Employee Benefits & Executive Compensation Monthly Minute
CARES Act: Defined Contribution, Defined Benefit & Health Plan Impact
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides broad-spectrum relief for participants and plan sponsors of qualified plans and expanded benefits for participants in group health plans including the following:
- For defined contribution plans including 401(k) plans, the changes include expanded in-service distribution provisions up to $100,000, relief from early withdrawal penalty taxes, a temporary increase in 401(k) plan loan limits to $100,000, and relief from minimum required distributions for the remainder of 2020. The adoption of any optional provisions may require plan amendment. It appears amendments would not have to be adopted until at least December 31, 2022.
- There are also special rules related to funding defined benefit plans.
- There are several provisions that impact group health plan coverage requirements.
The information below provides a summary of certain changes of particular interest to plan sponsors.
CARES Act and Defined Contribution Plans:
1. Coronavirus-Related Distributions Up To $100,000. Individuals impacted by the COVID-19 pandemic can withdraw up to $100,000 from their plan through December 31, 2020. It appears these distribution changes are optional so plans are not required to offer these distributions.
- Eligible Individuals. Individuals in any of the following categories are considered “impacted” and can take a distribution:
- Diagnosed with COVID-19.
- Has a spouse or dependent who is diagnosed with COVID-19.
- Experiences adverse financial consequences because of one of the following events that occurred in connection with the COVID-19 pandemic:
- Being quarantined, furloughed, laid-off or having work hours reduced.
- Being unable to work due to a lack of child care.
- Closing or reducing the hours of a business owned or operated by the impacted individual.
- Other reasons specified by the Treasury Secretary.
- Employee Certification Sufficient. Employers can rely on a certification from an employee that the distribution was a coronavirus-related distribution.
- Distributions Can Be Repaid To The Plan. A distribution can be repaid to the plan over three years without regard to plan contribution limits.
- No Early Withdrawal Penalty. A distribution is not subject to the 10% early withdrawal penalty tax on the individual.
- No Mandatory Federal Tax Withholding. Mandatory 20% withholding does not apply to a distribution.
- Favorable Federal Income Tax Treatment. A distribution will be included in an individual’s income ratably over three years for federal income tax purposes to the extent not repaid.
2. Temporary Increase In Plan Loan Limits. For the next 180 days after enactment, impacted individuals can also borrow from their plan up to the lesser of: (a) $100,000; or (b) their total vested plan account balance. It appears this change is optional so plans are not required to increase the loan limits.
- Repayments Delayed. 2020 repayments for loans currently outstanding and those taken during the remainder of 2020 can be delayed for a year. Remaining payments and interest are reamortized. It appears this change is required so plans must adopt this extension rule.
3. Minimum Required Distributions Payable In 2020 Are Delayed. Individuals do not have to take any further minimum required distributions for the remainder of 2020. It appears this change is optional so plans are not required to suspend minimum required distributions.
CARES Act and Defined Benefit Plans:
1. Minimum Funding Requirements.
- 2020 Minimum Funding Payments Delayed. Minimum funding payments due in 2020 can be delayed until January 1, 2021. The delayed payments will have to be made to the plan with interest. This delay in funding is optional.
- 2020 Funded Ratio Restrictions. A sponsor can use its plan’s 2019 adjusted funding target attainment percentage (AFTAP) when determining whether the plan is less than 80% funded and subject to benefit restrictions. This change is optional.
What About Group Health Plans?
- Group health plans will be required to cover, without cost sharing, any qualifying COVID-19 preventive services. Qualifying COVID-19 preventive services are items, service or immunizations that are intended to prevent or mitigate COVID-19, subject to the outlined clinical requirements (i.e., must have an A or B rating by the US Preventive Services Task Force). This change is required.
- For plan years beginning on or before December 31, 2021, health plans will not fail to be considered HDHPs if they do not have a deductible for telehealth and other remote care services. This change is optional.
- OTC medicine and drugs as well as menstrual products are now considered a qualifying medical expense for HSA, HRA and FSA purposes. This change is required.