Q: How would the proposed Coronavirus Aid, Relief, and Economic Security Act affect employee benefit programs? (Updated March 26)

A: Expected to be approved by Congress and signed into law by President Donald Trump on Friday, March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has far-reaching impacts on qualified retirement plans and health and welfare plans. A complete summary of all employee benefit plan provisions in the CARES Act is available in our separate Alert, entitled CARES Act to Provide Significant Employee Benefit Plan Relief for Participants and Plan Sponsors.

Q: Can my high-deductible health plan offer free telemedicine services (before the deductible is met) and still remain health savings account (HSA) eligible? (Updated March 26)

Yes, when the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is enacted. As explained in our CARES Act Alert, the CARES Act includes a provision that would ensure that those who receive free telemedicine services are still eligible to contribute to an HSA.

Until the CARES Act is enacted into law, which is expected to occur on Friday March 27, current guidance (including Notice 2020-15) would appear to provide that cost-free coverage of telemedicine services prior to satisfaction of a deductible will not impact HSA eligibility so long as the telemedicine services are limited to COVID-19 diagnosis or treatment. If telemedicine services are offered more broadly for all medical services on a cost-free basis prior to satisfaction of a deductible, this may render an employee ineligible to contribute to an HSA.

Q: Is our health plan required to provide free coverage of services related to COVID-19 diagnosis and treatment? (Updated March 26)

A: Yes, as it relates to diagnostic testing. On March 14, the House passed H.R. 6201, the Families First Coronavirus Response Act (the Families First Act). The Senate approved that legislation, and President Donald Trump signed it on March 18. Pursuant to Section 6001 of the Families First Act, all group health plans and health insurance issuers offering group or individual health insurance coverage, including grandfathered health plans, must provide coverage for COVID-19 diagnostic testing, including related physician/facility costs, with no cost-sharing or prior authorization requirements. This coverage requirement would apply during an “Emergency Period,” as defined under Section 1135(g)(1)(B) of the Social Security Act (“the period during which, there exists … a public health emergency declared by the Secretary pursuant to section 319 of the Public Health Service Act”). The Families First Act sunsets on Dec. 31, 2020. Note that the Families First Act does not impose similar coverage requirements for COVID-19 treatment. Similar requirements appear in the CARES Act, a full summary of which is provided in our separate CARES Act Alert.

Q: May an employee take a hardship withdrawal from his or her 401(k) plan due to financial needs created by the COVID-19 pandemic? (Updated March 26)

A: Maybe, depending on the circumstances. First, you need to confirm whether the plan permits hardship withdrawals at all. Second, if the plan does permit hardship withdrawals, you need to determine whether the employee’s situation satisfies the conditions for such a distribution. There are two main conditions that must be satisfied for an employee to take a hardship withdrawal:

• The participant (or, in some cases, the participant’s spouse, child, dependent or primary beneficiary) must have an “immediate and heavy financial need.”
• The distribution must be necessary to meet that financial need, which generally means that the participant does not have other resources to meet that need (e.g., other available distributions under the plan).

Most plans use “safe harbor” rules to determine if there is an immediate and heavy financial need. At this time, there is no specific safe harbor that would allow any employee to take a hardship withdrawal due to COVID-19. However, there are certain safe harbor financial needs that might be relevant, including:

• Expenses for medical care previously incurred by the participant, the participant’s spouse, any of the participant’s dependents or the participant’s primary beneficiary under the plan; or expenses necessary for those persons to obtain medical care (but limited to expenses for medical care that are deductible under Internal Revenue Code § 213).
• Payments necessary to prevent the eviction of the participant from the participant’s principal residence or foreclosure on the mortgage on that residence.

It is clear that COVID-19 could trigger expenses related to medical care, in which case plans that include that safe harbor could likely provide a hardship withdrawal to pay for those expenses. While hardship withdrawals to prevent foreclosure or eviction may be appropriate, on March 18, U.S. Department of Housing and Urban Development Secretary Ben Carson authorized the Federal Housing Administration (FHA) to implement an immediate foreclosure and eviction moratorium for single-family homeowners with FHA-insured mortgages for the next 60 days. While not all evictions and foreclosures fall under this umbrella, states may follow suit with their own moratoriums. Accordingly, hardship withdrawals on account of potential evictions or foreclosures resulting from COVID-19 impacts may be rare.

