CARES Act Key Employee Benefit Plan Provisions

April 14, 2020Insight
COVID-19 Business Strategies Hub

CARES Act Key Employee Benefit Plan Provisions

On Friday, March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, ( CARES Act or Act), a $2 trillion stimulus bill the House passed by voice vote earlier the same day and the Senate passed on Wednesday, March 25, by a vote of 96-0. 

The CARES Act is the largest economic relief package in the history of the United States.  It provides numerous forms of relief to individuals and businesses, including direct financial assistance, special loan programs, payroll tax credits, payroll tax deferrals, numerous health care industry provisions, and significantly expanded unemployment benefits.

Not to be overlooked, the CARES Act also includes several provisions that affect employee benefit plans and executive compensation, as summarized below.

Qualified Retirement Plans

  • Coronavirus-Related Distributions and Loan Relief (Section 2202)

Coronavirus-Related Distributions

The Act allows qualified plans to make coronavirus-related distributions of up to $100,000 on or after Jan. 1, 2020 and before Dec. 31, 2020.  Plans can make coronavirus-related distributions to participants who do not otherwise have distributable events, and participants will not be subject to a 10 percent early withdrawal penalty, provided such participants either (1) are diagnosed with SARS or COVID-19 by a CDC-approved test, (2) have a spouse or dependent who is so diagnosed, or (3) have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having reduced hours because of being unable to work due to a lack of child care due to the COVID-19 emergency.  Plan sponsors are permitted to rely on a participant’s certification that these conditions are satisfied.

For determining the $100,000 limit, all plans maintained by the employer (and the employer’s controlled group) are aggregated.

Notably, a participant receiving a coronavirus-related distribution may opt to repay the distribution over a three-year period (either in one or in a series of payments).  Such repayments would not count towards the annual limits on plan contributions, and they can be made to any plan under which the individual is eligible to make a rollover contribution.  Further, a participant may opt to spread the income tax on the distribution over a three-year period.

A coronavirus-related distribution will not be treated as an eligible rollover distribution, so the rollover notice and mandatory withholding requirements do not apply.

Loan Relief

Participant loans from qualified plans are limited to the lesser of 50 percent of a participant’s vested account balance or $50,000.  The Act increases this limit to $100,000 for any loan to a qualified individual during the 180-day period beginning on the date of the Act’s enactment.  A qualified individual is anyone who would satisfy the criteria described above for receiving a coronavirus-related distribution.

The Act also delays by one year the repayment due date for any loan of a qualified individual that is outstanding any time between the date of the Act’s enactment and Dec. 31, 2020.  The one-year delay does not shorten the five-year maximum repayment period.


Plans are not required to permit coronavirus-related distributions or loan relief.  Those that do will require an amendment no earlier than by Dec. 31, 2022 (2024 for governmental plans).  The IRS could possibly extend the amendment deadline beyond this time.

  • RMD Waiver (Section 2203) – Qualified plans are subject to required minimum distribution (RMD) rules designed to prevent indefinite deferral of tax on retirement contributions and earnings.  The RMD rules require distributions begin no later than a participant’s required beginning date (RBD), which is generally April 1 of the year following the year in which the participant attains age 70.5.  Due to recent changes made by the SECURE Act, if a participant did not attain age 70.5 by Dec. 31, 2019, then that participant’s RBD is determined by the year in which they attain age 72.

Dramatic volatility in financial markets, such as that caused by the COVID-19 emergency, is particularly harmful to participants subject to RMDs (e.g., 2020 RMDs would otherwise be based on account values as of Dec. 31, 2019).  Accordingly, the Act allows 2020 RMDs to be waived for defined contribution plans (i.e., similar to the 2009 RMD waiver allowed by WRERA in response to the 2008 financial crisis).

The 2020 RMD waiver applies both to participants with RBDs before 2020 and in 2020.  For participants with RBDs in 2020, the waiver applies both to the 2019 RMD otherwise due by April 1, 2020 (if not already paid) and the 2020 RMD otherwise due by Dec. 31, 2020.

Now, when a participant dies before his or her RBD, the RMD rules provide that a distribution of his or her entire plan account must be made under either the 5-year rule or the life expectancy rule.  The plan document generally determines which of these two rules applies (or whether a beneficiary may elect between the two).  Under the 5-year rule, the entire interest must be distributed by Dec. 31 of the year that contains the fifth anniversary of the participant’s death.  The Act provides that the 5-year rule will apply without regard to calendar year 2020.

