How the CARES Act impacts benefit plans for both employees and employers

With the economy reeling from the COVID-19 pandemic, businesses closed and millions of employees out of work, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) is offering financial relief to both businesses and individuals.

Under certain circumstances, the act gives employees easier access to funds in their defined contribution plans. In addition, employers have delayed obligations regarding pension contributions, and there is less of a financial burden for coronavirus-related health care.

“This is relief provided by the government to address some issues that individuals and businesses are facing with the pandemic,” says George P. Pickard, CPA, MSA, principal at Ciuni & Panichi Inc.

Smart Business spoke with Pickard about the benefits aspects of the CARES Act, who qualifies and how to take advantage of its provisions.

Who qualifies for relief under the CARES Act?

If you have been diagnosed with COVID-19, or a spouse or dependent is diagnosed, you qualify. In addition, if you have experienced financial consequences because of a furlough, layoff, reduced hours or quarantine, because your company has closed, or because you are unable to work due to a lack of childcare, you can benefit from its provisions.

What are the changes to the rules for accessing funds in 401(k)s, 403(b)s, ESOPs, SEPs and other plans?

Previously, there were restrictions on how and when you could withdraw funds. While you could access money before turning 59½, in addition to paying taxes on those funds, there was a 10 percent penalty. Under the CARES Act, that withdrawal, up to $100,000, is considered a coronavirus-related distribution and the penalty is waived. In addition, the withdrawal will be taxed as income over three years instead of one, but if you reinvest back into the fund within three years, you avoid the tax altogether.

For 180 days following the March 27 start date, qualified individuals can take distributions of the lesser of $100,000 — up from $50,000 — or 100 percent of their vested balance, up from 50 percent. For 401(k) loans in place when the CARES Act was passed, for repayment due before Dec. 31, 2020, participants can have payroll payback suspended for one year, although interest continues to accrue.

For employees to take advantage of these changes, an amendment must be adopted by the plan. It can implement the changes immediately, but it must formalize amendments to allow employees to withdraw funds.

However, if you don’t absolutely need the money, don’t take it out. With funds down, you are going to realize losses. Leave the money in and allow the stock market to come back. And if you are able, start pumping more money into your funds in this down time.

How does the act impact minimum distribution requirements and health care plans?

Minimum distributions requirements are suspended for 2020, so if you don’t want to withdraw money in a down market, you can leave it in place until 2021.

The CARES Act follows the Families First Coronavirus Response Act (FFCRA). Under FFCRA, health plans are required to cover qualified preventive services and approved diagnostic testing, without any cost-sharing with the employee. The CARES Act expands the types of COVID-19 testing that must be covered.

What is the impact on employers regarding pension plan contributions?

If a business has a single employer plan, it is required to fund the plan to a certain minimum annual amount. Under the CARES Act, it can delay funding until Jan. 1, 2021, although interest on the deferred amount accumulates. This gives companies leeway to use that cash now to keep the business going and pay employees.

However, these plans rely heavily on investment returns to offset what they contribute, and if investments are down, companies could be liable for a very hefty amount.

Insights Accounting is brought to you by Cuini & Panichi Inc.