COVID-19

House Passes Bill to Expand Paycheck Protection Program

The U.S. House of Representatives passed by a 417-1 margin on Thursday, May 28, the Paycheck Protection Program Flexibility Act of 2020. This legislation would modify certain core terms of this Small Business Administration (SBA) emergency lending program. The Paycheck Protection Program (PPP) was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020. Under the program, qualifying small businesses may apply for loans from the SBA to retain employees on their payrolls, and—especially attractive to business owners—the loans are forgiven if certain conditions are met.

As provided in the CARES Act, PPP loans taken to cover 8 weeks of program-eligible expenses can be forgiven (no repayment required). Although mortgage, rent, and other business expenses are included, to be eligible for forgiveness, 75 percent of a loan amount must—under current rules—be used for employee payroll expenses. Certain employee benefits, including defined contribution and defined benefit plan employer contributions, health insurance benefits (including premium payments), and certain employee leave benefits can be considered payroll expenses.

Today’s House-passed legislation would extend the 8-week period to 24 weeks, and would change the 75 percent payroll requirement to 60 percent.

The legislation would also relax certain loan forgiveness provisions in recognition that an employer may be unable to rehire some former employees or to find similarly qualified employees. Loan amounts not forgiven could be repaid over a period of 5 years instead of 2 years as under current rules.

Members of the U.S. Senate have been discussing a similar bill, one said to expand the 8-week period to 16, not 24 weeks. If the Senate is unable to pass its version of PPP revisions this week, which seems likely, its bill could be taken up when the Senate returns to Washington, D.C., next week.


House Passes More Pandemic Aid; Quick Senate Action Not Expected

The House of Representatives late Friday passed H.R. 6800, the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, providing additional aid to many who are adversely affected by the novel coronavirus (COVID-19) pandemic. The bill also contained non-COVID-19-related provisions considered likely to prove controversial in the Senate.

Unlike the Families First Coronavirus Response Act, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act—both of which moved fairly rapidly through Congress—the HEROES Act has been called “dead on arrival” by Senate Majority Leader Mitch McConnell (R-KY), who—with Republican colleagues—envisions a much less comprehensive bill. Sen. McConnell has also expressed a desire to move slowly and gauge the effectiveness of earlier relief. Most expect no additional COVID-19-related legislation to be enacted before sometime in June.

As announced last week, the House bill contains provisions for the following.

  • Continued financial assistance to unemployed workers
  • Financial assistance to state, local, tribal, and territorial government entities
  • Waiver of 2019 required minimum distributions (RMDs)
  • Waiver of the 60-day and one-rollover-per-12-month rules for otherwise-required RMDs waived for 2019 and 2020
  • Amendments to the Emergency Family and Medical Leave Expansion Act
  • Relief for participants in health flexible spending arrangements (FSAs)
  • Codifying the ability of employers to deduct certain expenses covered by loans that are forgiven under the SBA Paycheck Protection Program
  • Providing money purchase pension plans the early distribution and loan relief that the CARES Act provided to other qualified retirement plans
  • A new retirement “composite plan,” with features that include those of 401(k) and defined benefit (DB) pension plan
  • Relief for multiemployer (collectively-bargained) DB pension plans
  • Amortization relief for single employer DB pension plans
  • Further funding relief (beyond that provided by the SECURE Act) to certain community newspaper DB plans
  • Aid to certain federal agencies affected by the pandemic, including the Departments of Homeland Security, Interior, Health and Human Services, Labor, Transportation, Housing and Urban Development, and Education
  • Enhanced Medicare and Medicaid benefits
  • Medical supply chain enhancement
  • Testing and reporting enhancement
  • National strategic stockpile for pandemic response
  • Bankruptcy protections for homeowners
  • Certain student loan relief and protections
  • Additional aid to veterans during the COVID-19 pandemic
  • Federal election early and by-mail voting procedure

Washington Pulse: New COVID-19 Relief for Employee Welfare Benefit Plans

During the last few months, the Department of Labor (DOL), Treasury Department, and Department of Health and Human Services (DHHS) have jointly issued multiple pieces of guidance intended to provide much needed relief to those suffering economic hardships from the coronavirus (COVID-19) pandemic. In this article, we’ll explain how the most recent relief affects employee welfare benefit plans.

