By Greta Cowart
More Relief Provided Late on Friday
On March 20, 2020, a joint news release issued by the Internal Revenue Service, the U.S. Treasury Department, and the U.S. Department of Labor announced regulations to be issued this week that will permit employers – subject to the Paid Leave Act and Emergency Paid Family and Medical Leave Expansion Act (collectively, the “Paid Leave Acts”) – to offset their payroll tax deposits to recover the paid leave credits under the Families First Coronavirus Response Act (FFCRA). The payroll taxes that may be offset are not only the employee’s and employer’s share of Social Security and Medicare taxes for all employees, but also the federal income taxes withheld from the employees’ wages. Such employers will also be provided with a form that they can file with the IRS to request an expedited advance for the credit.
For businesses subject to the mandated paid leaves within the joint Paid Leave Acts, this guidance provides cash flow relief by offering credit for mandated paid leaves to be immediately deducted from the payroll taxes withheld from the employees, and from certain payroll taxes paid by the employer. The guidance also relieves the employer from the requirement to deposit the full payroll tax obligation. Furthermore, employers whose credits exceed their payroll tax deposits may file a form (to be issued) to request a prompt refund of the excess. So if your credit for paid leaves under the FFCRA were $10,000, but your payroll tax deposits permitted to be offset were only $7,000 for that period, you would not deposit the $7,000 of payroll taxes due to the paid leave credit, and you would file a tax refund claim for the $3,000 of additional paid leave credit.
401(k) Plan Changes Employers May Need to Consider
An employer facing financial challenges due to COVID-19 may need to reconsider the level of its contributions to its 401(k) retirement plan. If the employer uses the safe harbor matching contributions or non-elective contribution formula, the change to stop the safe harbor contribution formula can only be made if specific requirements are satisfied, including a 30-day advance notice to the participants. Employers should carefully analyze all of the requirements to qualify to make a change and to implement it so that the change cannot be challenged.
Employers who do not use a safe harbor matching contribution formula or a qualified non-elective contribution formula or the qualified automatic contribution formula as safe harbors may also be reevaluating the employer contributions to their 401(k) plans. Employers need to be careful to properly amend their plans and communicate the amendment to employees, if such amendments become the prudent course of action.
For employer plans permitting participants to take loans from their 401(k) plans, the IRS regulations guide how participant loans to participants on furloughs are to be treated and when payments may be missed without triggering inclusion of the outstanding loan amount in the participant’s income. Verifying the coding for participants on unpaid leaves with the plan record keeper to ensure participant on unpaid leaves are not inadvertently defaulted on their participant loans may help to avoid unpleasant tax consequences to employees on unpaid leaves or furloughs.
Other Tools Available or Potentially Available to Assist Employees
There are a number of other tools in the Code or in employee benefit plans that may assist employers in helping their employees through the disruption of employment and any concurrent economic downturn. Employers making benefits changes in response to an economic downturn need to carefully communicate the change and how it impacts different groups of employees and the distinctions within workforces between furloughed, layoffs, and terminated employees to avoid miscommunication of the impact of the change on different groups of employees.
401(k) Tools to Assist Employees
401(k) and 403(b) plans may consider the medical expenses related to treating the employee, spouse, child or other dependent’s COVID-19 diagnosis constitute a hardship permitting a distribution to cover the medical expenses, or if it might constitute a hardship for another reason permitting distributions. However, most hardship distributions are also subject to an additional 10% tax under Code section 72 unless the participant is over 59 ½ years of age or one of the other exceptions apply, so participants need to consider the full cost of taking such a distribution. Hardship distributions that are not qualified disaster distributions cannot be repaid by the participant into the plan, so the funds withdrawn are permanently lost as retirement savings.
Participants who are terminated can receive a distribution of their 401(k) plan account to ease the financial burdens. Participants who are not terminated but only furloughed may be able to obtain a participant loan or a hardship withdrawal for certain qualifying expenses, such as medical care expenses for the participant and the participant’s primary beneficiary. A plan loan is not taxed to the participant when it is taken, but the hardship withdrawal is taxed to the participant. If the hardship is used solely to pay qualifying medical expenses, it will not be subject to the additional 10% tax on early distributions. If a hardship distribution is taken in the wake of COVID-19 for payment of tuition and related educational expenses in the next 12 months for certain family members, or to prevent eviction of an employee from their principal residence or foreclosure on their mortgage or for the payment of certain funeral expenses for certain family members, it could be a hardship distribution but would also be subject to the additional 10% tax under Code section 72.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) was signed into law on December 20, 2019, as part of the Further Consolidated Appropriations Act, 2020 (CAA). (2020, H.R. 1865, Pub. L. No. 116-94.) While the law was designed to encourage small employers to adopt or expand access to qualified retirement plans, the tools provided for such expansion will require a number of system changes to capture the information needed to administer the new provisions and to accommodate new provision for distributions for children born to or adopted by a plan participant and the new repayment option for such distributions.
Qualified Disaster Distribution
While this change is not technically within the portion of the CAA comprising the SECURE Act, it is within the CAA. Section 72(t) was made inapplicable to “qualified disaster distributions.” (CAA, Division Q, Subtitle D, Title II, §202.) Such qualified disaster distributions are in amounts of up to the \total which is the difference between $100,000 less the aggregate amounts treated as qualified disaster distributions received by such individual for all prior taxable years. This limit is applied to all plans from any member of the controlled group of the employer.
