U.S. Employee Benefit Considerations Related to COVID-19
As the Coronavirus continues to spread and businesses face financial challenges, U.S. employers may look to the impact that a temporary reduction in their business has on their existing U.S. employee benefit programs, adjust those benefits to meet the needs of both employers and employees and consider the impact of the newly created obligations under recently enacted and pending federal legislation. Many employers are grappling with significant reductions in force, the furloughing of employees and/or reducing hours and compensation for employees as a result of this crisis. All of these consequences significantly impact employee benefit plans and policies. In addition, employers may need to make temporary or permanent changes to these employee benefit plans and policies. It is important for employers to review all of their employee benefit plans and policies and service provider contracts to assess the impact these actions may have on employee benefit programs. With this in mind, we have provided a summary of issues related to the following areas for you to consider during these uncertain times:
- Service provider contracts;
- Emergency paid sick leave, family leave and related tax credits;
- Health and welfare plans;
- Qualified retirement plans; and
- Incentive compensation and non-qualified deferred compensation plans.
Service Provider Contracts for Employee Benefit Plans
Employers should review the terms of their existing contracts with the various service providers for their employee benefit plans (e.g., recordkeepers, third-party administrators, investment advisors, custodians, etc.) to ensure understanding of the material terms of the contracts. The fees in many administrative contracts are determined based on the number of participants in a particular plan. A reduction in force or reduction in hours that affects the total number of eligible employees participating in a plan could result in increased fees under the contract. The outbreak and resulting lockdowns and work from home requirements could affect service providers’ ability to meet their contractual obligations. Many commercial contracts contain “force majeure” provisions which excuse a party’s nonperformance under a contract due to extraordinary events. Application of these provisions is contract-specific. Service provider non-performance with respect to ERISA plans could be severely problematic for employers. Employers should seek specific legal advice with respect to navigating the effects of COVID-19 on its existing service provider contracts.
Emergency Paid Sick Leave and FMLA Expansion
The Families First Coronavirus Relief Act (“FFCRA”) was enacted on March 18, 2020, and generally requires employers with fewer than 500 employees to provide paid sick leave and additional FMLA benefits to their employees. For more information on emergency paid sick leave, please click here. For more information on emergency family and medical leave expansion, please click here. In order to offset some of the costs these provisions impose, FFCRA also provides a quarterly payroll tax credit equal to 100% of the qualified sick and leave wages paid to employees as emergency paid sick leave and emergency family and medical leave. For more information on the tax credit, please click here.
Health and Welfare Plans
- COVID-19 Related Coverage: FFCRA requires group health plans to cover costs related to diagnostic testing for COVID-19 and related healthcare provider services (in-person and telehealth) and facility costs (including doctors' offices, urgent care centers and emergency room) without requiring participants to share in the cost (g., deductibles, copayments or coinsurance). In addition, FFCRA provides that prior authorization and other medical management requirements must be waived with respect to COVID-19 services. For more information on the FFCRA requirements, please click here. The Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”) requires that group health plans cover certain preventive services and vaccines related to COVID-19. For more information on the CARES Act requirements related to group health plans, please click here.
- Reduction in Hours/Furlough – Eligibility for Health Coverage: Plan or policy terms dictate whether employees who are furloughed or who experience a reduction in hours can maintain their health coverage. Most plans require that employees satisfy minimum hour thresholds to maintain eligibility for health coverage. In addition, employers should consider plan provisions related to employees’ payment of premiums while on a leave of absence. Employers may be able to amend their plan or policy to expand coverage or modify the procedures for employee premium payments but should seek approval from the applicable insurance carrier before making any changes. For insured health plans, expanding coverage to ineligible employees without the insurer’s consent could result in nonpayment of claims. Read below for a discussion of potential Affordable Care Act (“ACA”) implications.
- COBRA Continuation Coverage: COBRA continuation coverage must be offered to employees who are terminated or experience a reduction in hours making them ineligible for coverage under an employer-sponsored health plan. Employers may wish to provide a subsidy to help employees cover the cost of COBRA continuation coverage. While this is generally permitted, employers who maintain self-insured plans should consider whether the subsidy would create any discrimination issues if the subsidy is not broadly offered to employees. In addition, it is unclear whether discontinuance of the COBRA subsidy for employees prior to the end of the COBRA eligibility period creates a special enrollment right for those employees under the ACA Healthcare Marketplace (the “Marketplace”). The ACA regulations do not allow for a special enrollment period for any individual who voluntarily drops COBRA coverage; however, the information on HealthCare.gov states that an individual qualifies for a special enrollment period if an employer stops contributing to the individual’s COBRA coverage, thus, requiring the individual to pay the full cost of the COBRA coverage. Whether this discrepancy is due to some state Marketplaces allowing more generous special enrollment rights or other factors is unclear but employers may want to proceed with caution in addressing such issues with employees. Read below for a discussion of potential ACA implications for furloughed employees.