 

Overview of New Relief

To help overcome the financial hardships facing millions of Americans, the DOL and the Treasury Department published a final rule on May 4, 2020. The final rule extends and suspends various employee welfare benefit plan and COBRA deadlines that fall between March 1, 2020, and the end of a 60-day period following the close of the COVID-19 National Emergency (known as the Outbreak Period), which has yet to be announced.

The DOL and Treasury Department also worked with the DHHS to create EBSA Disaster Relief Notice 2020-01. This guidance extends deadlines for providing notices, disclosures, and documents that are due to plan participants and beneficiaries between March 1, 2020, and the end of the Outbreak Period. The relief applies to plan fiduciaries that act in good faith to provide this information as soon as administratively practicable. The EBSA notice also confirms that Form 5500 filing deadlines that occur between April 1, 2020, and July 14, 2020, must now be filed by July 15, 2020 (calendar-year plans are not affected).

On May 12, 2020, the IRS issued Notice 2020-29 and Notice 2020-33. Notice 2020-29 allows employees to make election changes relating to employer-sponsored group health coverage, health flexible savings accounts (FSAs), and dependent care FSAs mid-year with no special enrollment events. The notice also allows for health FSA and dependent care FSA participants to submit new claims for reimbursement up to December 31, 2020, from amounts that remained in accounts as of a plan year end or the end of the grace period that occurred at any time in 2020.

Notice 2020-33 increases the maximum $500 health FSA carryover amount to an amount that is equal to 20 percent of the maximum salary reduction contribution for the plan year. The increase takes effect immediately, making the maximum amount that can be carried forward for the 2020 plan year $550 (20 percent of $2,750).

 

How the Final Rule Affects Employee Welfare Benefit Plans

The most significant impact of the final rule involves providing certain individuals extended deadlines for performing certain acts. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

  • Filing a benefit claim: The final rule extends the deadline for filing claims for benefits under welfare benefit plans. Importantly, this relief will also include calendar-year health FSAs and health reimbursement accounts (HRAs) that had a runout period ending on March 1, 2020 or later. Although this provision will help individuals with existing claims, it does not allow them to incur new claims applicable to an old plan year.
    • Example: An employee terminated employment and lost health coverage on May 1, 2020. Because the plan has a 90 day-runout period for terminated participants, the employee would normally have until July 30, 2020, to submit claims for reimbursement of eligible expenses incurred before the employee terminated employment. The period between the date of termination and the end of the Outbreak Period is now disregarded. If March 2, 2021 is the end of the Outbreak Period, the 90-day runout period will start on March 3, 2021, and end on May 31, 2021.
  • Filing an appeal and requesting a review: The final rule extends the period to file an appeal of an adverse benefit determination. This period must be at least 60 days (for welfare benefit plans) or 180 days (for group health plans) following notification of the adverse benefit determination. The final rule also extends the four-month period for filing a request for external or internal review.
  • Special Enrollment Periods: Employees and their eligible dependents now have more time to enroll in a group health plan following a special enrollment event. Usually individuals must elect coverage during a 30-day period (or a 60-day period, depending on plan provisions) following a special enrollment event.
    • Example: An employee had a child on March 20, 2020. The employee would normally have 30 days to elect coverage for the child. The period between the birth and the end of the Outbreak Period is now disregarded. If October 10, 2020, is the end of the Outbreak Period, the 30-day period would start on October 11, 2020, and end on November 9, 2020.

 

How Notice 2020-29 Affects Employee Welfare Benefit Plans

IRS Notice 2020-29 gives plans additional deadline flexibility and eases restrictions associated with various plan requirements found in the Internal Revenue Code and associated Treasury Regulations. The extensions provided by the Notice are described below.

  • Modified rules on irrevocable elections: Notice 2020-29 eliminates certain restrictions that limit the ability of participants to revoke and make new plan elections after the start of the plan year. During the 2020 plan year, elections pertaining to employer health coverage, health FSAs, and dependent care FSAs can now be made at any time on a prospective basis. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example: A participant elected to defer $1,200 into an FSA during open enrollment for a plan year that began on January 1, 2020. The participant is now permitted to change her election at any time and defer a different amount (e.g., $2,200) if she so chooses.
  • Extended the deadline for incurring claims: Plan participants in health FSAs and dependent care FSAs may now incur and submit new claims for reimbursement up to December 31, 2020, based on amounts that remained in their FSA as of the end of a plan year or the end of a grace period that occurred at any time in 2020. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example:  An employee was a participant in a 2019 calendar year FSA with a grace period that ended on March 15, 2020. He had $1,200 remaining in his account as of that date. He had not incurred any claims that he could submit for reimbursement through March 15, 2020. On June 29, 2020, the participant received medical services in excess of $1,200. He can submit his claim and be reimbursed for that amount.

