COVID-19 has swept across the globe, with the health crisis paralyzing much of the world’s activities and causing substantial economic turbulence.  Many organizations now face extraordinary challenges.  In response to this crisis, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The CARES Act is the largest emergency stimulus package in United States history.  It includes economic relief for businesses and individuals, provides assistance to states, and includes protections for workers.

As explained below, the CARES Act contains a number of provisions that will impact employers’ employee benefits and compensation arrangements.  This alert also addresses relief under the CARES Act that provides an employment tax credit to certain affected employers for retaining employees and that extends the time employers have to remit certain employment taxes.

Employee Retention Employment Tax Credit for Employers

Employers may be eligible for a refundable employment tax credit of 50% of the “qualified wages” paid to employees from March 13, 2020 through December 31, 2020.  This credit is generally available to employers, including tax-exempt employers, who either (1) had operations fully or partially suspended during 2020 because of government orders limiting business activity, travel, or meetings (for commercial, social, religious, or other purposes) due to COVID-19 or (2) whose gross receipts for a calendar quarter in 2020 were less than 50% of its gross receipts for the same calendar quarter in the prior year (until the business's gross receipts are equal to at least 80% of its gross receipts relative to the same quarter in the prior year).

In the case of large employers (i.e., employers with an average of more than 100 full-time equivalent employees in 2019), qualified wages include only wages paid to employees who are not providing services during the relevant period.  However, in the case of small employers (i.e., employers with an average of 100 or fewer full-time equivalent employees in 2019), qualified wages also include wages paid to employees who continue to provide services during the relevant period.  In defining which businesses would be considered large employers, the CARES Act cross-references the rules provided under the Affordable Care Act (in Section 4980H of the Internal Revenue Code of 1986, as amended (the “Code”)), which are complex.  The definition of “qualified wages” in the CARES Act includes certain “qualified health plan expenses,” such as costs for group health plans (but only to the extent such amounts are excluded from the employees’ income).

For purposes of calculating the employment tax credit, the amount of wages relating to the tax credit is capped at $10,000 per employee for all calendar quarters (which caps the total amount of the employment tax credit at $5,000 per employee).  Any business receiving “small business interruption loans” under the Paycheck Protection Program provided in Title I of the CARES Act is not eligible to receive this employment tax credit. Additionally, the amount of the employment tax credit provided under the CARES Act will be reduced for any employers who claim tax credits relating to paid sick leave and paid family leave that are provided under the recently-enacted Families First Coronavirus Response Act (“FFCRA”) or certain other tax credits that employers may claim (e.g., tax credits for employment of qualified veterans or for certain expenditures by qualified small businesses).

Delay of Certain Employment Tax Payments

An employer must generally pay certain federal employment taxes with respect to its employees.  In particular, an employer is responsible for paying its share (6.2%) of Social Security taxes and its share (1.45%) of Medicare taxes for each employee’s covered wages.  The CARES Act allows an employer to defer paying its portion of the Social Security employment tax (i.e., 6.2% of an employee’s covered wages) that would otherwise have been due between the date of enactment of the CARES Act and December 31, 2021. Under the CARES Act, the first half of the amount of these taxes is due by December 31, 2021, and the second half is due by December 31, 2022.  The CARES Act provides similar relief for self-employment.  Employers who received forgiveness for “small business interruption loans” under the CARES Act are not eligible for this employment tax deferral.

Provisions Applicable to Qualified Retirement Plans 

    • Coronavirus-Related Distributions.  Employers that sponsor qualified defined contribution plans (including Code Section 401(k), 403(b), and governmental 457(b) plans) may allow for distributions from such plans of up to $100,000 to certain plan participants who have been impacted by coronavirus-related issues, as described below.

Coronavirus-related distributions are generally available to participants who have been diagnosed with COVID-19 (which includes the SARS-CoV-2 virus and the 2019 coronavirus disease) by a CDC-approved test, participants whose spouse or dependent have been so diagnosed by such a test, and participants experiencing adverse financial consequences from being quarantined, furloughed, laid off, having hours reduced, being unable to work due to a lack of child care on account of COVID-19, or other factors as may be determined by the Secretary of the Treasury. These distributions must be made before December 31, 2020. Plans may rely on certifications provided by participants that they are eligible to receive these distributions.

