Federal CARES Act Provides Substantial Relief to Employers from Effects of COVID-19
Date: March 27, 2020
Today President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act (Act) in order to combat the economic consequences of the novel coronavirus pandemic. The Act includes more than $2 trillion in stimulus funds and other aid, such as provisions for expanded unemployment insurance; aid to both large and small businesses, as well as states; and cash payments to households. It also includes provisions to expand access to medical services and provide greater flexibility for retirement plan participants to access loans and qualified distributions and other measures that impact the funding and administration of employee benefit plans. Below is a summary of some of the provisions of the Act most applicable to businesses in their role as employers and sponsors of employee benefit plans.
- Amends language in the Emergency Family and Medical Leave Expansion Act (EFMLA) through the Families First Coronavirus Response Act (FFCRA) to limit the amount of paid leave under EFMLA to $200 per day and $10,000 in the aggregate for each eligible employee;
- Amends language in the Emergency Paid Sick Leave Act throughtheFFCRA to limit the amount of paid sick leave available as:
- $511 per day and $5,110 in the aggregate for each employee, when the employee is taking leave because they are:
- subject to a federal, state or local quarantine or isolation order;
- advised by a health care provider to self-quarantine; or
- experiencing symptoms of COVID-19 and are seeking a diagnosis.
- $200 per day and $2,000 in the aggregate for each employee, when the employee is taking leave because they are:
- caring for an individual covered by (1) or (2) above;
- caring for a son or daughter whose school or place of care has been closed or whose child care provider is unavailable due to COVID-19 precautions; or
- experiencing any other substantially similar condition specified by the Secretary of Health and Human Services (in consultation with the Secretaries of Treasury and Labor).
- Allows an employee who was laid off by an employer on March 1, 2020, or later, to have access to EFMLA leave under the FFCRA if they are rehired by the employer, provided that the employee worked for the employer for at least 30 of the last 60 days prior to being laid off.
- $511 per day and $5,110 in the aggregate for each employee, when the employee is taking leave because they are:
- Enables individuals not normally eligible for unemployment assistance (self-employed, independent contractors, those with limited work history, etc.) to qualify for such benefits if they are unable to work as a direct result of the coronavirus public health emergency;
- Provides payments to states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through the end of the year to pay unemployment benefits;
- Provides individuals with an additional $600 of unemployment benefits per week, for up to four months, above the benefits they receive from their respective state unemployment office, and provides an additional 13 weeks of unemployment benefits through the end of the year for those who remain unemployed after they are no longer eligible for state unemployment benefits;
- Provides funding to states that choose to waive one-week waiting periods for unemployment eligibility in order to pay the costs of the first week of unemployment benefits;
- Provides funding to states to support “short-time compensation” programs, where employers reduce employee hours instead of laying off workers and employees with reduced hours receive a pro-rated unemployment benefit.
Payroll Tax Deferrals and Employee Retention Tax Credit for Employers Subject to Closure by COVID-19 and Related Orders
- Provides a quarterly refundable payroll tax credit equal to 50% of “qualified wages” paid by employers that were carrying on a trade or business in 2020 to employees duringtheCOVID-19 crisis, where the employer’s (1) operations were fully or partially suspended due toaCOVID-19-related shutdown order, or (2) gross receipts declined by more than 50% when compared to the same quarter in the previous year. The credit is provided for the first $10,000 in compensation (i.e., up to a $5,000 tax credit), including health benefits, paid to an eligible employee, and is provided for wages paid or incurred after March 12, 2020 through the end of the year. This payroll tax credit is available to tax exempt organizations described in Section 501(c) of the Internal Revenue Code (Code). An employer cannot take this payroll tax credit if the employer receives a Small Business Interruption Loan pursuant to Section 1102 of the Act.
- For employers with more than 100 full-time employees (based on the average number of full-time employees in 2019), “qualified wages” are wages paid to employees when they are not working due to either (1) or (2) above;
- For employers with 100 or fewer full-time employees (based on the average number of full-time employees in 2019), all employee wages qualify for this credit, whether or not the employee is able to work during the quarterly period with circumstances described in either (1) or (2) above.
- Allows employers to defer payment of the 6.2% employer share of the Social Security tax payable through December 31, 2020, and requires that the deferred payroll tax be paid over the following two years, with half of the tax amount required to be paid by December 31, 2021, and the other half by December 31, 2022. An employer may not defer payroll tax if the employer received forgiveness of a Small Business Interruption Loan pursuant to Section 1106 of the Act.
- Failure to deposit penalties are waived for an employer that fails to deposit payroll taxes due to reasonable anticipation of a payroll tax credit under this Act.
