Each year, retirement plans’ fiduciaries have a lot of responsibilities as they prepare for year-end. This year, fiduciaries and plan sponsors have a few extra “to do’s” on their list, with the passage of the CARES and SECURE Acts within the past year. Join Summer Conley, partner at Faegre Drinker, and Bonnie Treichel, co-founder and COO of ZUNA, on Thursday, October 22, 2020, at 1:00 p.m. ET for an actionable audiocast that will cover the tasks that are most critical to preparing for a successful year-end and start to 2021.
On June 23, 2020, the Department of Labor, Department of Health and Human Services (HHS), and Department of the Treasury (the Departments) issued new frequently asked questions (FAQs) regarding coverage for COVID-19 testing under the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The FFCRA and the CARES Act generally require employer health plans to provide coverage for COVID-19 testing without imposing any cost sharing (including deductibles, copayments and coinsurance), prior authorization or certain other medical management requirements. Prior FAQs were issued on April 11, 2020 (FAQs Part 42).
The June 23, 2020, FAQs provide additional guidance on health coverage issues for sponsors of group health plans during the COVID-19 pandemic, and are particularly relevant for employers considering return-to-work policies.
On June 19, 2020, the Internal Revenue Service (IRS) issued Notice 2020-50 (the Notice) to provide guidance on coronavirus-related distributions, increased plan loan limits, and deferment of plan loan repayments allowed pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Notice provides further guidance for retirement plan sponsors on implementing changes under the CARES Act provision, and supplements prior IRS guidance issued in the form of FAQs, as discussed in a prior post.
Key elements of the Notice include:
An Expanded Definition of “Qualified Individual”
Under the CARES Act, coronavirus-related distributions, the increased plan loan limits, and the deferral of plan loan repayments are available only to “qualified individuals.” A “qualified individual” is someone who has been diagnosed with the virus SARS-CoV-2 or the coronavirus disease 2019 (each referred to herein as “COVID-19”); whose spouse or dependent has been diagnosed with COVID-19; or who experiences adverse financial consequences stemming from COVID-19 as a result of being quarantined, furloughed, laid off, having reduced work hours, being unable to work due to lack of child care, the closing or reduction of hours of a business owned or operated by the individual, or other factors as determined by the Department of the Treasury.
In the Notice, the IRS exercises this authority and expands the definition of “qualified individual” to include an individual who experiences adverse financial consequences as a result of one or more of the following:
- Having a reduction in pay (or self-employment income) due to COVID-19
- Having a job offer rescinded or a start date for a job delayed due to COVID-19
- The individual’s spouse or member of the individual’s household being (1) quarantined, furloughed, laid off, or having work hours reduced due to COVID-19; (2) being unable to work due to lack of childcare due to COVID-19; (3) having a reduction in pay (or self-employment income) due to COVID-19; or (4) having a job offer rescinded or start date for a job delayed due to COVID-19
- The closure or reduction of hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.
A “member of the individual’s household” means someone who shares the individual’s principal residence.
NOTE: This broadens the already expansive definition of qualified individual, and allows a greater number of plan participants to benefit from the favorable tax treatment of a coronavirus-related distribution (discussed in more detail in our earlier alert).
Clarification of Rules Allowing Reliance on Self-Certification of “Qualified Individual” Status
The Notice also resolves an open issue about whether a plan administrator may rely on an individual’s self-certification that he or she is a “qualified individual” for purposes of the expanded plan loan provisions. The CARES Act and earlier FAQ guidance allowed plan administrators to rely on self-certification, but only for coronavirus-related distributions. The Notice makes it clear that plan administrators may rely on self-certification for purposes of the plan loan changes as well. In both instances, reliance on an individual’s self-certification is permitted if the administrator does not have actual knowledge that is contrary to that certification. For purposes of this standard, a plan administrator is not obligated to inquire into whether the individual has satisfied the conditions to be a “qualified individual.” The Notice also includes a sample certification.
Clarification that CARES Act Changes Are Optional
The Notice clarifies that retirement plan sponsors are not required to allow coronavirus-related distributions, increase the plan loan limits, or suspend plan loan repayments. These changes are optional, and plan administrators may develop any reasonable procedures for identifying which distributions are treated as coronavirus-related distributions under its retirement plans, provided the plan is consistent in its treatment of similar distributions.
Regardless of whether a plan is amended to allow coronavirus-related distributions, a qualified individual may obtain favorable tax treatment by treating a distribution that would otherwise satisfy the CARES Act requirements as a coronavirus-related distribution on his or her federal income tax return.
A Safe Harbor for Administration of Suspended Loan Payments
The CARES Act includes a rule under which the due date for repayments on a qualified individual’s outstanding plan loan that would otherwise be due during the period beginning March 27, 2020, and ending on December 31, 2020, may be delayed for one year. Subsequent loan repayments are required to be adjusted to reflect the delay and any interest accruing during the delay, and the period of the delay is disregarded in determining the five-year maximum repayment period.
Prior to the Notice, there were a number of open questions related to administration of this provision and re-amortization of repayments otherwise due during the suspension period. The Notice establishes a safe harbor that is available when a qualified individual’s obligation to repay a plan loan is suspended for any period beginning March 27, 2020, and ending not later than December 31, 2020 (the “suspension period”), provided: (1) the loan repayments resume after the end of the suspension period; (2) interest accruing during the suspension period is added to the remaining principal of the loan; and (3) the loan is re-amortized and repaid in substantially level installments over the remaining period of the loan (which may be extended by up to one year from the date the loan was originally due to be repaid). If a plan administrator satisfies the safe harbor, the plan is treated as complying with the applicable requirements of section 72(p) of the Internal Revenue Code of 1984, as amended (the Code). Compliance with the safe harbor is not required, however, and the Notice acknowledges that there may be other, reasonable ways to administer this provision in the CARES Act.