 

How the Final Rule Affects COBRA Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) helps employees going through a qualifying event (such as termination of employment) maintain health coverage, often at a lower cost than they might find in the marketplace. To assist those who have lost health insurance coverage because of the pandemic, the final rule extends several COBRA-related deadlines. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

Delayed COBRA Election Deadline

To assist those who have lost health insurance coverage through termination of employment or a reduction of hours, the final rule extends the deadline to elect COBRA coverage. Normally, the election period ends 60 days following the later of 1) the qualifying event or 2) the date the plan provides the COBRA election notice to the qualified beneficiary.

  • Example: An employee is terminated on April 10, 2020, and loses coverage on April 30, 2020. If the terminated employee receives the COBRA election notice on May 5, 2020, he would normally have until July 4, 2020, which is 60 days, to elect COBRA coverage. But the Outbreak Period is now disregarded. If November 14, 2020, is the end of the Outbreak Period, the 60-day election period would start on November 15, 2020, and end on January 13, 2021.

This provision also gives employees flexibility in determining whether to spend money to continue coverage based on the type of medical issues they have during the extended deadline. Some people may choose to not enroll in COBRA coverage unless some type of expensive medical event makes it necessary. Normally, they would have a shorter window to determine the necessity of enrollment.

While the extended deadline helps individuals, it also creates risk for insurers and employers who may see employees taking advantage of the deadlines to enroll only if they incur significant costs. Healthy employees who would normally elect coverage, pay the premiums, and incur limited costs, will not have incentive to enroll during the window and will not be able to help offset costs as they normally would.

Delayed COBRA Payments

The final rule extends the amount of time that a qualified beneficiary has to submit a COBRA premium payment before coverage under the plan will cease. To be considered timely, the payment deadline is normally 30 days after the due date (or 45 days for the initial payment). While it is possible for qualified beneficiaries to take advantage of this relief in order to minimize expenses and avoid paying their premiums during the Outbreak Period, it is important to note that once the Outbreak Period is over, qualified beneficiaries must fully pay all prior months’ premiums in order to retain coverage. This could be a substantial financial burden. But if a qualified beneficiary has a major medical event, it could be cheaper to make up the costs of numerous months of premiums than to pay for the medical expenses.

Delayed COBRA Notices

  • Extended qualified event notification deadline: The final rule extends the date by which a covered employee or qualified beneficiary must notify the plan administrator of the following qualifying events: divorce (or legal separation) or a dependent child ceasing to be a dependent child. The normal deadline is 60 days after the date of the qualifying event.
  • Extended disability notification deadline: Covered employees and qualified beneficiaries have more time to notify the plan administrator of a disability determination. The normal deadline is 60 days after the date of being determined to be disabled.
  • Extended COBRA rights notification deadline: Plan administrators have more time to notify qualified beneficiaries of their COBRA rights following a qualifying event. The normal deadline is 14 days following the qualifying event (or 44 days when the employer is the plan administrator). Although plan administrators are not required to provide the COBRA election notice during the Outbreak Period, they must provide COBRA coverage if a participant elects it. Plan administrators will likely want to provide timely notices to encourage qualified beneficiaries to elect and pay for COBRA coverage.

 

Previous Relief Affecting Employee Welfare Benefit Plans

In March 2020, the IRS released Notice 2020-18, postponing the due date for all Federal income tax returns normally due on April 15, 2020, to July 15, 2020. Although not mentioned, contribution deadlines were expected to be delayed as well. A few weeks later, these expectations were met when Notice 2020-23 officially extended multiple deadlines that fell on or after April 1, 2020, and before July 15, 2020, to July 15, 2020—including deadlines for

  • making 2019 HSA contributions;
  • completing a 60-day rollover;
  • providing Form 5498-SA to HSA owners and to the IRS;
  • forfeiting unused FSA benefits;
  • receiving cash for unused vacation days; and
  • electing benefits in a noncalendar-year cafeteria plan.