- Allows employers to receive an advance payroll tax credit on qualified wages paid with regard to the retention tax credit provisions of the Act and on paid leave provided under the FFCRA instead of receiving a refund after filing a quarterly payroll tax return, and creates regulatory authority to implement the tax credit advances.
Provisions Impacting Retirement Plans
The CARES Act provides individuals greater access to their retirement plan benefits during these challenging times and permits individuals to delay required distributions. In addition, it allows defined benefit pension plan sponsors relief for funding obligations arising during the 2020 plan year.
- Coronavirus-Related Distributions. The CARES Act allows plan sponsors to amend their retirement plans to allow certain participants to take penalty-free distributions from qualified retirement plans. If added to retirement plans, these “coronavirus-related distributions” allow participants (i) who are diagnosed with COVID-19 (or whose spouses or dependents have been diagnosed with COVID-19) or (ii) who have experienced financial hardship from quarantine, layoffs, reduced hours, or furlough between now and December 31, 2020 (“COVID Impacted Participants”) to take a distribution of up to $100,000. While the standard 10% penalty for withdrawals under age 59 1/2 (except in the event of death or disability) is waived, the distributions remain subject to income tax. However, the tax can be spread out and taken over three years. Participants are permitted to repay that distribution within three years, without regard to the annual cap on contributions, if they so choose. The provision allows participants to self-certify that they meet the criteria to obtain such a distribution and it specifically provides that, if added, this distribution right can be eliminated as of the end of 2020. Plan sponsors will generally have until the last day of the 2022 plan year to amend their plans to include these provisions. However, the decision to add this distribution option is likely to be raised to plan sponsors very soon by their recordkeepers.
- Plan Loans. The CARES Act adds two provisions related to participant loans from retirement plans. First, plan sponsors are permitted to allow for greater participant loans to COVID Impacted Participants. If adopted by a plan sponsor during the 180-day period following enactment of the CARES Act, a COVID Impacted Participant is permitted to take loans totaling up to $100,000 from his or her plan account. Typically, participant plan loans are limited to $50,000. In addition, such loans can be in an amount equal to 100% of a participant’s vested plan balance as compared with the typical requirement that a loan is not permitted to exceed 50% of a participant’s vested plan balance. Again, plan sponsors have until the last day of the 2022 plan year to incorporate these changes into their plans, but the decision to add this loan opportunity is likely to be raised by recordkeepers very soon.
Next, the CARES Act provides that, with respect to a loan to a COVID Impacted Participant, any repayments that become due after enactment and before the end of 2020 will have an extended due date that is one year following the original due date. Remaining repayments for such a loan are then to be spread across the new extended loan term. While this provision appears to be required for any existing participant loans, that conclusion will subject to the pronouncement of regulators in the coming weeks.
- Required Minimum Distributions. As occurred during the Great Recession, the CARES Act provides that no required minimum distributions from defined contribution plans or IRAs are required to be made for the 2020 calendar year.
- Defined Benefit Plan Funding Relief. The CARES Act allows sponsors of single-employer defined benefit pension plans to delay payment of minimum required contributions (including quarterly contributions) that would otherwise be due during the 2020 calendar year. The new due date for such contributions is January 1, 2021. The amount of the minimum required contribution will be increased by interest accruing between the original due date and the payment date, at the effective rate of interest for the plan for the plan year that includes the payment date. For plan years that include calendar year 2020, a plan sponsor is also permitted to elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the current percentage for purposes of determining funding status under Internal Revenue Code § 436 and ERISA § 206(g).
Provisions Impacting Health Plans
The CARES Act includes a number of provisions to expand coverage for COVID-19 diagnostic testing, accelerate the timeline for covering newly recommended COVID-19-related preventive care, allow high deductible health plans to provide first-dollar coverage of telehealth services, and allow the use of various health care spending or reimbursement accounts to purchase over-the-counter (OTC) medicines and feminine care products without a prescription.
- Mandated COVID-19 Diagnostic Testing. The recently enacted Families First Coronavirus Response Act requires most group health plans to provide full coverage (without any participant cost-sharing) for specifically approved COVID-19 testing and certain items and services furnished to a plan participant during a related health care visit (see our previous client update for more details). The CARES Act expands the list of approved forms of COVID-19 diagnostic testing that must be covered and mandates the price that group health plans must pay for the covered testing. The CARES Act requires providers of COVID-19 diagnostic tests to publicize the price of a test on the provider’s public website and establishes rates of reimbursement for testing. If a negotiated rate was in place prior to the January 31, 2020 public health emergency declared by the U.S. Department of Health and Human Services, testing must be reimbursed at that rate. If no such negotiated rate was in place before that declaration, testing must be reimbursed at the publicly listed price or at a lesser newly negotiated rate.
