CARES Act – Impact on Employer Benefit Plans

Apr 15, 2020

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed by the President on March 27, 2020, includes several provisions affecting employer benefit plans.


Expansion of Withdrawal and Loan Rights

The CARES Act provides additional opportunities for participants to access funds from their employer retirement plans.  Specifically:

  • New In-Service Withdrawal Opportunity.  The CARES Act authorizes eligible retirement plans (as defined under Internal Revenue Code (“Code”) Section 402(c)(8)(B), including employer-sponsored 401(k), 403(b) and governmental 457(b) plans) to permit “Qualified Individuals” to withdraw funds (which we refer to as a “Coronavirus-Related Distributions”) from their plan account.  Here are the key takeaways:
    • The Group of Eligible Recipients is Fairly Broad. The following individuals qualify as “Qualified Individuals”, both for the new withdrawal right as well as for the plan loan relief discussed below:
      • Someone who is diagnosed with the coronavirus (SARS-CoV-2) or coronavirus disease (COVID-19) by a test approved by the Centers for Disease Control and Prevention (the “CDC”);
      • Someone whose spouse or dependent (as defined in Code Section 152) is diagnosed with such virus or disease by a CDC-approved test; or
      • Someone who experiences adverse financial consequences as a result of (i) being quarantined, or being furloughed or laid off, or having work hours reduced due to such virus or disease, (ii) being unable to work due to lack of child care due to such virus or disease, (iii) closing or reducing hours of a business owned or operated by the individual due to such virus or disease (this clause (iii) essentially applies to self-employed individuals and owner-employees), or (iv) other factors as determined by the Secretary of the Treasury.

The first two prongs do not require employees to experience an adverse financial consequence as a result of the diagnosis (though it may be presumed in these cases).  The third prong should be read broadly – for example, employees who are furloughed, laid off or have reduced work hours due to the general economic downturn caused by the virus, and are experiencing adverse financial consequences as a result, would be eligible for a Coronavirus-Related Distribution.  This is contrast to, for example, employees who are being furloughed or laid off due to a reduction in force or plant closing that was already planned before the market downturn related to the virus.

Plan administrators may rely exclusively on an employee’s certification that the employee satisfies one of the above conditions to determine eligibility for a distribution.  We recommend that employers consult with their plan record-keepers to develop a certification (written or electronic) as part of their administrative process.

    • Distributions are Available Only for a Limited Time.  Coronavirus-Related Distributions will be available only from January 1, 2020 through December 31, 2020.  The impact of the retroactive effective date is not clear.  Presumably, that is to allow Qualified Individuals who have previously taken a distribution this year to receive some of the tax benefits and the repayment right (as discussed below) with respect to that distribution.  However, more guidance is needed from the Internal Revenue Service on this point.
    • It’s Permissive.  Employer-sponsored retirement plans are not required to allow these types of distributions.  If they would like to make these distributions available, then the plan must be (i) amended by the end of the plan year that begins on or after January 1, 2022 (subject to an additional 2-year delay for governmental plans) and (ii) operated consistent with the amendment on and after the effective date of the amendment (referred to in this summary as the “Amendment Requirements”).
    • Withdrawal Limited to $100,000.  The aggregate amount of coronavirus-related distributions received by a participant from all plans maintained by the plan sponsor and its controlled group members, for any taxable year may not exceed $100,000.  Plan sponsors that adopt these provisions may set a lower limit and/or designate the subaccount ordering rule that will apply with respect to these distributions.
    • Not Subject to 10% Early Withdrawal Excise Tax.  Coronavirus-Related Distributions will not be subject to the 10% excise tax on early distributions under Code Section 72(t).
    • Income Tax Consequences Can be Delayed.  Unless the individual opts-out, the amount of any Coronavirus-Related Distribution that would otherwise be included in income for the tax year in which it is made must be included ratably over the 3-taxable year period beginning with the year in which the distribution is made.   We expect that the plan will issue a Form 1099-R related to the full distribution amount as normal, and then the participant will have to claim the 3-year ratable taxation on his or her personal tax returns.  However, more guidance will be needed from the Internal Revenue Service to confirm this.
    • Income Tax Consequences Can be Mitigated Through Repayment.  Anyone who receives a Coronavirus-Related Distribution may repay some or all of such distribution, at one time or through multiple repayments, during the 3-year beginning the day after the distribution is received through 1 or more contributions to an eligible retirement plan (as defined above) and to which a  rollover contribution could otherwise be made.  Coronavirus-Related Distributions that are made from an eligible retirement (other than an IRA) will be treated as if the individual made a direct trustee-to-transfer within 60 days of the receiving the distribution.  In other words, if the distribution was made from an employee’s pre-tax 401(k) account and is then repaid to the 401(k) plan, such repayment must be treated/coded like a pre-tax rollover contribution.

