 457(b) plan.
Coronavirus-Related Participant Loan From Retirement Plan
A qualified retirement plan may allow certain employees to access their retirement funds using this new loan provision if the funds are taken as a loan within 180 days of the enactment of the CARES Act on March 27, 2020. This new provision allows an employee to take up to $100,000 out as a loan up to the present value of the participant’s full account balance (non-Coronavirus loans are limited to a maximum of $50,000 reduced by a calculation). The Coronavirus loans are not limited to half of the vested account balance as other participant loans are limited.
In addition, any plan participant who currently has a loan from a retirement plan outstanding on March 27, 2020, will have any payment due deferred until December 31, 2020. Payments may be delayed , with payments due after the delay adjusted for the delay via reamortization of the amount due including interest that would have accrued during the payment delay period. The delay period is not considered when determining if the loan meets the required five-year term limit.
These special loan rules apply to any individual who is eligible to receive a Coronavirus distribution (described above). Retirement plans and annuity contracts do not need to be amended prior to using these tools, so a plan will not fail to qualify because its operations do not match the plan document and it will not violate the anti-cutback rules as long as the amendment is adopted before the last day of the first plan year beginning on or after January 1, 2022. Different deadlines apply for governmental plans.
Required Minimum Distribution Due in 2020 Delayed
The required minimum distribution rules for all qualified retirement plans, 403(b) arrangements, or individual retirement accounts relying on the required minimum distribution rules under Code section 401(a)(9) were delayed. The delay is similar to the period following the economic crisis in 2008, and it permits a temporary waiver of the required minimum distribution that should be paid in 2020 until 2021. This permits individuals to wait to take a required minimum distribution until a time when hopefully their retirement account has recovered from the current downturn in the market.
Health Plan COVID-19 Testing Coverage Changes
The CARES Act expands the coverage of COVID-19 testing to not only testing that is approved under the Food, Drug, and Cosmetic Act, but also to cover COVID-19 testing for which there has been a certain type of authorization requested for use without Food and Drug Administration (FDA) approval, provided such authorization has not been denied or the request not submitted in a reasonable time frame. The CARES Act also includes testing developed and authorized by a state or other tests the HHS Secretary approves. This expansion of coverage covers testing that has not yet made it through the FDA approval process but is being utilized, so that an individual who is given such a test does not have his or her health plan deny coverage for the diagnostic test as an experimental treatment or care.
Health Plan Coverage of COVID-19 Testing Pricing Rules
A group health plan must cover diagnostic testing at the negotiated rate the group health plan had with the healthcare provider before the Public Health Emergency declaration under §319 of the Public Health Service Act. Presumably, this also covers pricing contractually negotiated by a network for all of its participating employer-sponsored group health plans. If the group health plan COVID-19 pricing was already established in such an agreement, then that pricing will apply throughout the period of testing.
If a group health plan did not have a negotiated rate established in a contract with a healthcare provider with respect to the COVID-19 testing (e.g., an out-of-network provider for a group health plan with an established network of healthcare providers), then such plan will reimburse the healthcare provider an amount which equals the cash price for such service as listed by the healthcare provider on its public website. Alternatively, the group health plan can negotiate an agreed price with the healthcare provider for less than the published cash price.
Every healthcare provider is required to publish its rate for COVID-19 testing on its public website under the CARES Act. A healthcare provider who fails to post the cash price for the COVID-19 testing can be subject to a civil penalty of not more than $300 per day of the violation.
Health Plan Coverage of Coronavirus Prevention
The CARES Act requires group health plans and health insurance issuers to cover without cost sharing any qualifying coronavirus preventive service. Vaccines for the Coronavirus are covered as preventive care under the Patient Protection and Affordable Care Act (ACA) under the same provisions that cover flu vaccines. Coronavirus preventive measures (when developed) are required to be covered effective 15 days after the date the coverage recommendation is made in accordance with ACA procedures. All group health plans under the ACA are subject to this requirement. While ordinarily other preventive care measures added as approved preventive care measures under the ACA are not required to be covered until over a year after the recommendation of coverage is made, Coronavirus preventative treatment will require a nearly immediate change in health plan coverage.
