Now that we are slowly returning to “normal” life again, it’s time to take stock in what updates need to be made to clients’ employee benefit plans to ensure compliance with the various laws and regulations that have been passed while most of us were sheltering in place and scrambling to keep up with changes in the law and the pandemic.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed by President Trump on March 27, 2020, provides for a number of benefits aimed at assisting individuals and businesses through the pandemic. Included in the CARES Act, and notices aimed at implementing and interpreting the legislation, are the following options for sponsors of employee benefit plans to consider.
Retirement Plan Options
Any amendment adopting any of the provisions in paragraphs 1, 2, or 3 below must be adopted no later than the last day of the first plan year beginning in 2022.
1. Coronavirus-Related Distributions
The CARES Act provides that “qualified individuals” may treat a distribution, between January 1, 2020, and December 31, 2020, of up to $100,000 from their eligible retirement plan as a coronavirus-related distribution (CRD). A CRD is not subject to the normal 10% excise tax that is applied to distributions made before an individual is 59½, may be repaid to an eligible retirement plan within a three-year period (resulting in an exclusion from income), and may be included in income over a three-year period.
For purposes of this item and item No. 2 below relating to plan loans, a “qualified individual” is defined as an individual: (a) who is diagnosed with COVID-19; (b) whose spouse or dependent is diagnosed with COVID-19; (c) who experiences adverse financial consequences as a result of: (i) being quarantined, furloughed, laid off, or having work hours reduced due to COVID-19, (ii) being unable to work due to lack of childcare due to COVID-19, or (iii) closing or reducing hours of a business owned or operated by the individual due to COVID-19; (d) who has a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19; or (e) the individual’s spouse or a member of the individual’s household experiences an event described in (c) or (d).
Employers may rely on an individual’s certification that the individual is a “qualified individual” for purposes of this item and item No. 2.
2. Plan Loans
The Act also provides that plans may increase plan loan limits to the lesser of 100% of the participant’s account balance or $100,000, and may also extend repayment terms for a year. The plan loan limit increase is available for loans made between March 27, 2020, and September 22, 2020. The loan repayment suspension
applies to loan repayments due between March 27, 2020, and December 31, 2020, and extends the due date for the payments for up to a year.
Contrary to how the Act was originally interpreted, Notice 2020-50 provides that individuals may take CRDs and loans to address adverse financial consequences experienced by a spouse or household member. This enables an individual to receive a plan loan or CRD in order to offset the financial distress caused by the furlough of his or her spouse or other household member.
3. Required Minimum Distributions
The Act also provides that plans can waive required minimum distributions (RMDs) for 2020. This means that participants with an RMD due in 2020, including those who turned age 70½ in 2019 and would have had to take the first RMD by April 1, 2020, can skip receiving these distributions for this year. The IRS recently published Notice 2020-51 which provides that anyone who has already received an RMD in 2020 may roll those funds back into a qualified retirement account, as long as the rollover is completed prior to August 31.
4. Safe Harbor Contributions
The IRS has provided temporary relief from certain requirements relating to mid-year amendments to safe harbor 401(k) plans to reduce or suspend safe harbor contributions. Typically, an amendment to reduce or suspend future safe harbor matching contributions or safe harbor nonelective contributions can only be made during the plan year if the amendment also provides that the ADP test will be satisfied for the entire plan year, and the employer is either operating at an economic loss for the plan year or the plan’s safe harbor notice included a statement that the plan may be amended to reduce or suspend safe harbor contributions, upon 30 days’ notice to participants. Notice 2020-52 provides relief from these requirements.
Under the Notice, if a plan amendment (adopted between March 13, 2020, and August 31, 2020) reduces or suspends safe harbor matching contributions or safe harbor nonelective contributions for the plan year, the plan will not be treated as failing to satisfy the requirements set forth above. In addition, if the plan amendment reduces or suspends safe harbor nonelective contributions, the plan will not be treated as failing the safe harbor requirements if a supplemental notice is not provided to the eligible employees at least 30 days before the reduction or suspension is effective, as long as the supplemental notice is provided to eligible employees no later than August 31, 2020, and the amendment is adopted no later than the effective date of the reduction or suspension in contributions. This provision does not apply to safe harbor matching contributions.
Health & Welfare Plan Provisions
1. Cafeteria Plan Amendments
In addition to the optional changes in retirement plan benefits, the CARES Act also included amendment options for cafeteria plans. For example, the Act provides that medical flexible spending accounts (FSAs) and health savings accounts (HSAs) can reimburse for feminine care products and over-the-counter medications without a prescription.
In addition, Notice 2020-29, which was issued by the IRS to add flexibility to cafeteria plans, allows employers to amend their cafeteria plans to provide additional mid-year elections, i.e., make a new election, or revoke an existing election, to employer-sponsored health coverage, Health FSAs, and dependent care assistance programs (DCAPs).
Notice 2020-29 also permits employers to extend the grace period relating to unused amounts in Health FSAs and DCAPs, as of the end of the 2020 grace period or 2020 plan year, to pay or reimburse qualified expenses through December 31, 2020. Moreover, the Health FSA carryover limit for a plan year starting in 2020 has been increased to $550.
An employer desiring to make any of the changes described above must immediately inform the employees who are eligible to participate in the cafeteria plan about the changes, but has until December 31, 2021, to adopt the plan amendment.
2. Key Deadline Extensions
In addition to reviewing plan documents and drafting the necessary amendments, an employer should also review its health and welfare plans for compliance with Notice 2020-01, which was published jointly by the Department of Labor, Treasury Department, and the Internal Revenue Service on April 28, 2020, and announced an extension to several key deadlines under the Employee Retirement Income Security Act (ERISA). Under the Notice, the period from March 1, 2020, through the 60th day after the announcement of the end of the national emergency (the “Outbreak Period”) shall be disregarded for all plan participants and beneficiaries in determining:
- The 30-day period (or 60-day period, if applicable) to request special enrollment;
- The 60-day election period for COBRA continuation coverage;
- The date for making COBRA premium payments, i.e., 45 days following the COBRA election;
- The date for individuals to notify the plan of a qualifying event or disability;
- The date for filing a claim for benefits or an appeal under the plan’s claim procedures; and
- For group health plans, the date for providing a COBRA election notice.
The Notice also provides an extension of time for plan officials to provide benefit statement, annual funding notices, and other ERISA-required notices and disclosures as long as a good faith effort is made to provide the documents as soon as administratively practicable.
Clients should be encouraged to review their employee benefit plans and do
- Decide whether to implement any of the CARES Act retirement plan options;
- Decide whether to implement any of the CARES Act or IRS Notice cafeteria plan options;
- Actively review and monitor employees who are eligible for COBRA or are making COBRA premium payments to ensure compliance with the deadline delays; and
- Consider revising their traditional safe harbor notices going forward to permit the employer to reduce or suspend safe harbor contributions upon 30 days’ notice to participants.
Heather C. Panick is counsel in Koley Jessen’s Employment Department. She focuses her practice on employee benefits and executive compensation. She assists clients in drafting health and welfare plans, deferred compensation agreements under Code Section 409A, and tax-related issues in the administration, compliance, and design of qualified and nonqualified retirement plans. She can be reached at email@example.com.