The individual may repay the qualified disaster distribution within three years that begins on the date after the distribution was received in one or more payments. The individual may elect to include the amount in income ratably over a three year period. The qualified disaster distribution is treated as meeting the plan’s requirements for purposes of §401(k)(2)(B)(i), §403(b)(7)(A)(ii), §403(b)(11) and §457(d)(1)(A), but did not amend any of such sections. (I.R.C. §72(t) made inapplicable to qualified disaster distributions by CAA, Division Q, Subtitle D, Title II, §202.)
Other Tools for Providing Assistance to Employees Impacted by COVID-19
Employers frequently look for ways to assist employees affected by disasters and we can now benefit from the tax tools that we learned about following Hurricane Katrina. Some of the tools for Katrina were enacted as part of the relief legislation for the hurricane and were of limited duration and those will not be discussed. This will only be a high level discussion of the tools that are still in effect to keep this to a readable length and not too deep in the Code or in historical provisions. In order to be able to assist employees, employers must have current contact information on all employees (both work and personal phone, email addresses, and emergency contact information) to be able to reach the employees wherever they may be staying.
Paid Time Off Donations to Pool for Affected Individuals
Aside from creating an employer affiliated tax exempt foundation to assist employees, there are other ways an employer can assist its employees or offer its employees as a way to assist the affected individuals, including employees. In the past some employers have permitted employees to donate their paid time off or leave to a pool that can be used by the affected employees. Donation of leave is possible as long as one carefully structures the leave donation program in compliance with existing guidance so that there is no constructive receipt of the donated leave by the donating employee. The Service issued subregulatory guidance on leave donation programs. The leave donations were to a pool governed by a committee who then determined which such affected individuals should receive an allocation of the donated paid time off or other personal entitlement to vacation or other time off.
Disaster Preparation for Employers
Emergency preparedness plans usually initially focus on access to business assets and operations, the integrity of the facilities, business emergency preparedness plans, backup facilities, and emergency response teams and how to locate employees and retirees. Employers, once a natural disaster hits, may shift from business continuity to employee support and assistance in terms of relocating the employees and families, temporary housing, home repairs/restoration/sales, and support of daily needs such as food, water, clothing, shelter, medical care, dealing with regular bills, and disaster-related financial obligations as well as emotional and trauma support. COVID-19’s spread required employers to implement the business continuity plans and know where the employees would be at the same time, and requires an employer to have continuous contact with the employees after the business operations move to a remote work situation.
Employee Assistance Plans Can Provide Emotional Support for Living in the Stress of a Pandemic
Employee assistance programs can be established in a tax-favored manner in the event of a disaster, but employers are often concerned with whether if they build it, will the employees use it or will it be abused. Employee assistance plans are frequently tied to group medical plans for employees to exclude the cost of the coverage from an employee’s income. While the COVID-19 pandemic has focused on medical plan coverage for diagnosis, testing, and treatment of COVID-19 and for using telehealth tools as part of such group health plans, working from home can bring additional stress such as balancing work and children at the same time, working in a confined setting or in isolation, and the uncertainties from the nature of the pandemic which may indicate that an employee assistance plan’s available counselors or referral service may provide important to support to employees in stressful situations. Employers may want to remind employees of all of the tools of the employee assistance program, which can include referrals to financial counseling as well as emotional and mental health counseling or referrals.
Qualified Disaster Relief Payments – Potentially Tax-Free to Individuals
The Code that permit an employer to exclude from an employee’s income an amount paid as a “qualified disaster relief payment.” This is a provision that predated Hurricane Katrina and continues to exist and can permit payment to an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster and to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation or replacement of a personal residence or its contents attributable to a qualified disaster, but only if such expense is not otherwise compensated for by insurance. This only applies to Presidentially declared disasters if all of the requirements of the section apply. On March 13, 2020, President Trump issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the COVID-19 pandemic. The relief cannot be paid to any individual identified by the Attorney General to have been a participant or conspirator in a terroristic action or a representative of such an individual. An individual who receives a qualified disaster relief payment under this provision is not permitted a deduction or credit related to the qualified disaster relief payment.
The focus of this article is to provide information on the proposed legislation for your consideration. Watch for further alerts addressing additional developments related to guidance on the Families First Coronavirus Response Act. The Jackson Walker Coronavirus microsite will continue to be updated for additional developments.
Greta E. Cowart has counseled employers for more than 30 years on best practices in human resources and employee relations issues related to benefits and executive compensation. In her practice, Greta routinely develops strategies for effective administration of claims and other disputes, including defense of grievances, and in litigation considering implications under ERISA, while also considering applicable labor and employment laws. Greta also provides fiduciary training and review of fiduciary operations to improve the documentation of the fiduciary process. Greta is a former chair of the Employee Benefits Committee of the ABA Section of Taxation, and has served on the U.S. Department of Health and Human Services CHIP Working Group.
Please note: This article and any resources presented on the JW Coronavirus Insights & Resources site are for informational purposes only, do not constitute legal or medical advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Jackson Walker. The facts and results of each case will vary, and no particular result can be guaranteed.