 

Watch for Future Guidance

The last few months have seen a flurry of new guidance. This trend may continue for the duration of the pandemic. In fact, at the time of this writing the House of Representatives had just introduced a fourth stimulus package. Ascensus will be closely monitoring all future guidance. Visit ascensus.com for the latest updates.

 

Click here for a printable version of this issue of the Washington Pulse.


More Details on IRS Guidance for Cafeteria Plan Flexibility

On Tuesday, the IRS issued two Notices (2020-29 and 2020-33) that provide additional flexibility to participants in cafeteria plans as a result of the coronavirus (COVID-19) pandemic. The following provides additional details on the contents of these Notices.

Permitted Election Changes

Cafeteria plan elections must be made prospectively in advance of the plan year and can only be changed in limited circumstances due to certain events, as detailed in Treasury Regulation (Treas. Reg.) 1.125-4. The IRS has recognized that the permitted election changes in Treas. Reg. 1.125-4 are not extensive enough to accommodate plan participants’ needs, given the unprecedented circumstances of the COVID-19 pandemic. IRS Notice 2020-29 permits additional, temporary flexibility to make prospective, mid-year election changes during the 2020 calendar year for health coverage, health flexible spending arrangements (FSAs), and dependent care assistance plans (DCAPs).

An employer will be permitted (but is not required) to amend its plan to allow for prospective election changes that would not have to satisfy the requirements of Treas. Reg. 1.125-4. The following election changes will be permitted.

  • Make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage
  • Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage)
  • Revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer (note that the employer can rely on the employees’ attestation that they are enrolled or will enroll in other coverage, unless the employer has actual knowledge to the contrary; a sample attestation of other coverage is included in Notice 2020-29 for use in satisfying this requirement)
  • Revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis
  • Revoke an election, make a new election, or decrease or increase an existing election regarding a DCAP on a prospective basis

Employers can use discretion in amending for election changes and not be required to provide for all changes on an unlimited basis. But they will still need to comply with Internal Revenue Code nondiscrimination rules. Also, as long as they comply with existing rules, employers can design the plan election changes to prevent adverse selection.

Employers will have to provide all applicable notices to participants if they change the terms of the plan; this would include distributing a summary of material modifications (SMM) for ERISA plans.

If amounts have already been reimbursed from an FSA, employers can limit a participant’s ability to change an election amount so that the new election cannot be an amount below what has already been reimbursed.

This guidance can be applied retroactively to January 1, 2020, to plans that have already permitted election changes outside the scope of Treas. Reg. 1.125-4 and have been operating in accordance with the requirements of Notice 2020-29.

These permitted election changes are not mandatory, they are options. Employers that want to offer them must amend their plans to allow for the relief as permitted by Notice 2020-29. The amendment (which will apply only for the 2020 plan year) must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020. In the interim, a plan that permits these changes should operate in accordance with Notice 2020-29 and the employer must inform all eligible employees of the changes to the plan. Notice 2020-29 does not provide details on the required timing to notify participants; presumably participants should be informed as soon as practicable.

Extended Claims Period for Health FSAs and DCAPs

Because of unanticipated requirements to stay at home and associated business closures that came about early in the year, employees may have had difficulty using their FSA funds. For example, they may have been unable to see a doctor or no longer needed to use daycare. As a result, they are more likely now than under normal circumstances to have unused amounts remaining in their FSAs or DCAPs when their plan year or grace period ended.

Notice 2020-29 permits employees to submit new claims for reimbursement of the amounts that remained in their health FSAs or DCAPs as of the end of a plan year, or end of the grace period, as long as the end date was any time in 2020 (this will affect 2019 calendar year plans that had a grace period with an end date any time in 2020 but not 2019 calendar year plans with no grace period). Employees will be able to be reimbursed for expenses that are incurred through December 31, 2020, with the funds remaining in the account that would otherwise have been forfeited. Regardless, the dollars that are in health FSAs and DCAPs must still be used for the same purposes and cannot be applied to other expense types as a result of this guidance.

The extension of time for incurring claims is available to cafeteria plans that have a grace period and plans that provide for a carryover, as long as the end of the plan year or end of the grace period was in 2020.

For general-purpose health FSAs, this additional extension will cause individuals to be health savings account (HSA)-ineligible for the extent of the extended claim period. This is something that employees may not have anticipated, and will affect those who may have started to make HSA contributions, believing that their FSA was no longer covering them.