As with the 2009 RMD waiver under WRERA, the Act provides that if a 2020 RMD is made notwithstanding the waiver, the distribution is generally not treated as an eligible rollover distribution.

  • ​​​​​​​DB Plan Funding Relief (Section 3608) – The Act extends to Jan. 1, 2021, the due date for any minimum required contribution otherwise due in 2020 under Code Section 430(j).   Accordingly, sponsors of calendar year single-employer defined benefit plans now have until Jan. 1, 2021 instead of Sept. 15, 2020 to make a required contribution for the 2019 plan year. 

With respect to certain underfunded plans, Code Section 430(j)(3) requires accelerated quarterly contributions.  A plan subject to this requirement would otherwise have three quarterly installments due during the 2020 calendar year (i.e., on April 15, July 15, and October 15).  These quarterly installments are now due on Jan. 1, 2021.  The fourth quarterly installment would still be due on Jan. 15, 2021.

The Act also provides that a sponsor of a single-employer defined benefit plan may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before Jan. 1, 2020, as the AFTAP for plan years which include calendar year 2020.  Financial market volatility due to the COVID-19 emergency will negatively affect most plans’ funded percentage.  By being able to use pre-2020 AFTAPs for plan years that include calendar year 2020, plans may avoid certain funding-based limits on benefits that would otherwise apply under Code Section 436. 

Health Plans

  • Coverage of COVID-19 Diagnostic Testing (Section 3201) – The Families First Coronavirus Response Act (signed into law on March 18, 2020) provides that group health plans and health insurance issuers must cover without cost-sharing FDA-approved diagnostic tests for COVID-19. 

The Act expands this requirement and provides that health plans must cover without cost-sharing any COVID-19 diagnostic test (1) the developer of which has requested or intends to request emergency use authorization from the FDA, (2) developed in or authorized by a state, or (3) deemed appropriate by HHS.

  • Telehealth Services and HSA-Eligibility (Section 3701) – To be eligible to make or receive contributions to an HSA, an individual must be enrolled in a high-deductible health plan (HDHP) and have no other impermissible type of coverage.  Access to telehealth services without regard to the HDHP-minimum deductible may cause the individual to be ineligible to make or receive HSA contributions (although the IRS has not formally addressed this issue).

As one of a number of measures to expand telehealth and other remote care service in light of the COVID-19 emergency, the Act provides, for any plan year beginning on or before Dec. 31, 2021, HDHPs may provide or cover telehealth services before the statutory minimum deductible has been met without affecting HSA-eligibility.

  • Health Spending Accounts and OTC Menstrual Care Products (Section 3702) – Certain changes under the ACA provided that over-the-counter drugs and products without a prescription are generally not considered to be qualified medical expenses for HSAs, Health Flexible Spending Accounts, Health Reimbursement Accounts, and Archer Medical Savings Accounts.  The Act provides that, effective after Dec. 31, 2019, individuals may use these types of health spending accounts for over-the-counter menstrual care drugs and products without a prescription. 

  • HIPAA Privacy Rule (Section 3224) – The Act directs HHS to issue guidance within 180 days regarding the sharing of protected health information and compliance with regulations under the HIPAA Privacy Rule during the COVID-19 emergency.  It is worth noting that HHS issued a bulletin in February regarding the HIPAA Privacy Rule and the COVID-19 emergency.

Executive Compensation (Section 4004) – Among its other relief provisions, the Act appropriates $500 billion to the Treasury Department to provide liquidity (i.e., in the form of loans, loan guarantees, and other investments) to businesses in the airline industry and to any U.S. business that has not otherwise received adequate relief under the Act.  Businesses that receive this assistance will be subject to certain terms and conditions, such as restrictions on stock repurchases (including parent company stock) and paying dividends.

In addition, the Act imposes limits on the compensation such businesses may pay. Officers and employees who received total compensation in 2019 of more than $425,000 may not (1) be paid more than their 2019 total compensation for any 12-month period or (2) receive severance pay exceeding two times their 2019 total compensation.  In addition, officers and employees who received total compensation in 2019 of more than $3 million may not receive total compensation for any 12-month period in excess of $3 million plus 50 percent of the excess over $3 million the officer or employee received in 2019.  Thus, for example, if an officer received total compensation in 2019 of $5 million, then that officer may not receive more than $4 million during any 12-month period.

These compensation limits would remain in effect until one year after the loan or loan guarantee is no longer outstanding.

For purposes of these compensation limits, total compensation is defined to include salary, bonuses, awards of stock, and other financial benefits.

For specific information on how these guidelines and changes may impact your business, contact your Dinsmore attorney.