      Some unknowns are: (i) whether a retirement plan that permits the distributions must permit the repayment or if it is acceptable to require participants to repay such amounts to IRAs and (ii) whether the repayments are otherwise to be treated as any other rollover contribution to the plan, such as if rollovers are available for withdrawal at any time.

      The CARES Act does not explain how participants who make repayments are to claim a refund of the taxes they previously paid, if any, on the distributions that are subsequently repaid.  Presumably, guidance will be included in the Form 1040 instructions for 2020 and later years.

    • Not Rollover Eligible.  Coronavirus-Related Distributions are not eligible rollover distributions.  Therefore, the typical 20% federal income tax withholding requirement will not apply.
  • Expansion of Plan Loans.  The CARES Act provides favorable provisions for loans made to Qualified Individuals from qualified plans as follows:
    • Higher Limits.  Loans from qualified employer plans may generally not exceed the lesser of: (i) $50,000 (reduced by the excess of the participant’s highest outstanding loan balance(s), if any, during the prior 12 months over the balance(s) immediately prior to the date the loan is made) and (ii) 50% of the participant’s vested account balance.  Plan sponsors may now permit loans that are made to Qualified Individuals (as defined above) during the 180-day period following the enactment date of the CARES Act changes the $50,000 limit to $100,000 and  changes the 50% account balance limit to 100% .  This provision is permissive provided that the Amendment Requirements are satisfied.  Plan sponsors should check their plan documents to determine whether the Code limits are cross-referenced, in which case this provision would apply automatically to the plan.
    • Repayment Delays.  For Qualified Individual who have outstanding loan(s), whether the loan is already in effect on the date of the enactment of the CARES Act or is a new loan taken after the date of enactment:
      • The payments due on such loan(s) between the date of enactment and December 31, 2020 shall be delayed for 1 year,
      • Subsequent repayments with respect to such loans shall be appropriately adjusted to reflect the 1-year delay in the due dates and any interest accruing during such delay, and
      • In determining the 5-year period and term of the loan, the period during which the payments are delayed shall be disregarded.

Note that, as drafted, plan sponsors are required to make the loan repayment changes for any Qualified Individual.  It is unclear whether the Qualified Individual must request this change; for example, if someone with an outstanding loan certifies that they are a Qualified Individual for purposes of receiving a Coronavirus-Related Distribution, must these provisions automatically kick in as well?  And how active must plan administrators be in soliciting information about whether participants with loans are Qualified Individuals?


Waiver of 2020 Required Minimum Distributions (for Defined Contribution Plans Only)

The CARES Act includes a provision pursuant to which required minimum distributions (“RMDs”) from defined contribution plans under Code Section 401(a), 403(a), and 403(b), and governmental 457(b) plans are waived for calendar year 2020. This waiver would also apply to RMDs that are due by April 1, 2020 for individuals who turned age 70 1/2 last year, unless those payments were already made last year.  However, any amounts distributed during 2020 that would otherwise have been 2020 RMDs are not eligible for direct rollover (although an indirect rollover should still be available) and are not subject to the federal 20% withholding tax.  The Amendment Requirements apply, and a plan will not be deemed to have cutback benefits in violation of Code Section 411(d)(6) by failing to make 2020 RMDs.


Potential Delays for ERISA Deadlines

The CARES Act expands the authority of the Department of Labor to postpone certain deadlines pursuant to ERISA Section 518 in the event of a public health emergency declared by the Secretary of HHS.  Although no action has been taken pursuant to this authority to date, deadlines that could be affected include Form 5500 filing deadlines and ERISA claim and appeals-related deadlines.


Pension Plan Relief

The CARES Act provides limited relief for single-employer pension plans, as follows:

  • Minimum required contributions due during 2020, including quarterly contributions, can be delayed until January 1, 2021.  If the plan sponsor chooses to delay making such contributions, the plan sponsor will have to pay the plan interest on the delayed contribution amounts, at the plan’s effective rate from the time the contribution was originally due until when it is actually made.
  • A plan may choose to use its adjusted funding target attainment percentage (“AFTAP”) calculation for the most recent plan year ending before January 1, 2020 as its AFTAP for its plan year beginning in 2020 for all purposes of Code Section 436.  For calendar year plans, this may not be that important, since a calendar year plan’s 2020 AFTAP will be based on assets valued as of January 1, 2020, before the market downturn.  For non-calendar year plans, however, this could provide significant relief.  For example, a plan with a March 31 plan-year end would normally have to determine its AFTAP for the plan year beginning April 1, 2020 based on the plan’s asset values on such date.  Such a plan would instead be able to continue to use its AFTAP as determined for the prior plan year that ended March 31, 2019, if it wishes.  As a reminder, if a plan’s AFTAP falls below 80%, certain restrictions apply, such as restrictions on plan amendments that increase benefits and restrictions on the amount of benefits that may be paid as lump sums.  Plan sponsors should discuss with their plan actuaries whether to apply their prior year’s AFTAP for the plan year beginning in 2020.