These extensions are not mandatory, they are options. Employers who want to offer them must amend their plans to allow for the extensions as permitted by Notice 2020-29. An amendment for the 2020 plan year (that will apply only for the 2020 plan year) must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020. In the interim, the plan should operate in accordance with Notice 2020-29, and the employer must inform all eligible employees of the changes to the plan.

HSA/HDHP Impact

The IRS has provided guidance in previous Notices that COVID-19 testing and treatment costs can be provided before satisfying a health plan deductible and not affect an individual’s eligibility to make HSA contributions. Notice 2020-29 clarified that the previously-released guidance applies to all costs for testing and treatment incurred on or after January 1, 2020. It also specified that the panel of diagnostic testing for influenza A and B, norovirus and other coronaviruses, respiratory syncytial virus (RSV), and any items or services required to be covered with zero cost sharing will be considered expenses for testing and treatment and will not affect HSA eligibility.

Telemedicine arrangements are generally viewed by the IRS as plans that provide coverage before a minimum annual deductible is met, and generally disqualify an individual from making HSA contributions. But recent legislation temporarily allows HSA-compatible high deductible health plans (HDHPs) to cover telehealth and other remote care services before satisfying a deductible. Notice 2020-29 confirms that HSA-eligible individuals who have received telehealth or other remote care services on or after February 15, 2020, that might otherwise have disqualified them, will be HSA-eligible for 2020.

Increased FSA Carryover Limit

IRS Notice 2020-33 increases the maximum $500 FSA carryover amount to an amount that is equal to 20 percent of the maximum salary reduction contribution for the plan year. The increase takes effect immediately, making the maximum amount that can be carried forward for the 2020 plan year $550 (20 percent of $2,750).

A plan that wants to adopt the provision will have to be amended. For the 2020 plan year, the amendment must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the employer informs all individuals eligible to participate in the plan of the changes. In future years, amendments would have to be adopted at any time on or before the last day of the plan year.

ICHRA Relief

Notice 2020-33 also provides relief for the new individual coverage health reimbursement arrangements (ICHRAs). Plans that run on a calendar plan year may reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage before the first day of the plan year. This relief is designed to ease administrative issues, given that premiums for insurance coverage would generally be due before the effective date of the coverage.


House Democrats Introduce Next Coronavirus Relief Bill

In an atmosphere more partisan than earlier coronavirus relief efforts, the Democratic caucus of the House of Representatives has released a bill to fund another round of assistance as the nation attempts to cope with the health and economic effects of the coronavirus (COVID-19) pandemic. This legislation, as yet unnumbered, is being referred to as the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act.

Three prior bills—which provided direct cash benefits to Americans, created a small business lending program to help employers retain employees and provided enhanced access to tax-favored retirement savings—were dealt with quickly by Congress and signed into law by President Trump. This round of relief has been predicted to provoke greater resistance among lawmakers who are averse to expanding the federal deficit. There is also expected to be less common ground in the House and Senate—and Democrat and Republican—priorities for additional relief.

The House-released bill contains provisions for the following.

  • Continued financial assistance to unemployed workers
  • Financial assistance to state, local, tribal, and territorial government entities
  • Waiver of 2019 required minimum distributions (RMDs)
  • Waiver of the 60-day and one-rollover-per-12-month rules for otherwise-required RMDs waived for 2019 and 2020
  • Amendments to the Emergency Family and Medical Leave Expansion Act
  • Relief for participants in health flexible spending arrangements (FSAs)
  • Codifying the ability of employers to deduct certain expenses covered by loans that are forgiven under the SBA Paycheck Protection Program
  • Providing money purchase pension plans the early distribution and loan relief that the CARES Act provided to other qualified retirement plans
  • A new retirement “composite plan,” with features that include those of 401(k) and defined benefit (DB) pension plan
  • Relief for multi-employer (collectively-bargained) DB pension plans
  • Amortization relief for single employer DB pension plans
  • Further funding relief (beyond that provided by the SECURE Act) to certain community newspaper DB plans
  • Aid to certain federal agencies affected by the pandemic, including the Departments of Homeland Security, Interior, Health and Human Services, Labor, Transportation, Housing and Urban Development, and Education
  • Enhanced Medicare and Medicaid benefits
  • Medical supply chain enhancement
  • Testing and reporting enhancement
  • National strategic stockpile for pandemic response
  • Bankruptcy protections for homeowners
  • Certain student loan relief and protections
  • Additional aid to veterans during the COVID-19 pandemic
  • Federal election early and by-mail voting procedure

