Employers are grappling with increasingly difficult decisions as COVID-19 changes our labor force and the ways we work in profound ways. Below are various benefits-related issues and solutions to consider, amidst a rapidly shifting legislative environment:
- 401(k) loans and hardship distributions: Most 401(k) plans allow in-service withdrawals in the event of financial hardship. Many participants are already experiencing financial consequences from the COVID-19 pandemic, perhaps from work furloughs or reduced schedules, or a spouse’s job loss. If employees are terminated or attain age 59½, they are eligible for distributions; but active employees may access their 401(k) accounts through loans or hardship distributions, if the plan terms allow (or are amended to that effect).
- Health plans: The Families First Coronavirus Response Act (FFCRA, signed into law on March 18th) requires group health plans and health insurance issuers to provide COVID-19 testing and related diagnostic services with no cost sharing or prior authorization requirements. Plans are not required, however, to cover treatment beyond diagnostic testing. If a plan is fully insured, state law may impose coverage requirements in addition to those under the FFCRA; if a plan is self-funded, the plan sponsor should consult with their stop loss insurance carrier before providing coverage beyond that required by the FFCRA.
- ACA responsibilities: Employers should monitor the impact of furloughs, leaves and other employment and coverage changes on compliance under the Affordable Care Act with respect to the requirement to offer coverage to 95% of full-time employees and the affordability of coverage.
- FSA elections: An employer may allow changes to health and welfare coverage elections for reasons such as a reduction in hours affecting eligibility or loss of other coverage. Shutdowns in schools and other childcare facilities may trigger a mid-year change in status for employees to change their contributions to dependent care flexible spending accounts (regardless of a furlough).
- HSA eligibility: The IRS clarified in Notice 2020-15 that employees will not be disqualified from HSA eligibility solely because a plan provides COVID-19 testing and treatment benefits before meeting the deductible. (Note that the cafeteria plan status change rules do not impose the same restrictions on HSA elections.)
- Premiums: A participant’s failure to pay premiums could cause coverage to lapse without COBRA protections for welfare benefit plans. Employers should clarify how employees will continue to pay premiums for coverage for which they are eligible during leave (e.g., through a third party vendor, ACH payment, remitting a personal check by mail, etc.). Some states are ordering insurers to defer premiums related to their health insurance coverage by up to 60 days (e.g., Ohio).
- COBRA: Employers should confirm whether coverage eligibility is lost as a result of furlough. If so, furloughed employees may be eligible for COBRA and should be provided applicable notices.
- Sick leave: See our post on the Families First Act here.
- Qualified Disaster Relief Payments: Section 139 of the Internal Revenue Code allows employers to make qualified disaster relief payments to employees for reasonable and necessary expenses incurred as a result of federally declared disaster (such as the COVID-19 pandemic). Qualified payments are tax-free to employees but fully deductible by employers. Amounts paid or reimbursed must be reasonably expected to be commensurate with expenses incurred, and cannot be otherwise compensated for by insurance or intended to replace lost income (e.g., sick pay and family medical leave pay remain taxable as compensation).
Guidance will be updated as federal and state legislation is adopted to address issues stemming from the COVID-19 pandemic. Draft legislation being considered by Congress includes a waiver of the 10% penalty on early withdrawals of up to $100,000 from a qualified retirement plan and the opportunity for participants taking hardship distributions to repay them over a three-year period. Potential solutions being proposed by industry groups in anticipation of an imminent stimulus package include: 401(k) loan modifications, temporary waiver of required minimum distributions rules, and freezing the interest rate at pre-COVID-19 pandemic levels and extending the contribution due dates for pension plans.
We will continue to update this space with relevant legal developments.