This advisory summarizes key provisions in the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") applying to employee benefit plans. We provide a summary of key items and more detailed FAQs relating to retirement plans, health and welfare plans, tax credits for employers retaining employees, and consequences of employer payments towards certain employee student loans. Please contact your DWT employee benefits attorney for more information.
Yes, the CARES Act expands the distributions and loans that can be made available by a retirement plan for participants affected by coronavirus and the economic dislocation it has caused. This relief is optional and is similar to that previously provided for hurricane and wildfire disasters but is not limited to a particular geographic area.
During 2020, a plan may allow a participant to take a distribution, without the standard 10 percent early distribution penalty tax, of up to $100,000. (The provision is retroactive to January 1, 2020, so this may shelter participants who previously took hardship withdrawals from the 10 percent penalty.) To qualify, the participant (or spouse or dependent) must have been diagnosed with the illness, or have experienced adverse financial consequences as a result of a quarantine, furlough, layoff, reduction in hours, or inability to work due to lack of child care due to the virus. The owner of a business can also qualify if the business has had to close or reduce hours. The CARES Act provides that the plan can rely on the participant's certification that he or she meets these conditions. Taxation of the withdrawal can be spread over three years, and the amounts distributed can also be repaid within three years and treated like a rollover into the plan.
A plan can also offer loans to the same class of individuals. During the 180 days after enactment, instead of the normal limit of the lesser of $50,000 or half of the participant's vested accounts, the plan can offer loans up to the lesser of $100,000 or the full vested balance. The term of these loans and any existing loans to such participants that are outstanding can also be extended; any installment due from enactment until December 31, 2020, can be extended by one year, and subsequent payments are also pushed back. While interest will accrue, the delay is disregarded for purposes of the five-year limit on the term of plan loans.
Yes, but the relief is temporary only.
As background, employer-provided qualified defined contribution plans (401(k), profit sharing, money purchase, and target benefit plans), 403(b) plans, governmental 457(b) plans, as well as IRAs, are subject to minimum distribution rules that require distributions to commence by a required beginning date ("RBD").
Prior to the SECURE Act, the RBD was April 1 of the year following the later of attainment of age 70½ or retirement (except for a 5 percent owner in an employer-provided plan or for an IRA, the RBD date was April 1 of the year following age 70½). Where a spouse was a beneficiary, the spouse had the option of delaying the distribution to the RBD of the decedent, calculated as if the decedent had survived to his or her RBD. Death distributions not paid as an annuity had to be distributed within five years of the employee's death.
Under the SECURE Act, for distributions required to be made after December 31, 2019, the RBD was changed from age 70½ to age 72. Thus distributions were already delayed for those who turned age 70½ or died after 2019.
The CARES Act delays any distributions required to be made by defined contribution plans and IRAs in 2020 for an additional year. Specifically, the CARES Act states that a RBD need not occur in 2020. Thus, if the RBD for a distribution is in 2020 (for someone who turned age 70½ in 2019), that date is now delayed to 2021. Also, 2020 is ignored for death distributions, extending the five-year period. Finally, for those currently required to take required minimum distributions, no distribution is required to be made for 2020. It is currently unclear whether delayed distribution will be required to be made up in 2021 by taking two distributions in that year.
Yes, under Section 2301 of the Act eligible employers are entitled to a tax credit against applicable employment taxes (generally the employer's portion of Social Security taxes) with respect to 50 percent of qualified wages paid during 2020. The full scope of the provision hinges on a number of sometimes convoluted defined terms.
An "eligible employer" includes and entity conducting business (1) whose operations were fully or partially suspended due to governmental orders limiting commerce, travel, or group meetings due to COVID-19; or (2) whose gross receipts during a calendar quarter declined by more than 50 percent when compared to the same quarter in the prior year (in this case status as an "eligible employer" continues until the calendar quarter in which gross receipts increase to 80 percent or more when compared to the prior year's same quarter).
The "qualified wages" prong has two variations, one for employers with more than 100 full-time employees, another for employers with 100 or fewer full-time employees. (Note that for these purposes the determination of the average number of full-time employees follows the same analysis used for compliance with the Affordable Care Act—see Internal Revenue Code Section 4980H.) For the employers with over 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For employers with 100 or fewer full-time employees, qualified wages include all employee wages paid while the employer is experiencing the COVID-19 related circumstances described above (whether the employer is operating or not). Qualified wages also includes qualified health plan expenses, including expenses for maintaining a group health plan, to the extent the expense can be allocated to other qualified wages. What this seems to mean is that health plan expenses eligible for the tax credit are to be pro-rated and limited to the expenses incurred during the same period of time that other payments to employees constitute qualified wages. (The law anticipates that regulations may be needed to clarify this pro ration process.)
Yes. Section 2302 of the Act permits employers to delay payment of the employer's portion of Social Security taxes (referred to "applicable employment taxes") until the "applicable date." Effectively, an employer can delay depositing 50 percent of the taxes owed until December 31, 2021, and the other 50 percent until December 31, 2022. This deferral opportunity applies during the "payroll tax deferral period," which begins on the date of the enactment of the CARES Act and ends before January 1, 2021.
Under the CARES Act, an employer may make one or more payments on a qualified education loan incurred by the employee for his or her education, subject to an annual cap of $5,250, before January 1, 2021, and such payments (whether directly to the lender or to the employee) will be nontaxable to the employee. When applying the annual $5,250 cap, the employer must also take into account other education assistance (such as tuition, fees and books) that the employer is already providing to the employee under current law in addition to the student loan payment(s).
For this purpose, a "qualified education loan" means indebtedness incurred by the employee solely to pay qualified higher education expenses which (i) are incurred on behalf of the employee as of the time the indebtedness was incurred, (ii) are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and (iii) are attributable to education furnished while the employee was an eligible student. (Note this term also includes indebtedness used to refinance qualified education loan indebtedness.)
"Qualified higher education expenses" are the costs of attending an eligible educational institution (i.e., a public, nonprofit or privately owned for-profit school offering higher education beyond high school, including any institution with an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital or a health care facility which offers post-graduate training). And, an "eligible student" is one who meets the requirements of Section 484(a)(1) of the Higher Education Act of 1965 and is carrying at least half the normal full-time workload for the course of study the student is pursuing. Given the detailed nature of these definitions, please take care in analyzing whether an employee's loan meets the requirements of a "qualified education loan" so that the employer-paid loan payment will be nontaxable.
On a related note, the CARES Act also suspends repayments on federal student loans for six months and provides that interest accrued during that time will be waived. For credit reporting purposes, any suspended repayment will be treated as if it had been timely paid by the borrower.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.