New Benefits Rules for Retirement and Welfare Plans in Response to the Coronavirus

March 27, 2020

On March 25, 2020, the U.S. Senate passed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is the third major piece of legislation in response to the worldwide COVID-19 coronavirus epidemic.

Among other things, the CARES Act contains several substantial changes to the Internal Revenue Service rules for retirement plans, as summarized below.

I. Retirement Plans

A. Early Distributions

Participants in eligible retirement plans, including individual retirement accounts and tax-qualified retirement plans, such as employer-sponsored 401(k) plans, may take a distribution from their eligible retirement plan of up to $100,000 before the end of 2020 (a “Coronavirus-related Distribution.”). In order to be eligible for the distribution, the participant must be a “Qualified Individual.” A “Qualified Individual” is any individual that has been diagnosed with the COVID-19 coronavirus, any individual with a spouse or dependent diagnosed with the COVID-19 coronavirus, or any individual that has suffered a financial hardship as a result of being quarantined, laid-off, having hours reduced, or being unable to work due to having to take care of a child or their place of employment closing. Coronavirus-related Distributions are not subject to the usual 10% early withdrawal penalty. A Coronavirus-related Distribution may be repaid by the participant in full or in part over the course of the next three years and any repayments will not count toward the annual contribution limitation. If paid entirely before the three-year period is over, the Coronavirus-related Distribution will not be treated as income for the Qualified Individual and will not be subject to tax. Any amounts not repaid during the three-year period will be treated as income ratably over the next three years unless the Qualified Individual elects otherwise.

B. Loans from Qualified Retirement Plans

There are changes for both new and existing loans from qualified retirement plans in the CARES Act as well. For new loans, the maximum amount of a loan from a qualified retirement plan has been increased from $50,000 to $100,000 for Qualified Individuals, however this amount is still subject to reduction for any outstanding loan balance(s) and may not exceed the present value of the employee’s vested account balance (the previous cap was one-half of an employee’s vested balance). Any new loans must be taken by the Qualified Individual within 180 days of enactment of the CARES Act. The term of any new loans will not begin until one year after the loan is taken. The due date for any currently outstanding loans by Qualified Individuals that are due before the end of 2020 will also be delayed for one year.

C. Waiver of Required Minimum Distribution Rules

For retirement plans including 403(a), 403(b), 457(b) plans, and individual retirement accounts, any participant with a required beginning date in 2020 who has not already begun receiving distributions will not have to begin taking required minimum distributions until after 2020. Any distributions that would otherwise be required minimum distributions but for the temporary waiver of the required beginning date will not be considered eligible rollover distributions for 2020. Additionally, if a participant dies before his or her interest has started to be distributed, 2020 will not count for the required five-year distribution period.

D. Plan Amendments

  1. Plan Amendments for Early Distributions and Loan Changes: Employers on a calendar plan year that wish to incorporate the changes set forth above into their plans have until the end of 2020 to make the plan amendments and employers using a non-calendar plan year have until the end of the plan year beginning in 2020 to make such amendments. Employers may administer the plan as if the amendment had been in effect from the enactment of the CARES Act until the plan amendment is finalized.
  2. Plan Amendments for Required Minimum Distribution Changes: Employers may begin administering plans in accordance with the changes made by the CARES Act immediately. If an employer operates the plan as if the plan had been amended to reflect the changes to the required minimum distribution rules, the employer will have until the end of 2022 (if using a calendar plan year) or the end of the plan year beginning in 2022 (if using a non-calendar year plan year) to make amendments to the plan.

E. Contribution Deadlines

In conjunction with the extended tax filing deadline, the Internal Revenue Service guidance provided in Notice 2020-18 also implies that the contribution deadline for individual retirement accounts, Roth individual retirement accounts, and health savings accounts may also be extended to July 15, 2020.

II. Welfare Plans

A. CARES Act Welfare Plan Changes

  1. Coverage for COVID-19: Group health plans and health insurers offering group or individual health insurance are required to cover “qualifying coronavirus preventative service” without any deductible, copayment, or other cost-sharing required by the individual. “Qualifying coronavirus preventative services” are any items, services, or immunizations that treat or prevent the COVID-19 coronavirus and are approved by the United States Preventative Services Task Force or the Centers for Disease Control and Prevention. Such coverage is required to be effective no later than fifteen business day after any item, service, or immunization is recommended as a “qualifying coronavirus preventative service.”
  2. Anti-Discrimination Changes: The CARES Act amends the Public Health Service Act to prohibit discrimination against any individual with a “substance use disorder” with respect to employment, health care (including admission, access to, or treatment), and benefits provided by or funded by Federal, State, or local governments. Any discrimination against individuals with a “substance use disorder” is also prohibited for any services funded by Federal funds by the recipient of such funds.

B. Families First Coronavirus Response Act

The Families First Coronavirus Response Act signed into law by President Trump on March 18, 2020, provides tax credits for employers providing mandatory paid sick and family medical leave to employees.  For a detailed summary of the family and sick leave credits, please see our prior alert here

Group health plans and health insurers providing group and individual coverage are also required to cover diagnostic testing for the COVID-19 coronavirus without any cost-sharing imposed on the individual seeking testing.  Pursuant to the CARES Act, any negotiated rate with a provider for diagnostic testing will apply during the public health emergency declared under the Public Health Service Act. If there is no negotiated rate the between a provider and health plan or insurer, the health plan or insurer must reimburse the cash price for diagnostic testing or negotiate a reimbursement rate less than the cash price. Providers are required to publish rates for testing on a public website and may be imposed a fine of up to $300 per day for failure to do so.