- ACA Employer Mandate: Pursuant to the ACA Employer Mandate, employers with an average of at least 50 full-time employees (e., averages 30 or more hours of service per week) must provide affordable health insurance that provides minimum value to its full-time employees in order to avoid exposure to a penalty tax under Section 4980H of the Internal Revenue Code (the “Code”). Most employers track employees’ hours over a prior measurement period to determine eligibility for a plan year. When contemplating an employee furlough or reduction in hours, employers using a prior measurement period should consider that participants who are full-time employees will retain their full-time status for the duration of the applicable plan year even if they are no longer full-time. For calendar months in which the employee retains his or her full-time status and the medical coverage is not affordable, a tax penalty under Code Section 4980H(b) may be assessed if the employee obtains subsidized coverage through the Marketplace. Therefore, employers should consider whether subsidizing the employee cost of coverage is necessary or desirable for these employees.
- HIPAA: Employers who are covered entities under HIPAA and their business associates should remember that the HIPAA privacy and security rules continue to apply during the COVID-19 pandemic. Please click here for a summary of the continuing HIPAA obligations. In addition to the general continuing obligations, covered entities and their business associates who find themselves with more employees working remotely should review and update their HIPAA privacy practices and work systems to ensure that appropriate administrative, technical, and physical safeguards continue to be in place.
- Cafeteria Plan Elections: Employees cannot make mid-year election changes based on a furlough or reduction in hours (e., change in employment status) with respect to any coverage paid on a pre-tax basis through a cafeteria plan unless the election is consistent with the nature of the event. Employers should review their cafeteria plan documents to determine the circumstances in which changes are permitted for certain benefits and amend as necessary to provide participants with additional options.
- Premium Adjustments: Premiums for fully-insured health insurance policies and stop-loss policies purchased in connection with self-insured plans are often determined based upon the number of participants and certain other factors related to the participant population. A reduction in force or other workforce changes that affect employee eligibility could result in premium adjustments for the coverage. Employers should consult with their insurance or stop-loss carriers to determine the effects of workplace changes on the amount of premiums.
- Value of Welfare Benefits: The value of certain welfare benefits is often tied to an employee’s compensation (g., disability benefits and life insurance benefits offered as a percentage of pay). Reductions in compensation can significantly reduce the value of these benefits for employees. Employers should consider how best to communicate these changes to employees.
Qualified Retirement Plans
- Fiduciary Responsibilities Under ERISA in a Volatile Market. Fiduciaries of qualified retirement and other funded ERISA plans should pay particular attention to their fiduciary duties during uncertain market conditions, particularly their duties to act prudently, diversify plan assets and comply with plan provisions. Those fiduciary duties may require that action be taken to, among other items, seek expert advice, reassess investment strategies, and rebalance plan assets. For more information, please click here. Carefully consider whether to defer or cancel any near term blackout periods.
- Participant Access to Retirement Plan Accounts:
- Coronavirus-Related Distributions: The CARES Act permits employers to expand participant access to certain retirement plan accounts for “coronavirus-related distributions” made from January 1, 2020 through December 31, 2020, up to a maximum of the lesser of the participant’s vested account balance or $100,000 (determined on a controlled-group basis). These distributions would not be subject to the 10% early withdrawal penalty and may be repaid to the plan over a 3-year period. In addition, the income tax payable with respect to these distributions may be paid over a 3-year period. For more detailed information on coronavirus-related distributions, please click here.
- Loans: If your 401(k) plan permits participant loans, a participant may prefer to take a loan rather than a taxable coronavirus-related distribution. The CARES Act allows employers to increase the maximum loan amount available for certain qualifying individuals during the 180-day period beginning on the date of enactment. The CARES Act also provides for an extended due date for existing loans. For more information on the modifications applicable to participant loans, please click here. Apart from the CARES Act change, employers could consider expanding the contribution sources from which plan loans may be funded,
- Hardship Withdrawals: Most plans permit hardship withdrawals in accordance with the existing IRS safe harbor requirements, which would not specifically permit hardship withdrawals for expenses and losses related to COVID-19, absent qualification under one of the safe harbor reasons. If a participant lives or works in a federally-declared disaster area, the participant may be eligible for a hardship withdrawal to cover expenses and losses as a result of COVID-19. However, contrary to the coronavirus-related distributions described above, hardship withdrawals are still subject to the 10% early withdrawal penalty for participants who have not reached age 59½ and are fully taxable in the year of the withdrawal. For that reason, coronavirus-related distributions may be a better option for participants to address current financial needs.
