CARES Act Effect on Benefits Plans (2020)

Posted on October 15, 2020

Originally published in October 2020

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

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On March 13, 2020, President Trump declared a national emergency related to COVID-19. Under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, a national emergency related to COVID-19 pandemic existed in the United States beginning March 1, 2020.

The CORONAVIRUS, AID, RELIEF AND ECONOMIC SECURITY ACT (“CARES ACT”), was signed into law on March 27, 2020.

Employers need to consider how the “new normal” impacts their benefit plans. This is on top of very volatile financial markets. “New normal” brought in an Outbreak Period tolling period. The IRS and the Employee Benefit Security Administration (EBSA) requires plans to disregard specified time limits in imposing deadlines on the participants. The Outbreak Period starts on March 1, 2020 and ends 60 days after the end of the National Emergency or the date announced by the agencies in a future notice.

COVID-19 Distributions (“CRD”) are allowed up to $100,000 for employees who are already affected by COVID-19. The distributions may be repaid over 3 years with income tax liability also spread over 3 years. Neither 10% early distribution penalty nor the mandatory 20% withholding apply to CRD. The participants may “self-certify” that they are eligible for CRD distribution. The plan sponsor may adopt this option for their plan.

Participant’s Loans. The limit on new participant loans has increased from $50,000 to $100,000 with corresponding increase of the percentage of the account balance available for a loan from 50% to 100%. The loan repayments on the existing outstanding loans may be extended up to 1 year. The plan sponsors may adopt this option.

Amendments. Plans can be amended by December 31, 2022 to reflect changes in operations pursuant to CARES Act provisions.

Tips related to Plan Administration in light of COVID-19 and most recent IRS and DOL announcements related to COVID-19 pandemic:

Changes to the plan will need to be communicated to participants through notices. On May 21, 2020 the Department of Labor issued final regulations on electronic disclosures, providing new notice and access safe harbor rule.
If plans require notarized spousal consents for distributions and beneficiary changes, the IRS issued Notice 2020-42 on June 3, 2020 authorizing remote notarization.
If the plan sponsor considered black-out periods, they need to weigh volatility of the markets and additional notices to participants
The plan sponsors need to be familiar how the term “compensation” is defined in their plans. This may impact payments received by the employees under paid leave federal and state legislation.
Unless the payment of the benefits is annuitized, RMD for 2020 are waived. The plan sponsors may consider whether to amend their plans to allow participants to forgo RMDs in 2020. On May 4, 2020, the IRS issued 14FAQs on Section 2202 of the CARES Act whereby it provided, among other things, for special roll-over rules with regard to CRD and an additional year to make certain repayments of plan loans. Until further guidance, the IRS will follow Notice 2005-92 issued to address Hurricane Katrina disaster relief.

IRS and DOL extended the filing deadline for specific time-sensitive actions, including, but not limited, to filing Forms 5500 as well as other employer tax returns in Notice 2020-23 and notice 2020-35. (Notice 2020-23 provides that specified time-sensitive actions due to be performed during the time period between April 1, 2020 and July 15, 2020 are automatically extended until July 15, 2020.

IRS announced in Notice 2020-23 that specific relief is provided to participants. Such relief includes (i) requests to suspend loan payments until July 15, 2020, (ii) requests to complete rollover contributions after the 60-day deadline, (ii) IRA contributions can be accepted through July 15, 2020 even though they were designed for 2019 plan year; and (iv) cafeteria plan extensions for non-calendar year plans.

The initial remedial amendment period for pre-approved and individually designed 403(b) plan documents was extended from March 31, 2020 until June 30, 2020. ”The IRS is extending the following deadlines to July 31, 2020:

the April 30, 2020, deadline for employers to adopt a pre-approved defined benefit plan and to submit a determination letter application (if eligible) under the second six-year remedial amendment cycle, and
the April 30, 2020, end of the second six-year remedial amendment cycle for pre-approved defined benefit plans, as set forth in Announcement 2018-05.

The third six-year remedial amendment cycle for pre-approved defined benefit plans now will begin on August 1, 2020 (and will still end on January 31, 2025). The on-cycle submission period for pre-approved defined benefit plan providers to submit opinion letter applications for the third six-year remedial amendment cycle will still begin on August 1, 2020, and end on July 31, 2021.

EBSA Disaster Relief Notice 2020-01 issued by the DOL on April 28, 2020, grants delays and other relief to health and retirement plans related to:

Notices, disclosures, and documents due under ERISA Title I during the national emergency;
Failures to follow verification procedures for plan loans and distributions;
Loans provided pursuant to the CARES Act;
Deadline for adopting loans and distributions permitted by the CARES Act;
Forwarding repayments of participant loans to a plan;
Blackout notices; and
Form 5500 and Form M-1 filings.

Author: Nadia A. Havard

Originally published in October 2020