Tax Law Insights

The CARES Act, enacted on March 27, 2020, includes several provisions that change the rules for employee benefit plans, ranging from providing greater access to retirement benefits and HSA funds to offering funding relief to single-employer pension plans.

The CARES Act adds a new tax-favored withdrawal option that applies to the following types of retirement plans:  IRAs, qualified plans (e.g., profit sharing and 401(k) plans), 403(a) and (b) plans, and 457(b) governmental plans.  The withdrawal is permitted only if it is a Coronavirus-related distribution, which is defined as a distribution made (i) on/after January 1, 2020 and before December 31, 2020 (ii) to an individual:

• Who is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC,
• Whose spouse/dependent is diagnosed with SARS-CoV-2 or COVID-19 by a CDC approved test, OR
• Experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19; being unable to work due to lack of child care due to SARS-CoV-2 of COVID-19; the closing or reduction in hours of a business owned/operated by the individual due to SARS-CoV-2 or COVID-19; or other factors as determined by the Secretary of the Treasury.

The aggregate Coronavirus-related distribution received by an individual may not exceed $100,000, and it is exempt from the 10% additional tax on early distributions.  Moreover, recipients of the distribution have the option to repay the distribution during a 3-year period beginning on the day after the date the distribution is received.  The repayment can be made all at once or in multiple payments over the 3-year period.  Amounts that are repaid are treated as if they were timely rolled over in a direct rollover transaction, meaning that the distribution amount is not included in income.  Amounts that are not repaid are included in the recipient’s income, and at the recipient’s option may be spread ratably over a 3-year period beginning with the year of distribution.

The administrator of a plan may rely on an employee’s certification that the withdrawal is a Coronavirus-related distribution.  An employee benefit plan will not be treated as violating any Code requirement that otherwise applies to the plan, if a participant’s Coronavirus-related distributions exceed the $100,000 limit -- as long as no more than $100,000 was taken from plans maintained by the employer (including plans of the employer’s controlled group members).

Loans to qualified individuals (see definition of a Coronavirus-related distribution in the tax-favored withdrawal discussion above) from qualified plans and 403(a) and (b) annuity plans are expanded by the CARES Act.  For loans made during the 180-day period beginning on March 27, 2020, the maximum loan amount is increased from $50,000 to $100,000 and the maximum loan may be up to 100% of the participant’s vested benefit (an increase from 50%).  In addition, in the event a qualified individual has an outstanding loan on/after March 27, 2020, for any loan repayment that is due during the period beginning on March 27, 2020 and ending on December 31, 2020, the due date is extended by one year and subsequent repayments will be adjusted to reflect that delay and the interest that accrued during the delay.  The period beginning on March 27, 2020 and ending on December 31, 2020 will be disregarded for purposes of determining the otherwise applicable 5-year loan repayment period and the level amortization requirement.

The CARES Act also includes a temporary waiver of required minimum distributions from defined contribution plans (stock bonus, pension, profit sharing, 403(a) and (b) annuity plans, and governmental 457(b) plans) and IRAs.  The waiver  applies to minimum distributions that would otherwise be required to be made for the 2020 tax year.  While the withdrawal and loan provisions are designed to increase access to funds, the RMD waiver means that retirees will not have to cash out retirement funds at a time when the financial markets are down.

These above provisions are not mandatory.  An employer that wants to add any or all of them to their plan will have to amend the plan.  The deadline for adopting the amendment is the last day of the first plan year that begins on/after January 1, 2022 (January 1, 2024 for governmental plans).

Funding relief is provided to single-employer defined benefit plans in the form of a delay in certain minimum required contributions.  In the case of a minimum required contribution that would otherwise be due during the 2020 calendar year (including quarterly contributions), the due date is delayed to January 1, 2021 and the amount of each minimum required contribution must be increased by the interest accruing between the original due date and the payment date.  In addition, the CARES Act allows a plan sponsor to elect to treat the plan’s AFTAP for the last plan year ending before January 1, 2020 as the AFTAP for the plan year that includes 2020.

Finally, the CARES Act contains a couple of provisions directed at health plan benefits.  First, it provides that a plan will not fail to be treated as a HDHP by reason of failing to have a deductible for telehealth and other remote care services.  This is effective on March 27, 2020.  Second, it expands the definition of medical care for HSAs, Archer MSAs, health FSAs and HRAs to include all over-the-counter drugs as well as menstrual care products, effective for distributions/reimbursements after December 31, 2019.

We will continue to monitor the ever-changing legal landscape as well as agency guidance on implementation of the CARES Act and other recently enacted federal legislation.  Please contact Burr if you need assistance with any of these changes.