The coronavirus public health emergency has created a number of issues affecting employee benefit plans. Employers are asking numerous questions: What does our health plan have to cover as it relates to coronavirus testing and treatment? Can our employees take a distribution from their retirement plan penalty free to deal with the coronavirus and its impact on their families?
On the health plan side, Congress and President Donald Trump have taken action, and we have some clear rules regarding what is (and is not) required. We are still waiting, however, on some additional guidance to fully understand the details.
On the retirement plan side, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has been enacted, with some significant changes that employers may enact now to give employees another source of income if needed. However, employers should keep in mind the drastic market losses we have recently experienced, and locking in these losses may not be best for employees.
Required Change to Health Plans to Cover Coronavirus Testing
The Families First Coronavirus Response Act (the Families First Act), termed phase 2 of the coronavirus relief legislation, was signed by the president on March 18. The Act requires employers to make changes to their employee health plans to cover coronavirus testing.
Employer-sponsored group health plans (both insured and self-insured and regardless of grandfather status) must provide coverage for Federal Drug Administration (FDA)-approved diagnostic testing products for the coronavirus. Plans must also cover the items and services furnished to an individual during an office visit (whether an in-person or a telehealth visit), urgent care center visit, or emergency room visit to the extent they relate to furnishing the test or evaluating the individual’s need for the test.
Both the test and the visit must be covered with no cost-sharing requirements (including deductibles, copayments, and coinsurance), as well as no prior authorization or other medical management requirements.
Here are some clarifying points:
- The new law requires coverage of the office visit related to the coronavirus test itself, without cost sharing, even if the provider determines actual testing isn’t necessary.
- It isn’t clear whether the new no-cost-sharing requirement (for testing and related office visits) applies to out-of-network providers. So far, the consensus seems to be yes, although we expect more guidance on this point to hopefully make it clear that it’s only in-network.
- If the testing is required or prescribed by the provider, a plan cannot apply prior authorization or medical management requirements at the plan level (e.g., a plan can’t require a negative flu test before paying with no cost sharing for the coronavirus test).
- Coverage for treatment, beyond the diagnostic testing, isn’t required. As more treatment options for the coronavirus become available, however, it’s likely that the no-cost-sharing requirement could be expanded to include certain treatment. But it isn’t included for now.
The requirements are to be more fully implemented in subregulatory guidance by governmental agencies in due time. By the text of the statute itself, it appears that excepted benefit plans and retiree-only health plans aren’t subject to the requirements, but additional agency guidance will be needed.
Coverage is required as of the day the Families First Act was enacted (Wednesday, March 18) until the U.S. Secretary of Health and Human Services determines the emergency has expired.
Additionally, the Internal Revenue Service (IRS) has released guidance indicating that coverage of coronavirus testing and treatment by a high deductible health plan (HDHP) before a participant has met the applicable deductible won’t cause it to fail to qualify as an HDHP, and participants will continue to be eligible to contribute to their health savings account.
Employers should take steps now to implement the changes to their health plans. You can make the operational changes now and then work to put in place any required plan amendment later (by the end of the plan year, e.g., December 31, 2020).
Potential Changes to Employer-Sponsored Retirement Plans
In keeping with the fast pace of legislative response to the coronavirus, the CARES Act was enacted on March 27—what is being termed phase 3 of the legislative response. A significant part of the new law affects employer-sponsored retirement plans.
Qualified coronavirus distributions. Typically, an employee may not withdraw funds from an employer-sponsored retirement plan, such as a 401(k) plan, before the age of 59½ without being subject to an early withdrawal penalty.
However, the CARES Act allows participants to take a “coronavirus-related distribution” of up to $100,000 without incurring the early withdrawal penalty. Additionally, the typical 20% mandatory income tax withholding is not required, and most employees would be able to elect no withholding at all.
One very generous and unusual feature of the CARES Act allows participants to repay the distribution at any time during the 3-year period after the distribution by making one or more contributions back to the plan.
If the plan allows it, a participant may take a coronavirus-related distribution until December 31, 2020. The distribution may be made to a person:
- Who is diagnosed with the coronavirus by a Centers for Disease Control and Prevention (CDC)-approved test;
- Whose spouse or dependent is diagnosed with the coronavirus by a CDC-approved test;
- Who experiences adverse financial consequences as a result of being quarantined, furloughed, or laid off or having work hours reduced due to the coronavirus or who is unable to work due to lack of child care or the closing or reduced hours of a business owned or operated by the individual; or
- Who experiences other factors as determined by the Secretary of the Treasury.
Although the early withdrawal penalty would not apply to the distributions, withdrawal of pretax contributions is still subject to income tax. However, the CARES Act allows income tax owed on the distribution to be spread out equally over 3 years unless the participant elects otherwise.
This new qualified distribution appears to be an optional feature that employers may add to their plan if desired.
Coronavirus loans. Additionally, for the 180 days following the enactment of the CARES Act, the maximum loan an affected participant (a participant who meets the same requirements for a coronavirus distribution, described above) may take from his or her account is increased—generally, the lesser of $100,000 or 100% of his or her vested account (up from $50,000 and 50% of his or her vested balance).
However, it’s important to note that although the provisions of the tax code were changed to allow a participant to take a loan up to 100% of his or her vested account balance, the provisions of the Employee Retirement Income Security Act (ERISA) also govern plan loans. ERISA generally requires that the plan obtain adequate security for the loan, which is typically 50% of the participant’s account balance.
The CARES Act did not remove this ERISA requirement, so we expect this to be addressed in future guidance. Until then, it might be desirable for the plan to only allow the distribution feature and wait on the loan feature.
Finally, the CARES Act allows participants to defer coronavirus loan payments for 1 year. The new loan features appear to be optional, allowing employers to turn on if desired.
Waiver of RMDs. As was changed by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, required minimum distributions (RMDs) must begin for participants who reach age 70½ before 2020 or age 72 in 2020 or later.
However, the CARES Act allows certain plans (including 401(k) plans) to suspend RMD payments during the 2020 calendar year. This change is likely not optional.
These changes may be operationally implemented immediately as long as the plan is amended on or before the last day of the first plan year beginning on or after January 1, 2022, or later if prescribed by the U.S. Treasury Secretary.