Many plans have been amended to include an additional, newer safe harbor hardship reason that allows distributions for expenses and losses caused by a federally declared disaster. President Donald Trump has so far only declared a federal “emergency,” which is not the same as a federal “major disaster” that involves the Federal Emergency Management Agency. Thus, plans that have added this new rule may not provide a distribution as a result of the currently declared federal emergency. But the situation is evolving quickly. The CARES Act, when enacted, will provide for a new coronavirus-related distribution. More information on that new distribution option is available in our CARES Act Alert. It is possible that later guidance or regulatory action will provide additional leeway for plans to allow distributions for certain specific hardship expenses and losses related to the current COVID-19 emergency.

For plans that do not utilize the safe harbor hardship withdrawal rules, a facts-and-circumstances determination would apply in order to determine whether the employee has an immediate and heavy financial need that cannot be satisfied through other resources. Plan terms always should be reviewed to ensure that the distribution is appropriate. The plan sponsor should carefully define the types of losses or expenses, determine whether such relief is limited to the participant’s spouse and dependents or is available to relieve the needs of extended family members, and define the plan accounts from which funds may be withdrawn.

Finally, it is also important to remember that hardship distributions are subject to the same tax rules as other plan distributions and cannot be repaid to the plan like a loan. They may also be subject to a 10% early distribution penalty, unless the participant has reached age 59½ or the hardship distribution is for the purpose of satisfying certain medical expenses.

Q: Due to a reduction in hours scheduled to be worked, our company believes that many of our employees will have insufficient compensation to cover the cost of their benefits elections. Do we have the option of continuing their benefits and collecting their past-due premium payments when their work schedule returns to normal and charging “catch-up” premiums? (March 25)

A: It is likely that this sort of arrangement is permissible, but the employer should set up, clearly communicate about, and consider whether it is required to obtain the employee’s consent to a new payment schedule. It may be the case that the company’s benefit plan already contemplates catch-up payments for benefits continued during an unpaid leave of absence, but this probably is not the common case, other than for leaves under the Family and Medical Leave Act (FMLA). An employer contemplating benefit plan catch-up payments should consult with appropriate counsel to ensure that both Internal Revenue Code and state wage laws are considered before a new payment schedule is implemented.

Q: Our company is facing serious cash flow issues as a result of the COVID-19 outbreak and related governmental restrictions on our business. Can our company defer or reduce employee benefit plan benefits, including 401(k) match benefits, during this time? (March 25)

A: Maybe. The plan administrator of an ERISA employee benefit plan must comply at all times with the terms of the plan document. Accordingly, one initial consideration is whether the particular change is permitted under the plan. If not, it may be possible to amend the plan to reduce or eliminate future benefits, but there are a host of legal considerations to keep in mind. First, the Internal Revenue Code Section 411(d)(6) anti-cutback rules generally prohibit any reduction or elimination of accrued retirement plan benefits.

Second, while some employers have contemplated delaying the contribution of elective deferrals to 401(k) plans in response to the financial crisis, we would heavily discourage this approach. The Department of Labor generally expects that employee contributions be made to plans as soon as reasonably practical (typically in a matter of days), and any delay in normal procedures is generally viewed as a fiduciary breach and a prohibited transaction, requiring corrections, reporting and payment of excise taxes.

Third, if reducing or eliminating an employer matching contribution midyear, special considerations may apply:

• If the match is a safe harbor match, the match can be reduced or eliminated midyear only if (1) the plan sponsor is operating at a loss or (2) the annual safe harbor notice distributed to participants included certain language reserving the right to make such changes. Employers also must notify each employee of the change at least 30 days prior to its effective date and give employees a reasonable period of time to change their cash or deferral election after receipt and before the effective date of the change. A 30-day election period is deemed reasonable.
• If the match is not a safe harbor match, a midyear change is generally permitted, provided the change is prospective. An amendment would be needed, and clear communication of the change is important.
• If the match is discretionary, an amendment may or may not be needed. Again, clear communication is advisable.

Historically, similar rules also applied to determine whether a midyear elimination or reduction of safe harbor nonelective contributions is permitted. The SECURE Act changed the rules for plan years beginning after 2019. Given the lack of complete guidance on the application of those changes, plan sponsors that are considering a midyear elimination or reduction of safe harbor nonelective contributions should work closely with counsel to determine whether such changes are permitted.

Reducing or eliminating benefits can be controversial and raises legal issues beyond those noted here. For those reasons, any company considering amending its benefit plan to change benefits on a prospective basis should discuss such proposed change with appropriate counsel before taking action.