NOTE: This safe harbor for re-amortization of suspended repayments is substantially similar to the relief the IRS provided following Hurricane Katrina and the similar loan rules established in the Katrina Emergency Tax Relief Act of 2005. This guidance is welcome relief for plans and administrators who hoped the IRS guidance would align with past administrative practices.
In addition to the changes listed above, the Notice provides guidance on a number of other aspects of coronavirus-related distributions, including: tax reporting by plans and individuals; the types of distributions that can and cannot be designated as a coronavirus-related distribution; the types of distributions that may be recontributed to a retirement plan or IRA; accepting recontributions; special tax notice and mandatory/optional withholding requirements; and the $100,000 total distribution limit.
Along with the guidance on the CARES Act, the Notice also briefly addresses nonqualified deferred compensation plans. The Notice permits the cancellation of a service provider’s deferral election under such a plan when the service provider receives a distribution from a retirement plan that constitutes a coronavirus-related distribution by deeming such a distribution a hardship distribution for purposes of existing regulations under Code section 409A. Note that it is required that the deferral election be cancelled; it cannot be delayed.
Please contact your Faegre Drinker attorney with questions and/or to request more detailed information about implementing these CARES Act changes and the impact of the Notice.
To address growing concerns over an increase in ERISA litigation claims related to the COVID-19 pandemic, Faegre Drinker’s ERISA litigation team developed the “Preventing an ERISA Litigation Outbreak After COVID-19” alert series to help clients navigate the fiduciary and plan liability issues associated with COVID-19. Part Two of our series examines the potential for fraudulent 401(k) distributions as an unexpected result of the Coronavirus Aid, Relief and Security Act (CARES Act), and highlights steps plan sponsors and recordkeepers can take to mitigate the risk of these cybercrimes.
View Part One of this series, which provides guidance to assist ESOP fiduciaries in carrying out their duties during the pandemic.
On May 12, 2020, the Internal Revenue Service (IRS) issued Notice 2020-29 (the Notice), an important piece of guidance for employers that sponsor health & welfare plans.
The Notice provides much-needed flexibility for employers who are dealing with unexpected requests and circumstances as a result of the 2019-nCoV (COVID-19) pandemic. As discussed below, the Notice permits – but does not require – cafeteria plans to provide additional opportunities for mid-year election changes for health coverage, health flexible spending account (health FSA) coverage and dependent care FSA (dependent care FSA) coverage. It also permits plans to extend the claims periods for health FSA and dependent care FSA expense reimbursement, and it clarifies earlier guidance regarding coverage of telehealth and COVID-19-related items under a high deductible health plan (HDHP).
As described in our May 1 blog post, the Department of Labor (DOL) and the Internal Revenue Service (IRS) recently issued guidance (the “Extension Guidance”) providing relief to benefit plan sponsors and participants for complying with certain deadline and notice requirements under ERISA and the Internal Revenue Code (“Code”). One piece of the Extension Guidance, EBSA Disaster Relief Notice 2020-01 (the “Notice”) focuses specifically on ERISA retirement plan obligations, including ERISA-required notices, ERISA rules for retirement plan loans, and ERISA timing requirements for remitting participant contributions to retirement plan trusts. This alert describes in more detail the relief in the Notice and implications for plan sponsors.
For the full alert, visit the Faegre Drinker website.
As the COVID-19 pandemic continues, our clients are dealing with rapidly evolving compliance issues with respect to health and welfare benefit plans and the implementation of existing and new regulatory requirements. Below is a chart providing links to guidance issued by various government agencies with respect to health and welfare plan issues related to COVID-19. This chart is current as of May 12, 2020. There are a number of questions and issues outstanding, and we expect further guidance. Please contact your Faegre Drinker attorney with questions and/or updates regarding this guidance.
On March 27, Congress enacted the Coronavirus Aid, Relief and Economic Security (CARES) Act, a massive stimulus package in response to the global coronavirus pandemic. Section 2202 of the CARES Act provides certain individuals who are affected by the pandemic – referred to as “qualified individuals” – with special distribution options from 401(k), 403(b) and governmental 457(b) plans and IRAs, and expands permissible retirement plan loans.
On Monday, May 4, the Internal Revenue Service published answers to commonly asked questions regarding section 2202.
On April 28, 2020, the U.S. Department of Labor (DOL) and the Internal Revenue Service issued a new final rule and additional guidance that together extend numerous deadlines under ERISA and the Internal Revenue Code (Code) that apply to group health plans, retirement plans, and participants in those plans (Extension Guidance). The extensions, which are being enacted in response to the COVID-19 pandemic and pursuant to the authority granted to the DOL by the CARES Act, promise to have a significant impact on employers’ administration of various benefit plan requirements, such as administration of benefit plan claims and appeals, COBRA continuation coverage and mid-year special enrollment in group health plan coverage.
In addition to raising a host of regulatory issues for employee benefit plans, including compliance with the Coronavirus Aid, Relief and Economic Security (CARES) Act, the COVID-19 pandemic is likely to cause a sharp rise in ERISA litigation in the coming months. Faegre Drinker’s ERISA litigation team will be issuing a series of alerts designed to help clients navigate the fiduciary and plan liability issues associated with COVID-19. Part One of our series provides helpful guidance for ESOP fiduciaries carrying out their duties during this uncertain time.