- In-Service Distributions: Many defined contribution plans permit participants to elect to receive in-service distributions, provided that they have reached age 59½. These in-service distributions are not subject to the 10% early withdrawal penalty. In addition, recent changes in the law permits defined benefit plans to allow currently employed participants to elect to commence payment of benefits as early as age 59½. In the wake of this crisis, employers might consider a plan amendment to expand or add in-service distribution provisions for defined contribution plans or defined benefit plans. In addition, employers could consider amending their defined benefit plans to allow earlier distributions to terminated vested participants. Employers should carefully consider the addition of new withdrawal rights as such action may create protected benefit rights for current participants that may not be taken away in the future.
- Reducing or Freezing Benefits/Contributions: Employers looking to reduce operating costs in the short term may seek to reduce or freeze benefits in their defined benefit plans or reduce or suspend employer matching or nonelective contributions in their defined contribution plans. Freezing or reducing future benefit accruals under a defined benefit plan requires that participants and/or beneficiaries receive a special notice generally at least 45 days prior to the effective date of the reduction. Discretionary employer matching and nonelective contributions may be suspended or reduced prospectively and may or may not require a plan amendment, although the ability of an employer to suspend or reduce matching or nonelective contributions to a safe harbor plan is more limited and subject to certain additional requirements. When considering these modifications, employers should consider certain IRS rules that prevent cutbacks in benefits. For more information, please click here.
- Funding Relief for Single-Employer Defined Benefit Plans. Employers with defined benefit plans may be concerned about meeting their funding obligations. The CARES Act gives single-employer defined benefit plans more time to meet their funding obligations by delaying the due date for any minimum required contribution otherwise due during 2020 until January 1, 2021, with interest due on the delayed payment. The CARES Act also provides that a single-employer defined benefit plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the adjusted funding target attainment percentage for plan years which include calendar year 2020.
- Contributions to Multiemployer Plans. The COVID-19 pandemic will have significant impact on multiemployer pension plans, and, as a result, on the employers who contribute to them. Contributing employers should bear in mind that increased shortfalls in multiemployer plan funding may result in additional surcharges on their contributions as well as increased withdrawal liability estimates. In addition, the potential for an assessment of withdrawal liability under multiemployer pension plans should be monitored, but can be avoided if layoffs and workforce reductions are temporary in nature. Finally, for employers that are party to collective bargaining agreements, FFCRA requirements relating to sick and FMLA leave can be satisfied through additional contributions to multiemployer plans that include leave benefits. For more information, please click here.
- Voluntary Termination of Qualified Retirement Plans. Some employers may conclude that they need to terminate their qualified plans as a result of the economic downturn associated with the COVID-19 pandemic. Upon termination of a qualified retirement plan, all participants must be fully vested in their accounts under the plan. Employers should be aware of a special rule which provides that an employer who terminates a 401(k) plan generally may not establish a new plan within 12 months following the termination, with some exceptions. In addition, employers considering terminating a defined benefit plan should consider the effects of recent changes in the markets and interest rates on a plan’s funded status. Finally, participants and/or beneficiaries must receive a special notice generally at least 45 days prior to the effective date of the defined benefit plan termination.
- Partial Termination of Qualified Retirement Plans: A reduction in force of 20% or more of a qualified retirement plan’s participants in a particular plan year that is not considered to be routine turnover could result in the inadvertent partial termination of the plan. In the case of a partial plan termination, all affected participants are required to be fully vested in their accounts. This determination requires an analysis of all of the facts and circumstances associated with the layoffs.
- Certain Deadlines for 403(b) Plans and Pre-Approved Defined Benefit Plans are Extended: The IRS has posted the following information regarding the extension of deadlines for 403(b) plans and pre-approved defined benefit plans (see complete posting here). The IRS is extending the last day of the initial remedial amendment period for Section 403(b) plans from March 31, 2020, to June 30, 2020. Plan sponsors now have until June 30, 2020, to update their pre-approved and individually designed 403(b) plan documents. 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.
An employer that adopts, by July 31, 2020, a pre-approved defined benefit plan that was approved based on the 2012 Cumulative List will be considered to have timely adopted the plan within the second six-year remedial amendment cycle. The remedial amendment period for disqualifying provisions described in section 15.03 of Rev. Proc. 2016-37 is also extended to the end of the second six-year remedial amendment cycle. 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).