- Accelerated Timing for Coverage of Preventive Services for COVID-19. Building on Affordable Care Act preventive care coverage mandates, the CARES Act accelerates the timing for coverage of items, services, or immunizations (i.e., vaccines) that are intended to prevent or mitigate COVID-19. Full coverage for the recommended preventive care item or service must be in place 15 business days after a qualifying recommendation has been made by the United States Preventive Services Task Force or the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention. Group health plans normally have at least a year to implement coverage for newly recommended preventive services, so this accelerated timing will require plan administrators to regularly monitor the applicable recommendations and act quickly to respond. This requirement does not appear to apply to grandfathered group health plans that are otherwise exempt from the requirement to cover preventive services.
- Pre-deductible Coverage of Telehealth Services. Effective as of the enactment of the CARES Act, for plan years beginning on or before December 31, 2021, high deductible health plans (HDHPs) are permitted to provide pre-deductible coverage for telehealth and other remote care services without disqualifying the HDHP for health savings account (HSA) eligibility purposes. This temporary relief applies to all telehealth services, not just to services related to COVID-19 testing. Many plan sponsors and third party administrators have already taken steps to expand access to telehealth services as a means of decreasing the risk of exposure to other individuals and health care providers, including by waiving cost-sharing to participants. Plan sponsors seeking to waive copays or coinsurance or to provide pre-deductible coverage for telehealth services should consider participant notice obligations and determine whether any plan amendments are required.
- Use of Health Savings Accounts (HSAs), Health Care Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) for OTC Medical Products. In another move toward providing individualswithmoreflexibilitytouseexistingresourcestomeetCOVID-19 related needs, the CARES Act removes prior restrictions on the use of certainhealthcarespendingandreimbursementarrangementstopayforOTC medicines without a prescription. Additionally, it provides that certain feminine care products are considered tax-qualified, reimbursable medical expenses for purposes of Code § 223 (addressingHSAs) and Code § 106 (asapplicabletohealthcareFSAsandHRAs).SimilarchangesweremadewithrespecttoArcherMSAs. As a result of these changes:
- Effective as of January 1, 2020, individuals may use their HSAs to purchase OTC medical products, including medicines purchased without a prescription.
- With respect to health care FSAs and HRAs, plan sponsors may opt to extend coverage for such OTC medical products (also effective as of January 1, 2020). Unlike HSAs, Health Care FSA and HRA plans may require a plan amendment to permit that coverage. If plan sponsors choose not to expand coverage, they still should review the terms of their plans to determine if an amendment is needed to clarify that certain OTC medical products will not be covered.
- The CARES Act treats qualifying feminine care products as medical care. Accordingly, an FSA or HRA that permits reimbursement of medical care expenses will not need to be amended to permit these reimbursements.
- Privacy of Medical Records. The CARES Act contains at least two provisions that may impact group health plans’ privacy practices. Both provisions are intended to address challenges that have emerged or become more pronounced during the COVID-19 crisis, while recognizing the need to balance patient privacy concerns with health care professionals’ and other individuals’ needs to access certain information to ensure quality care coordination. The first provision addresses confidentiality rules applicable to disclosures of patient records relating to substance use disorders. The CARES Act amends the Public Health Service Act to align prior rules applicable to those patient records with the HIPAA privacy and security rules, provided the patient initially consents to disclosure of his or her records, and directs the Secretary of Health and Human Services to make corresponding revisions to existing regulations. Finally, the CARES Act contains a separate provision directing the Secretary of Health and Human Services to issue guidance on the sharing of patients’ protected health information and compliance with HIPAA administrative simplification requirements during the COVID-19 emergency period. That guidance is required to be issued no later than 180 days following the enactment of the CARES Act.
Tax-Qualified Employer Payments of Student Loans
In addition to other forms of student loan relief, the CARES Act amends the Code § 127 rules to permit employers to provide up to $5,250 in tax-qualified student loan repayment benefits to employees under a Section 127 Education Assistance Program. Payments could be made directly to a lender or to the employee. The benefit is generally subject to the other rules applicable to Education Assistance Programs, as described in Code § 127, including the requirement that there be a written plan document. Amounts provided to an employee under this new benefit will reduce the amount of any student loan interest deduction the employee otherwise would be eligible to claim.
FOR MORE INFORMATION
For more information, please contact:
M. Scott Young
Anthony P. McNamara
Beth A. Mandel
Alexis J. Kim
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