Q: For all Federal income tax returns and payments due on April 15, 2020, IRS Notice 2020-18 generally postpones the due date until July 15, 2020. Does this have any impact from an employee benefits perspective? (March 25)

A: Yes, the IRS issued on March 24 FAQs to help clarify some of these issues. While the FAQs address a broad spectrum of income tax filing/payment issues, the employee benefits guidance is limited to the following:

• Broadly speaking, tax filing/payment relief applies to anyone who has a federal income tax return or payment due on April 15, 2020.
• The relief extends the deadline for making 2019 Individual Retirement Account (IRA) contributions from April 15, 2020, to July 15, 2020.
• The relief extends the deadline for paying additional 10% tax owed with respect to early distributions (prior to age 59 ½) from IRAs and retirement plans from April 15, 2020, to July 15, 2020.
• For employers with a tax filing deadline of April 15, 2020, the relief extends the deadline for making 2019 retirement plan contributions to July 15, 2020.
• The relief extends the deadline for making 2019 health savings account (HSA) and Archer medical spending account (Archer MSA) contributions from April 15, 2020, to July 15, 2020.

The FAQs also clarify that an employee who made excess deferrals to a retirement plan in 2019 is still required to take those excess deferrals (and income) out of the plan by April 15, 2020, in order to exclude the distributions from income.

Q: We have decided to institute employee furloughs; employees will remain employees but will be asked to not provide services for a period of time. Are there any health plan and ACA issues we need to consider? (March 23)

A: Where a company has determined that it needs to furlough employees, the company will need to determine whether and how it will handle the continuation of health care for those employees. If the furlough will result in employees experiencing a reduction in hours triggering a loss of health care plan eligibility, a COBRA-qualifying event will have occurred (so long as the company is subject to COBRA). The company will need to offer COBRA coverage to the qualifying beneficiaries; however, such coverage may be unaffordable for certain (or all) employees and expose the company to ACA employer mandate penalties for failure to provide affordable coverage (if the company is large enough to be subject to the ACA employer mandate). If this is the case, the company could decide to accept such exposure and play the odds of how many employees will qualify for subsidized exchange coverage as a result of the furlough. Or the company could decide to subsidize the COBRA coverage so that it will not be unaffordable. Any company considering the furlough of employees should carefully consider the health plan, the ACA and other employee benefits implications of such an action.

Q: We have decided we need to terminate/lay off employees due to our company’s deteriorating financial situation, but we hope we can rehire them. What employee benefits issues do we need to consider? (March 23)

A: Where a company has already decided to terminate a large number of employees, we advise ensuring that what the company is doing is consistent with the terms of its employee benefits plan documents, including insurance policies. For example, the health care plan terms should define when coverage terminates, and a Consolidated Omnibus Budget Reconciliation Act (COBRA)-qualifying event occurs (such as the end of the month in which termination occurs). Past practices are not necessarily consistent with plan documents, so we caution companies not to rely on that alone without reviewing the appropriate documents. If the employer wants to be more generous than the plan terms, it needs to consider whether the plan terms need to be amended and whether insurer consent is required. This is the case whether the health care plan is fully insured or is self-insured with stop-loss coverage. If a decision is made to be more generous than the plan terms and insurer consent is not obtained, there is a risk that an individual could incur substantial health care costs (e.g., requiring the use of a ventilator in a COVID-19-related case), and the insurer would take the position that the individual was not covered, leaving the employer potentially self-insuring the cost of care.

If severance will be paid in the form of a simple lump sum, that can typically be done without adopting an Employee Retirement Income Security Act (ERISA) severance plan. If the severance is more complicated, including severance payments over time and COBRA subsidies, there are other potential issues to consider, such as whether any self-insured health care benefits discriminate in favor of highly compensated individuals, whether the company has created a severance plan subject to ERISA and whether there are any Internal Revenue Code Section 409A deferred compensation issues.

The company also needs to consider its strategy for compliance with the Affordable Care Act (ACA) and its health care plan’s terms. What provisions will apply when/if the employee is rehired? Is this consistent with the company’s intent or might plan amendments be required? The ACA generally requires certain rehired employees to be treated as continuing employees if their break in service is short enough, so the company should be mindful of these rules if and when it begins the rehiring process.

