This alert, from the Employment & Benefits practice group, focuses on the various retirement, welfare and fringe benefit related changes that have come out of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and other relief that has been provided by the Department of the Treasury, the Internal Revenue Service, the Department of Labor and/or the Department of Health and Human Services.

Retirement plan liquidity options

In the CARES Act, Congress made 4 key changes that apply generally to tax-favored retirement vehicles – the creation of "coronavirus-related distributions," an expansion of the limits available for participant loans, a suspension of participant loan repayments and 2020 required minimum distribution (RMD) relief.

At the moment, it is not clear whether these provisions are mandatory, although in our view the 2020 RMD relief will likely be mandatory but the loan and coronavirus-related distribution provisions will likely not be. In analogous situations, such as relief that was provided by Congress following Hurricane Katrina, the provisions enacted by the so-called KETRA legislation were not mandatory and that remains our view, at least pending further clarification from the IRS.

Coronavirus-related distributions – It appears that yet another new type of distribution has been added to the Internal Revenue Code in the form of a "coronavirus-related distribution," or CRD. An individual may receive up to an overall amount of $100,000 of CRDs from any one or more of the following types of tax-favored retirement arrangements:  401(k), profit sharing, money purchase pension, stock bonus and defined benefit plans; individual retirement accounts (IRAs); 403(a) and 403(b) arrangements, other than endowment contracts under 403(b); and governmental 457(b) arrangements. (The CARES Act appears not to have waived any applicable joint and survivor annuity and spousal consent requirements.)

CRDs must occur before December 31, 2020 and be made to an individual who is (or was) diagnosed with COVID-19, has a spouse or dependent who is (or was) diagnosed with COVID-19 or who experiences (or who has experienced) adverse financial consequences as a result of quarantine, furlough, layoff, reduction in work hours or child care issues due to the coronavirus emergency (an Affected Individual). The CARES Act provides that the plan or arrangement is entitled to rely on a self-certification of the individual’s status, although the IRS has been known to change the rules of the game with respect to self-certification before, making recordkeepers and employers a bit wary of this approach.

A CRD is free from the 10% early withdrawal penalty, and while the distribution itself is otherwise taxable, income is included over 3 years – in 2020, 2021 and 2022 – unless the taxpayer elects otherwise. Similar to other retirement plan disaster-related distribution provisions and the recently enacted SECURE Act qualified birth or adoption distribution provision, the amount can be recontributed, in this case during the 3-year period beginning on the day after the distribution. Although the CARES Act is not explicit on this point, disaster related distributions can often be recontributed on a tax-favorable basis, although repayment may require the filing of amended income tax returns in order to obtain a refund of income tax paid on the distribution.

As of the date of this advisory, the Internal Revenue Service has not yet issued any guidance on CRDs. We understand that several large recordkeepers are providing that this distribution option will be made available, unless the plan sponsor elects out.  The plan itself, however, need not be amended until 2022.

Other forms of in-service distributions – As a reminder, various types of retirement plan assets may be available to participants (and not solely for Affected Individuals) if permitted under the plan or arrangement. These include hardship distributions, distributions of rollover and after-tax contributions (many plans allow a participant to receive these sources at any time), in-service distributions to participants who are at least age 59½ and, for matching and/or profit sharing contributions, distributions on account of the occurrence of an event, such as after a certain period of time. A plan document that does not already permit one or more of these forms may need to be amended to provide for the distribution option by the end of the year, and may not be available if the plan is using a prototype or volume submitter document.

CARES Act changes to participant loan rules – Until September 22, 2020, a retirement plan may permit Affected Individuals to obtain larger plan loans. The usual borrowing limit of the lesser of $50,000 or 50% of the participant’s vested account balance is increased to the lesser of $100,000 or 100% of the participant’s vested account balance. The change in the borrowing limit under the CARES Act, however, does not change the prohibited transaction exemption available under ERISA and the Internal Revenue Code for participant loans; that exemption provides that no more than 50% of the participant’s balance may be used as security. In Notice 2005-92, which provided guidance as to how a similar borrowing limit change applied in the aftermath of Hurricane Katrina, the IRS noted that the Department of Labor would not treat the special rule as resulting in a prohibited transaction. While the CARES Act does not include prohibited transaction relief, we would think that the Department of Labor will take a similar position in the present environment.

In addition, a plan can allow Affected Individuals to suspend loan repayment installments otherwise due between March 27, 2020 and December 31, 2020 for one year. As a result, the entire remaining repayment stream can be delayed such that the one-year suspension is disregarded for purposes of the normal 5-year limit on loans (or a longer term provided under a loan program that might apply to a principal residence loan). While there is no certainty, we anticipate that guidance analogous to the Hurricane Katrina guidance under Notice 2005-92 will likely apply in this situation. As was the case then, interest must continue to accrue during the period of suspension and repayments will likely need to be recalculated once the suspension period ends.

Because loan provisions are not always part of a plan document, it may be necessary to adopt these loan changes during 2020.

2020 RMD waiver – In recognition of the fact that account balances may be down significantly from their year-end values, the CARES Act waives 2020 MRDs for defined contribution plans (401(k), profit sharing, stock bonus and money purchase pension plans), 403(a) and 403(b) arrangements, governmental 457(b) plans and IRAs. This provision appears to be similar to relief that was provided in 2009, although unlike the earlier relief, it appears that individuals with a required beginning date of April 1, 2020 (for 2019 RMDs) may avoid the RMD if they did not receive the minimum required distribution in 2019, and thus we would anticipate that the relief will be interpreted in a similar manner, notwithstanding the substantial changes to the RMD provisions that were part of the SECURE Act. Any required amendment need not be adopted until 2022.