Incentive Compensation/Non-Qualified Deferred Compensation Plans
Code Section 409A imposes strict rules as to the time and form of payment of certain incentive compensation and other nonqualified deferred compensation. Failure to adhere to those rules can result in significant penalties and interest for employees and immediate taxation of all deferred amounts. Employers may also be subject to penalties for the failure to report compensation and withhold taxes properly. As employers and employees alike face potential liquidity issues due to the COVID-19 pandemic, employers should take care to ensure that they are properly navigating 409A with respect to employee deferrals and payments under their bonus plans or non-qualified deferred compensation arrangements. Employers should review their plan documents to determine whether any amendments to their plans are necessary and/or permissible to address the issues described below.
- Paying Annual Bonuses by March 15th: Many bonus plans are designed to take advantage of the “short-term deferral” exception from Code Section 409A and require payment by March 15th following the year in which the bonus was earned or became vested. Given the circumstances of the COVID-19 pandemic, employers may have missed the March 15th The regulations provide some relief with respect to this deadline if making the payment by March 15th was administratively impracticable due to an unforeseen event or if payment would jeopardize the employer’s ability to continue as a going concern, provided that the payment is made as soon as possible after these conditions are alleviated.
- Cancellation of Deferrals/Unscheduled Distributions: Generally, an employee’s deferral elections under a non-qualified deferred compensation plan must be irrevocable. However, an employee’s deferral election may be cancelled in the event of an unforeseeable emergency, if so provided in the plan document. An unforeseeable emergency would include an illness or an extraordinary and unforeseeable circumstance beyond the employee’s control (such as the COVID-19 pandemic) that creates a severe financial hardship which cannot be satisfied through other resources. Employers may also permit a participant to receive a distribution in the event of an unforeseeable emergency if the plan provides for such distributions. The participant must show that the emergency expenses cannot be satisfied through insurance, liquidation of other assets or through cessation of deferrals under the plan. In addition, the distribution must be limited only to the amount necessary to satisfy the financial need. Employers should review their plan documents to determine whether its terms contemplate cancellation of deferrals or distributions in connection with an unforeseeable emergency and, if not, consider whether an amendment would be appropriate.
- Scheduled Distributions/Distributions Payable Upon Separation From Service: An employer’s failure to make distributions according to participants’ elections and the terms of the plan is generally a violation of Code Section 409A, absent an exception. Many non-qualified deferred compensation plans provide for payment upon an employee’s separation from service. Complete termination or a reduction in hours could be considered a separation from service upon which the employee would be entitled to a distribution from the plan. Employers considering a reduction in hours for its employees should review the terms of their non-qualified deferred compensation plans to ensure they do not inadvertently create a distributable event or, in the alternative, be prepared to process a timely distribution.
- Performance-Based Compensation: Generally, Code Section 409A requires that a participant’s election to defer compensation must be made before the start of the performance period to which the compensation relates. However, for “performance-based compensation,” employees may make deferral elections up to 6 months before the end of the related performance period. Employers are required to establish relevant performance goals no later than the first 90 days of the performance period. If the calendar year is the performance period, the deadline for establishing performance criteria is March 30th. Absent further guidance from the IRS, employers should consider establishing performance goals within the deadline to preserve 409A compliance if they are relying upon this exception for performance-based compensation.
- Equity Award Considerations: Section 409A requires that stock options be issued with an exercise price equal to the fair market value of the employer’s stock on the date of issuance. Employers should consider whether an updated valuation is advisable that takes the effects of the COVID-19 pandemic into account for valuation purposes prior to the issuance of any equity compensation.
- Termination of Non-Qualified Deferred Compensation Plans: Employers may be considering terminating existing deferred compensation arrangements as a method to distribute benefits to employees. But they should think again. Section 409A does permit a voluntary plan termination and distribution of benefits under specific rules; however, those rules do not permit a termination in connection with a downturn of the employer’s financial status. Any termination of this type would also require that all similar nonqualified deferred compensation arrangements be terminated, payments must be delayed until 12 months after the plan termination, and the employer cannot adopt a new non-qualified deferred compensation arrangement of the same type for 3 years after the termination.
The information provided in this Client Alert should not be interpreted as specific legal advice related to any specific facts and circumstances. We encourage you to see professional legal advice applicable to your specific situation before taking any action (or not taking any action) with respect to any information provided herein.
Bryan Cave Leighton Paisner LLP has a team of knowledgeable lawyers and other professionals prepared to help employers deal with coronavirus related issues. If you or your organization would like more information on such issues or any other employee benefits issue, please contact an attorney in our Employee Benefits and Executive Compensation practice group or your trusted Bryan Cave Leighton Paisner LLP attorney.
This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.