The company also needs to consider its 401(k) plan. If a significant number of employees are terminated, the 401(k) plan may be deemed to have a partial termination, which requires vesting of affected participants. The determination of whether a “significant number” of employees have been terminated has numerical guidelines, but also is a facts and circumstances test, so counsel should be engaged to help the company understand the implications of terminating a group of employees. Also, the employer needs to anticipate that terminated employees will request distributions based on their termination from employment. If the employer is intending to rehire these employees very quickly, proceeds with distributions and then does quickly rehire the employees, these may be deemed sham terminations for which distributions should not have been allowed.

Q: We have significant concerns about company cash flow and viability. What employee benefits issues do we need to consider? (March 23)

A: Where a company has significant cash flow and viability concerns, we encourage consideration of employee benefits issues that could result in personal liability of certain officers/employees. Essentially, if employee benefits are not paid, the former employees and the U.S. Department of Labor will look for officers/employees (ERISA fiduciaries) to blame. Therefore, we strongly encourage employers to think about these issues as early as possible.

Any amounts withheld from pay for contribution to a 401(k) plan, including loan repayments, as well as employer contributions need to be timely contributed to the trust. Any amounts withheld from pay for insurance contributions (and the employer share of contributions) need to be timely paid to the insurance company. If the company thinks it cannot keep up with payment of employee and employer premium contributions, it may need to consider freezing the plans. This is especially the case if the company does not have control of its bank accounts, e.g., if a creditor is sweeping the accounts and will not agree to honor these commitments.

Also, we are seeing more companies that are self-insured as to health care, including smaller companies that have what is called “level funded” coverage. With a self-insured plan, if the company suddenly shuts down, there is typically no one (and no cash) to pay health care expenses that were incurred but not paid prior to the shutdown, stop-loss coverage ends, and COBRA is not even available. This could be catastrophic to employees, especially if employees are being terminated during a pandemic. Employees could have huge unpaid health care expenses for coverage they were told was in place and be forced to immediately find and pay for other health care coverage. Again, if things are starting to look bad, an employer needs to immediately consider its health care plan and what it can do to ensure that there will not be unpaid health care bills, including negotiating with the parties providing services and with creditors.

Q: Does the Families First Coronavirus Response Act (Families First Act) include any other employee benefits-related provisions? (March 20)

A: The Families First Act includes additional emergency paid sick leave and Family and Medical Leave Act provisions that affect employers with fewer than 500 employees.

Q: Does HIPAA prevent me from sharing employee information regarding COVID-19? (March 20)

A: The Health Insurance Portability and Accountability Act of 1996 (HIPAA) usually is not implicated in these situations because the employer is not a covered entity subject to HIPAA. It would likely violate HIPAA if an employer obtained health information regarding COVID-19 from the health plan (which is a HIPAA-covered entity). However, it is more likely that such information would come directly from the employee, and if it did, that would not violate HIPAA. It is important to remember, however, that state data protection laws and other laws do protect medical information, so it is still advisable to protect such information.

Q: Are employees who are not injured or ill eligible for short-term disability benefits if they are quarantined for COVID-19-related reasons but have not been diagnosed with COVID-19? (March 18)

A: Quarantine when the employee is otherwise healthy typically would not trigger short-term disability benefits. An injury or onset of illness is usually necessary to trigger most short-term disability plan benefits. The specific terms of the applicable short-term disability plan should be reviewed to determine whether a given instance of absence from work would qualify for short-term disability benefits. Please note that the employee may be eligible for other paid or nonpaid leave under applicable laws (including pursuant to the Families First Coronavirus Response Act).

Q: Should COBRA be offered to employees who are sent home or cannot work for COVID-19-related reasons? (March 18)

A: Generally, COBRA applies only if there is a triggering event (e.g., termination of employment or reduction in hours) that results in a loss of group health plan coverage. Each employer will have to look at this based on its current plan provisions and leave policies to determine whether this type of situation triggers a COBRA qualifying event. In the current environment, employers may want to exercise some flexibility, but they should clearly document changes from their normal procedures and notify third parties who may be affected by these changes, such as insurance carriers.

Q: Can my high-deductible health plan offer free coverage for COVID-19 expenses (before the deductible is met) and still remain health savings account (HSA) eligible? (March 18)

A: Yes, the IRS has issued guidance in Notice 2020-15 to clarify that coverage of COVID-19 expenses prior to satisfaction of the deductible will not render an otherwise eligible person ineligible for purposes of making HSA contributions.