Other issues affecting retirement arrangements

Defined benefit plans – The CARES Act provides for a delay, with interest, until January 1, 2021 of 2020 minimum required contributions to defined benefit plans.  In addition, defined benefit plans are permitted to continue to use the plan’s adjusted funding target attainment percentage for the prior plan year for purposes of applying benefit restrictions under Internal Revenue Code Section 436.

Some extended contribution deadlines – The IRS has stated in a set of Frequently Asked Questions available on its website that the following deadlines are automatically postponed to July 15, 2020 from the usual federal income tax return deadline of April 15, 2020 –

• The deadline for making contributions to IRAs, HSAs and MSAs in respect of 2019.
• The payment of any 10% early withdrawal penalty due with respect to distributions from various forms of retirement plans and IRAs.
• The deadline for making 2019 employer contributions (including Keogh plan contributions) for which the unextended deadline would otherwise be April 15, 2020.

Note, however, that any distribution required because the 401(k) or 403(b) limit of $19,000 for 2019 was exceeded must still be received by April 15, 2020 in order to avoid a double tax.

Extension of the March 31, 2020 403(b) deadline – The IRS has announced that the remedial amendment period for 403(b) plans, under which those plans can be amended to ensure compliance with the Internal Revenue Code, has been extended from March 31, 2020 through June 30, 2020.

Partial termination caution – An employer that must layoff or terminate employees in connection with the pandemic may discover that the plan must accelerate vesting for those participants as a result of a so-called partial termination. While there is no clear definition, the idea is that when a critical mass (a very rough rule of thumb is 20%) of participants are terminated in connection with an event, that group must be fully vested (even if they were not at the time of their termination). What makes this a particularly nettlesome provision is the fact that the terminations can occur over a period of time, potentially as many as 24 months.

Form 5500 relief – As of the date of this advisory, no extension of the filing deadlines for Forms 5500 has yet been issued, although Congress gave the Department of Labor authority to do so.

Welfare benefit issues

Expanded coverage of COVID-19 diagnostic testing – As noted in our earlier alert, COVID-19 diagnostic testing was required to be covered without cost-sharing by group health plans. The CARES Act clarifies that this applies to testing that is not only approved by the FDA but testing that is approved by states or directed to be covered by the Department of Health and Human Services (HHS). In addition, the CARES Act requires that group health plans cover certain COVID-19 preventative care within 15 days of recommendation.

As discussed in our prior advisory, as states began mandating telehealth coverage without cost-sharing, one issue that arose was whether high deductible health plans (HDHPs) could offer such coverage without causing the HDHP to lose its qualified status necessary to permit health savings account (HSA) contributions. As expected, the CARES Act resolves this issue favorably and allows telehealth services to be provided without cost-sharing under a qualifying HDHP for plan years beginning on or before December 31, 2021 (2020 and 2021 for calendar-year plans). This relief applies even if the telehealth services are not used solely for COVID-19 related treatment or diagnosis.

Changes in other covered expenses– The CARES Act repeals an Obamacare rule and now permits health care flexible spending accounts (HFSAs), health reimbursement accounts (HRAs), Archer Medical Savings Accounts and HSAs to reimburse or cover over-the-counter drugs. In addition, these accounts can now be used to cover menstrual products. Both changes are effective in 2020. Some plans may require a plan amendment and we anticipate that the IRS will issue guidance on the timing of any required amendments.

HIPAA Guidance – The CARES Act directs HHS to issue guidance, within 180 days, to covered entities, including group health plans, about sharing protected health information (PHI) during the coronavirus health emergency. The guidance is to include information to help plan sponsors and plan administrators manage the sharing of PHI, for example, as it pertains to notifying employees of potential exposure.

In order to facilitate the use and disclosure of critical information relating to the pandemic, HHS has also announced that it will not impose penalties on a covered entity or business associate that makes a good faith use or disclosure of PHI for public health activities or health oversight activities, in each case consistent with applicable regulations, and, in the case of use or disclosure by a business associate, the business associate must notify the covered entity of the use within 10 calendar days. HHS notes that this nonenforcement position is limited and does not cover, for example, other restrictions under the HIPAA privacy rule nor does it relieve a covered entity or business associate of obligations to comply with HIPAA’s security rule and in the event of a breach.

Education benefits:  The CARES Act includes a new provision that allows employees to avoid tax on student loan repayments made by their employer between March 27, 2020 and year-end with respect to any qualified education loan. The amount that may be excluded is capped at the Internal Revenue Code Section 127 limit of $5,250 (this is an annual limit and so would take into account other amounts that might be excluded under this provision).  Separately, the CARES Act also provides for a suspension of payments (without interest accrual) for various federal student loan borrowers through September 30, 2020.

*  *  *

Sullivan has developed a rapid response team of attorneys to help our clients and our communities cope with the impact of the COVID-19 pandemic and understand the implications of the CARES Act and other actions taken by state governments and the federal government. Please refer to Sullivan’s newly launched resource center at www.sullivanlaw.com/COVID19 for more information and for access to Sullivan’s library of related advisories.

Please know that Sullivan is focusing substantial efforts to provide assistance to businesses and individuals affected by COVID-19 and benefited by the CARES Act. If you have questions about how to move forward and navigate the novel legal issues raised by COVID-19 and/or the CARES Act, please contact your primary Sullivan attorney or send a message to CARES@sullivanlaw.com.