Health Plan Rules and Relief

  • Coverage for In-Network and Out-of-Network Coronavirus Testing.  As discussed in our previous article addressing the Families First Coronavirus Response Act (“FFCRA”), FFCRA requires group health plans to cover coronavirus testing without any cost-sharing (i.e., deductibles, copayments, or coinsurance) imposed on the plan member during the declared public health emergency.  The CARES Act clarifies that this applies to services conducted by both in-network and out-of-network health care providers.

Reimbursement Calculation for Out-of-Network Coverage.  Since there is no pre-negotiated rate with out-of-network providers, the CARES Act provides a special calculation for determining the rate paid to out-of-network providers for coronavirus testing.  Each provider is required to make public the “cash price” for such testing on a publicly-available website.  Health plans are required to reimburse out-of-network providers at this cash price, or negotiate a rate for less than cash price.

  • Expediting Coronavirus Vaccines (Once Available) as a Permanent Cost-Free Preventive Service.  The CARES Act expedites the process by which coronavirus vaccines (once available) will be determined a preventive service that must be covered by non-grandfathered health plans at no cost to the plan member, pursuant to the Affordable Care Act (“ACA”).  Unlike FFCRA’s coverage mandate (which is temporary mandate to cover testing with no cost-sharing during the public emergency), this would be a permanent coverage mandate.  To be determined a “preventive service,” ACA requires the vaccine to achieve a certain recommendation from a specified governmental health-related committee or task force, and then the coverage requirement is triggered upon the first plan year beginning one year from the date of the recommendation.  The CARES Act would fast-track this requirement and require coverage (with no cost-sharing) within 15 days of the date of the recommendation.
  • Temporary Relief for Telehealth and High Deductible Health Plans.  The CARES Act provides a temporary safe harbor to high deductible health plans (“HDHPs”) compatible with health savings accounts (“HSAs”).  Under the Act, a HDHP will not lose HDHP qualified status if it offers cost-free telehealth services to plan members before the annual deductible is satisfied.  In other words, HDHPs can offer plan members access to telehealth services with no cost-sharing to the member, regardless of whether the deductible is met, and such members will remain eligible to make and receive contributions to an HSA.  This offers significant relief to plan sponsors who want to offer first-dollar, pre-deductible telehealth coverage while still desiring to preserve HDHP qualified status.  This is only temporary relief.  This safe harbor only applies for plan years beginning before January 1, 2022.
  • Over-the-Counter Drug Reimbursements from HSAs, FSAs, and HRAs.  Eliminating an ACA prohibition, HSAs, health flexible spending accounts (“FSAs”), and health reimbursement arrangements (“HRAs”) can once again reimburse the costs of over-the-counter drugs with no prescription.  This provision is effective for expenses incurred and amounts paid after December 31, 2019.

Expansion of Educational Assistance Program Benefits

The CARES Act expands Code Section 127(c) to allow employers to provide “educational assistance” to an employee, by reimbursing employees for qualified education loan payments the employee has made or making such payment directly to the lender.  Qualified education loan payments include payments on principal or interest with respect to loans incurred by the employee to pay for “qualified higher education expenses” at an “eligible educational institution,” each as defined in Code Section 221(d).

The employee can exclude the first $5,250 of such payments in 2020 from the employee’s gross income.  The payments must be for a student loan incurred for the education of the employee (i.e., they cannot be for an employee’s child’s or spouse’s student loans).   This is a temporary benefit that is only available through the end of the year.

The rules that are already in place for Educational Assistance Programs under Code Section 127 will also apply to the new student loan assistance benefit, and include the following requirements:

  • The payments cannot relate to the provision of any benefits with respect to any course or other education involving sports, games, or hobbies;
  • The employer must adopt a written plan or program describing the benefit and communicate the terms of the program to eligible employees;
  • The program cannot favor highly compensated employees (those earnings more than $125,000 in 2019);
  • No more than 5% of the benefits under the program can be paid to shareholders or other owners; and
  • Employees may not choose between student loan repayments and other taxable benefits (e.g., student loan payments or additional salary).

For more information on the impact of the coronavirus pandemic on employee benefits and executive compensation, click here. To receive this content directly in your inbox, click here and submit the form.


Foley & Lardner LLP looks beyond the law to focus on the constantly evolving demands facing our clients and their industries. With over 1,100 lawyers in 24 offices across the United States, Mexico, Europe, and Asia, Foley approaches client service by first understanding our clients’ priorities, objectives, and challenges. This article was reprinted with permission and originally appearedhere.

Written by: Amy Ciepluch, Casey Fleming, Leigh Riley, Nick Welle

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