There are also changes to HIPAA privacy requirements with respect to substance abuse disclosures and related to PHI and sharing of PHI in a public health emergency. Please watch for a separate alert addressing these changes.
High-Deductible Health Plan Changes
The CARES Act also amends the rules for high-deductible health plans by permitting telehealth to be covered by a high-deductible health plan (HDHP) without imposing cost sharing or the deductible. This is effective on and after March 27, 2020, and ends as of the plan year beginning on or before December 31, 2021. For a calendar year HDHP, this means telehealth can be covered without imposing any cost sharing on the service from March 27, 2020, through December 31, 2021.
In addition, the expenses that can be reimbursed as a qualified medical expense under a health savings account, without incurring a tax penalty, were amended by removing the requirement that the drugs be prescribed medicine or insulin. In addition to eliminating the prescription requirement for coverage of medications, the Act also permits coverage of menstrual care products as eligible medical expenses. This last change applies to amounts paid from health savings accounts after December 31, 2019. This change was not made with respect to health flexible spending accounts, group health plans that are insured or self-insured, or health reimbursement arrangements, including the new individual coverage health reimbursement arrangements.
Time-Limited Student Loan Repayment Benefit
The CARES Act adds a new provision effective from March 27, 2020, until January 1, 2021, under which an employer may pay an employee’s qualified educational loan payments (including both principal and interest) and exclude those payments from the employee’s federal gross income. The employee gets no deduction for the student loan interest related to the amount being paid by the employer on the employee’s behalf. A qualified educational loan is a loan or indebtedness incurred by the individual to pay higher education expenses for the individual employee, their spouse, or their dependents.
Employee Retention Tax Credit
The Cares Act includes an employee retention credit for eligible employers whose business operations would have been subject to closure due to a Coronavirus-related order from an appropriate governmental authority, or which had certain reductions in its gross receipts compared to the prior year’s gross receipts. The credit is applied against the employment taxes that would have been deposited following the processing of payroll, and the tax credit is equal to 50% of a qualified wages in a calendar quarter. This credit will consider up to $10,000 of wages per employee for all calendar quarters. In addition the credit considers the cost to maintain the group health plan coverage for the employees which is excluded from the employees’ income under Code §106(a).
The credit can be claimed by the employer against certain portions of the employment taxes, and to the extent the credit claimed exceeds such employer’s payroll taxes, the credit is refundable.
This applies to any eligible employer who is carrying on a trade or business during 2020 and any calendar quarter during which business operations are fully or partially suspended due to orders from an appropriate government authority limiting commerce, transit, or group meetings due to COVID-19. An eligible employer also includes an employer whose gross receipts were less than 50% of the gross receipts for the same calendar quarter in the prior calendar year. Other limits on the duration exist.
This credit has a number of unique definitions and requirements that need to be explored before it is determined to be applicable. The credit only applies for wages paid from March 12 through December 31, 2020.
Executive Compensation Changes
For employers seeking loan relief under the relief loan provisions of the CARES Act, there are a number of requirements placing limits on executive compensation for officers and employees of the company.
During economic difficulties, there is often pressure on executive compensation and equity compensation awards. This can also place pressure on employee stock purchase plans, since a depressed stock price causes shares allocated to an equity plan or to an employee stock purchase plan to be burned through more rapidly than may have been planned. Given the increased regulation and scrutiny of executive compensation in financially difficult times, care must be taken to work through the challenges.
HIPAA Privacy Changes
There are changes under HIPAA privacy with respect to substance abuse disclosures, PHI, and sharing of PHI in a public health emergency. Please watch for a separate alert addressing these changes.
U.S. Department of Labor Given Authority to Delay Deadlines for ERISA Plans for Public Health Emergencies
The CARES Act amends ERISA to provide the Secretary of the U.S. Department of Labor the authority to delay deadlines for up to one year not only due to acts of terrorism or military actions, but now also for a declared public health emergency, provided it is declared by the HHS Secretary.