IRS Provides Additional Cafeteria Plan Flexibility in Response to Pandemic

The IRS has issued two notices that provide additional flexibility to participants in cafeteria plans as a result of the coronavirus (COVID-19) pandemic. Notice 2020-29

  • permits mid-year election changes on a prospective basis for elections made during calendar year 2020;
  • permits unused amounts in health flexible spending arrangements (FSAs) and dependent care FSAs that remain at the end of a grace period or plan year that ends in 2020 to be used for expenses incurred through December 31, 2020; and
  • provides additional detail and confirmation that individuals enrolled in high deductible health plans (HDHPs) providing COVID-19 testing and telehealth services prior to the satisfaction of a deductible will continue to remain HSA-eligible.

Notice 2020-33 increases the maximum amount permitted for FSA carryover to $550, to be adjusted for inflation, for plan years beginning in 2020.


Retirement Spotlight: Legislative Support for Small Businesses During Coronavirus Pandemic

Many U.S. businesses—large and small—are experiencing uncertainty and varying levels of hardship as they try to stay afloat during the coronavirus (COVID-19) pandemic. Hit particularly hard are small businesses and their workforce, which according to the Small Business Administration (SBA) encompasses 99.9 percent of U.S. businesses and represents nearly half of the U.S. private sector workforce. What lies ahead for the economy during 2020, and maybe even 2021, is surely unknown as these are unprecedented times. In the meantime, the federal government is deeply involved in helping to stabilize the economy until it can be opened up fully again.

Four bills have so far been enacted to help U.S. businesses and workers survive this time of turmoil, and more are expected. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, and authorizes the SBA to administer the Paycheck Protection Program (PPP). The PPP provides federally guaranteed, low-interest loans to businesses with 500 or fewer employees, and it includes the potential for loan forgiveness. The program’s key purpose is to keep employees on business payrolls during this unprecedented economic downturn. Specifically, the PPP loans help employers meet payroll (and certain other operating) costs during the eight weeks after the loan is disbursed. Among other things, approved payroll costs include wages (and withheld taxes), leave payments, and employee benefits such as retirement benefits and group healthcare coverage.

 

Second PPP Legislative Action

In the first PPP bill, the CARES Act provided approximately $350 billion in small-business loans. The program was so popular that the funds were depleted by mid-April. Subsequently, on April 24, the Paycheck Protection Program and Health Care Enhancement Act (H.R. 266) was signed into law, adding another $320 billion to the program, which includes $60 billion earmarked specifically for PPP loans to be administered through small, medium, and local financial institutions, like credit unions and community banks. The intent was to provide access to PPP loans to traditionally underserved businesses.

 

General Terms of the Loan

The PPP is administered by the SBA, but loans are obtained through financial organizations. Businesses with no more than 500 employees—including not-for-profits, sole proprietors, and independent contractors—can apply for the PPP loans through approved lenders. If the employer follows certain requirements, the loan will be forgiven and considered tax-free.

No collateral or personal guarantees are required, and neither the government nor lenders will charge small businesses any fees. PPP loans that are not forgiven must be repaid within two years at a one percent interest rate, but any loan repayments will be deferred for six months. Loan forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. The amount of the loan forgiven will be reduced if full-time headcount declines or if salaries and wages decrease.

Specific details of the program and information on how to apply can be found at the SBA website. Small-business owners may find it helpful to confirm whether the financial organizations they currently do business with are participating in the program.

 

PPP Loan Payroll Costs Include Retirement and Health Coverage

In an interim final rule and FAQs issued in April, the SBA confirmed that eligible payroll costs include a number of employee benefits, including among other things, employer contributions to defined contribution or defined benefit retirement plans,  group healthcare coverage (including payment of premiums), and certain parental, family, sick, and medical leave (with some exceptions if certain tax credits are claimed). Employees that are furloughed but remain on the payroll could presumably continue their salary deferrals to retirement accounts as well as their portion of health coverage and contributions to health savings accounts (HSAs), at their option. Employers may also continue their retirement contributions to these accounts if such contributions would be considered qualifying payroll expenses for the eight-week period.

