The President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020 (the “Enactment Date”). This update provides a brief overview of the CARES Act provisions that could impact certain employers’ benefit plans and the compensation practices of certain businesses that accept financial assistance, loans, loan guarantees or investments under the CARES Act.
Employee Benefit Plans
The CARES Act makes several changes that impact employee benefit plans.
Coronavirus-Related Distributions. A participant in a 401(k) plan, 403(a) plan, 403(b) plan, or governmental 457(b) plan may request an in-service “coronavirus-related distribution” (“CRD”) of up to $100,000 from the plan during 2020. CRDs also are available from IRAs.
An individual is eligible for the CRD:
- who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
- whose spouse or dependent (as defined in Section 152 of the Internal Revenue Code (the “Code”)) is diagnosed with the virus or disease; or
- who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
The administrator of the plan is permitted to rely on the participant’s certification that the conditions for the CRD are met.
The 10% early distribution penalty for individuals under age 59½ and mandatory 20% tax withholding requirement are waived. While the CRD is still a taxable distribution, it may be included in gross income ratably over three years.
Participants may recontribute the amount of the CRD to the plan or an IRA during the 3-year period following distribution without regard to Code’s contribution limits.
If is not entirely clear whether CRDs are optional or mandatory for a plan or IRA.
Plan Loan Relief. The maximum loan amount available under a defined contribution plan, including a 401(k) plan, is increased to $100,000 and 100% of the participant’s vested account balance from $50,000 or 50% of the participant’s vested account balance. The increased limits apply for plan loans made during the 180-day period following the Enactment Date.
In addition, plan loan repayments due between the Enactment Date and December 31, 2020 may be delayed for one year. This relief is available for plan loans outstanding prior to the Enactment Date. When repayments recommence, the repayment amount is to be adjusted to reflect the delay and interest that accrued during the delay period. However, the delay period is disregarded for purposes of the maximum loan period.
Waiver of 2020 Required Minimum Distribution. The required minimum distribution (“RMD”) for 2020 is waived for defined contribution plans, including 401(k) plans, and IRAs. RMDs are not waived for pension plans.
Pension Funding Relief for Single-Employer Plans. The due date for funding contributions for single-employer defined benefit pension plans otherwise due during 2020 is delayed until January 1, 2021, subject to interest due to the delay. For purposes of the plan’s adjusted funding target attainment percentage (“AFTAP”), the plan may elect to use the AFTAP for the plan year ending before January 1, 2020, for plan years which include calendar year 2020.
Health Savings Accounts for Telehealth Services. A high-deductible health plan with a health savings account (“HSA”) is permitted to cover telehealth services prior to a participant reaching the required deductible.
Over-the-Counter Medical Products without Prescription. Participants may use funds in their HSAs and flexible spending accounts for the purchase of over-the-counter medical products, including those needed in quarantine and social distancing, without a prescription from a physician.
Executive Compensation Restrictions on Businesses that Receive Relief
Under the CARES Act, the Secretary of the Treasury has the authority to make loans, loan guarantees and other investments in U.S. eligible businesses, including air carriers and other U.S. businesses not afforded adequate relief under the CARES Act, in an aggregate amount up to $500 billion. The Secretary will also provide financial assistance for the continuation of payment of employee wages, salaries and benefits to certain passenger air carriers, cargo air carriers and related contractors, in an aggregate amount of up to $32 billion. Businesses that accept loans, loan guarantees or investments under this program, and air carriers and contractors that accept financial assistance, must comply with certain covenants (such as, workforce retention requirements, prohibitions against stock buybacks and dividends), including restrictions relating to executive compensation practices.
Executive Compensation Restrictions. As a condition to receiving financial assistance, loans, loan guarantees or investments, the business must limit future payments of executive compensation and severance amounts to certain officers or employees whose total compensation exceeded certain thresholds.
Any officer or employee whose total compensation exceeded $425,000 in calendar year 2019 cannot receive:
- total compensation during any 12-month period that exceeds the officer’s or employee’s 2019 total compensation; or
- severance compensation or benefits that exceed twice the officer’s or employee’s 2019 maximum total compensation.
And, any officer or employee whose total compensation exceeded $3 million in calendar year 2019 cannot receive total compensation during any 12-month period that exceeds the sum of $3 million plus 50% of the officer’s or employee’s 2019 total compensation that exceeded $3 million.
Executive Compensation Restriction Period. For eligible businesses who receive loans or loan guarantees, the executive compensation restrictions apply once the agreement is executed and for one year after the date on which the loan or loan guarantee is no longer outstanding. For air carriers and related contractors who receive financial assistance, the executive compensation restrictions apply for a set two-year period from March 24, 2020 to March 24, 2022. For eligible businesses in which investments are made, the period during which these restrictions apply is less clear.
Considerations. The relevant compensation items described above relate to “total compensation” as described in the stimulus package. This “total compensation” concept is defined broadly in the draft stimulus package to include “salary, bonuses, awards of stock and other financial benefits.” At this time, it is unclear whether such “total compensation” will relate to actual compensation that is paid (e.g., W-2 compensation) during the relevant period or whether the concept will be broader. For instance, when the Troubled Asset Relief Program was passed in 2008, certain limits on executive compensation took into account, among other things, deferred compensation credits and accruals.
In addition, other than exceptions for compensation arrangements under existing collective bargaining agreements, the limits on executive compensation described above appear to be absolute (rather than something that can be violated and then offset by a loss of tax deduction or payment of excise tax). Therefore, it would be important for companies to understand their compensation arrangements and contractual obligations, and adjustments that would be required to comply with the executive compensation restrictions, before accepting any type of relief under the CARES Act.
The CARES Act has important implications for employers, benefit plan providers and businesses that utilize its relief programs and we expect that other considerations and issues will arise as the programs and provisions are implemented.
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