 

Loan Forgiveness

Perhaps the key feature of the program is loan forgiveness. If program rules are followed, the PPP provides for forgiveness of the loan—up to the full principal amount plus accrued interest. Loans will generally be forgiven if employees are kept on the payroll for eight weeks following the loan date and if the loan assets are used for payroll, rent, mortgage interest, or utilities. The amount spent on payroll costs will determine how much of the loan can be forgiven; no more than 25 percent of the forgiven loan amount can be for non-payroll costs.

In addition to retirement contributions and healthcare and certain leave benefits, payroll costs also include the following.

  • Salary, wages, commissions, and tips up to $100,000 of annualized pay per employee
  • Allowance for dismissal or separation
  • Payment for vacation, parental, family, medical, or sick leave
  • State taxes and local taxes withheld from the employee’s compensation
  • Payments of compensation or income to a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment not more than $100,000
  • Excluded are qualified sick leave and qualified family leave for which credit is claimed under the Families First Coronavirus Response Act (FFCRA); compensation paid to an employee whose principal residence is outside the United States; and the employer portion of payroll taxes (FICA), Railroad Retirement Tax (RRTA), and federal employment taxes

The $100,000 per-employee limit on annual payroll expense does not apply to non-cash benefits such as employer contributions to qualified retirement plans, health benefits, and taxes withheld from employees’ pay. The borrower may also use up to 25 percent of the funds for mortgage interest, rent payments, or utility payments if the indebtedness or service started before February 15, 2020.

 

Strong Cautions for Employers: Consult Your Tax or Legal Adviser and Your Lender

The employer is required to document and certify to the lender that the loan funds were used to retain workers and to maintain payroll or make mortgage interest, lease, and utility payments for the eight-week period following the loan in order to qualify for loan forgiveness. The SBA has also indicated it will release additional guidance regarding loan forgiveness. Because these loans may be used cover a variety of expenses, employers should work with their tax or legal advisors and the PPP lender in determining how to qualify for loan forgiveness.

 

Click here for a printable version of this issue of the Retirement Spotlight.


IRS Q&As Provide Details on Implementing CARES Act Provisions

The IRS’ posting earlier this week of new question-and-answer (Q&A) guidance on the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, was welcomed by those who administer retirement savings arrangements. The guidance provides some additional details on the IRA and retirement plan relief provided by the CARES Act.

The CARES Act is intended to aid those affected by the coronavirus (COVID-19) pandemic, which has affected the health and economic welfare—or both—of many Americans. It offers special retirement account distribution, loan access, tax treatment, and repayment options, as well as penalty tax relief. The CARES Act resembles, in most respects, legislation enacted in prior years to aid victims of hurricanes and other major disasters.

The new IRS Q&A-format guidance summarizes the special relief granted to IRA owners and retirement plan participants and, in some cases, provides new and clarifying information on dimensions of the relief. The following is a summary of the content of each Q&A, in numeric order.

  1. The relief includes expanded distribution options and favorable tax treatment for up to $100,000 (in aggregate) distributed from IRAs and employer-sponsored retirement plans. This includes exemption from the 10 percent early distribution penalty tax, ratable taxation over three years (unless electing current-year taxation), and a three-year period for repayment to an IRA or employer plan.
  2. This Q&A promises additional CARES Act guidance “in the near future.” This is welcome news because the CARES Act is similar, but not identical to, previous disaster relief legislation and previous IRS disaster guidance (Notice 2005-92, issued following Hurricane Katrina) is being looked to as an indication of how CARES Act-specific guidance may look. The IRS has further promised that CARES Act guidance will apply the principles of Notice 2005-92 to the extent that the CARES Act and the post-Hurricane Katrina legislation’s provisions align.
  3. Coronavirus-related distributions (CRDs) are IRA or employer plan distributions taken by qualified individuals. These are persons who have (or whose spouse or dependent has) been diagnosed with COVID-19, have been quarantined due to the COVID-19 pandemic, or have experienced adverse financial consequences such as job loss, reduction in work hours, or furlough; including being unable to work due to loss of child care. The IRS in this guidance has indicated that it is reviewing comments submitted and may expand the circumstances that qualify as adverse financial consequences.
  4. A CRD is defined as a distribution from an eligible employer retirement plan or IRA that is withdrawn by a qualified individual—as described above—from January 1, 2020, to December 30, 2020, in an aggregate amount not to exceed $100,000. It is of some concern that this unusual date could lead to end-of-year errors; the IRS is apparently unwilling to interpret the CARES Act to include December 31.
  5. This Q&A confirms that CRDs are exempt from the 10 percent additional tax on early distributions from tax-advantaged retirement arrangements to which they apply.
  6. Taxable amounts withdrawn as CRDs will be taxed ratably (equally) in one-third amounts in tax years 2020, 2021, and 2022, unless the taxpayer receiving them elects when filing 2020 taxes to have the CRDs taxed entirely in 2020.
  7. In common with legislation responding to several previous disaster events—including Hurricane Katrina in 2005—the distributions known as CRDs can be repaid to eligible retirement plans, including IRAs and eligible employer-sponsored plans. This must occur no later than three years after the date of the distribution(s). A repayment will be “treated as though it were repaid in a direct trustee-to-trustee transfer” within 60 days to preserve prior pretax character. Pretax status would be restored by a taxpayer amending his or her tax return for any prior year in which the distribution was included in income and taxed. This Q&A notes that IRS Hurricane Katrina Notice 2005-92 provides examples of this tax recovery procedure.
  8. For retirement plan loans that are outstanding on the date of CARES Act enactment (March 27, 2020), any payment due from March 27 to December 31, 2020, may be delayed for one year, with payments after the one-year suspension period adjusted for accrued interest. Employers may allow participants to take loans of up to 100% of their accrued vested balance (normally 50%) to a maximum of $100,000 (normally $50,000). The new guidance confirms that the final date for a participant to secure a CARES Act enhanced retirement plan loan is September 22, not September 23 as most had believed.
  9. Employers may choose to add CRDs as a distributable event for anyone CRD-eligible, regardless of age or other eligibility—and regardless of whether they will allow plan loans in the legislation-enhanced amounts. CRDs and enhanced plan loans are not linked, and an employer may elect to adopt one, both, or neither. Similarly, the increased loan limits and loan suspension period are independent of one another as options for the employer. Even if an employer does not adopt CRD distribution provisions, a taxpayer who meets a CARES Act COVID-19 diagnosis or economic harm condition for CRD eligibility—and has another distributable event under the plan—may claim the 10 percent penalty exemption, ratable taxation, and repayment privileges associated with CRDs.
  10. Employers that sponsor a defined benefit pension plan or money purchase pension plan may not choose to add CRDs as a distributable event. Furthermore, the qualified joint-and-survivor-annuity (QJSA) and spousal consent requirements of these plans continue to apply, including for any eligible distribution to a participant who meet CARES Act CRD conditions.
  11. A retirement plan administrator may rely on the participant‘s representations that he or she satisfies the criteria to be eligible for a CRD. CARES Act statutes do not mention employer “actual knowledge” as a reason to deny a CRD distribution over the representations of a participant. However, both the new IRS Q&As and Notice 2005-92—the Hurricane Katrina guidance—state that a CRD is not to be granted based on participant representations if an employer has actual knowledge to the contrary. While an employer may report a distribution as a CRD based on a participant’s representations, this reporting does not entitle the participant to claim CARES Act tax benefits if he or she is not truly eligible.
  12. An eligible retirement plan is permitted to accept timely CRD repayments if it accepts rollovers. These repayments are, in fact, rollover contributions, and would be placed in a rollover account, thus, eliminating any question about whether they must be assigned to another contribution source. A plan is not required to amend its provisions to accept CRD repayments. It is not clear from this Q&A whether a plan that accepts rollovers generally can exclude participant CRD repayments. Hopefully the IRS-promised additional guidance will clarify this.
  13. Qualified individuals will report CRDs when they file their individual income tax return. In addition to the 1040 series return itself, the taxpayer will file new Form 8915-E (the 8915 series reports certain disaster-related tax events) to determine the amount of any CRD included in income for the year, and to report CRD repayments.
  14. The retirement plan or IRA administrator will report the distribution itself on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. In this Q&A the IRS promises more information on how to report CRDs “later this year.”

 


How Ascensus’ Plans and Participants Reacted to COVID-19 in March

Recent NAPA and ASPPA articles, citing data provided by Ascensus, discuss the effect of the COVID-19 pandemic on U.S. employees’ savings behaviors in March. The Ascensus data serves as an “early baseline” for the evolution of contribution and withdrawal behavior in response to the virus. These early insights suggest that many Americans adjusted their contributions to savings plans. However, savers haven’t yet tapped into existing savings and are making efforts to “stay the course” to help ensure financial security.