Any such coronavirus-related distributions would not be subject to the ordinary 10% early withdrawal penalty that would otherwise apply to payments made to participants prior to the age of 59-1/2.  These distributions would also not be subject to tax withholding.  Instead of participants being taxed on the entire amount in the year of the distribution, participants would be allowed to include the distribution in their taxable income ratably over a 3-year period, beginning with the year in which the distribution occurred. Participants may also repay these distributions to the retirement plan within 3 years after taking the distribution, or alternatively, contribute the amounts to another eligible retirement plan, but only if the applicable plan permits such repayment.

    • Temporary Increase in Plan Loan Limitations.  The limit for the amount of loans that participants who are eligible to take a coronavirus-related distribution may borrow from their retirement plan is temporarily increased.  For 180 days following the date that the CARES Act was enacted,  such participants may borrow the lesser of $100,000 or 100% of such participant’s vested account balances (in effect doubling the maximum permissible loan amounts that the law would have otherwise allowed). It appears that plans may incorporate these temporary limit increases, but are not required to do so.

    • Plan Loan Extensions.  Participants who have plan loan repayments due in 2020 and who would qualify for coronavirus-related distributions may delay repayments for up to a year, and any subsequent repayments with respect to the loan would be adjusted to reflect the change in due date and interest accrued during the delay.  The CARES Act modifies the five-year limit on loan repayments to disregard the one-year delay for 2020. It is unclear whether participants may opt out of having their loan due dates extended by this provision.

    • Required Minimum Distribution.  The CARES Act provides a temporary waiver for 2020 required minimum distributions for certain defined contribution plans (including Code Section 401(k), 403(b), and governmental 457(b) plans) and IRAs.  This relief does not appear to apply to defined benefit pension plans.

    • Plan Amendments.  Qualified retirement plan sponsors may immediately take advantage of the provisions in the CARES Act described above and retroactively amend their plan document later to reflect the relief.  Under the CARES Act, plan sponsors will have until the last day of the plan year beginning on or after January 1, 2022 (i.e., December 31, 2022, for plans with calendar year plan years) to amend their plans (and governmental plans will have an additional two years).

    • Relief from Minimum Funding Rules for Single-Employer Pension Plans.  The CARES Act provides employers sponsoring single-employer pension plans with additional time to meet their plan funding obligations by delaying the due date for “minimum required contributions” that would otherwise be due in 2020 until January 1, 2021.  At that time, the 2020 contributions plus interest will be due (accruing from the original due date to the actual payment date using the plan’s effective rate of interest).  Note that this relief only applies to “minimum required contributions” (as defined in the Code) and does not apply to payments that are required to be made to a plan for any other reason.

    • Relief from Funding-Based Limitations for Single Employer Pension Plans.  The Code requires pension plans to meet specific funding levels, and failure to meet certain funding levels causes underfunded plans to be subject to various restrictions (such as preventing an increase in benefit accruals or preventing the payment of benefits in the form of a lump sum).  In order to determine the level of funding for a pension plan for these purposes, and whether a plan could potentially be subject to benefit restrictions, a plan's funding level (the “adjusted funding target attainment percentage” or “AFTAP”) for the 2019 plan year may be used with respect to the 2020 plan year.  This relief only applies to the funding based restrictions placed on single-employer defined benefit pension plans by Code Section 436, and Section 206(g) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

Provisions Applicable to Health Plans

    • Coverage of Coronavirus Preventive Services.  The CARES Act directs the Secretaries of the Department of Health and Human Services, the Department of Labor, and the Department of the Treasury to require all group health and health insurance issuers offering group or individual health insurance to cover, without cost-sharing, any qualifying coronavirus preventive services, which includes items, services, or immunizations intended to prevent COVID-19 and that have been recommended by certain government organizations. 

    • Coverage of Coronavirus Diagnostic Testing.  The CARES Act amends the recently-enacted FFCRA to expand the types of tests for diagnosing and detecting COVID-19 that group health plans and health insurance issuers must cover without cost-sharing, prior authorization, and other medical management requirements.

    • Telehealth Services.  For plan years beginning on or before December 31, 2021, the CARES Act permits (but does not require) a high deductible health plan (“HDHP“) to cover telehealth and other remote care services prior to a patient reaching their deductible without impacting the plan’s status as an HDHP.

    • Over-the-Counter Drugs and Menstrual Care Products.  Effective with respect to expenses incurred on or after January 1, 2020, the CARES Act eliminates the requirement to have a prescription for over-the-counter drugs to qualify for tax-favored reimbursement from health savings accounts, health reimbursement accounts, and health flexible spending arrangements.  In addition, menstrual care products are now considered a qualified medical expense that can be paid from these accounts.

Limits on Employee Compensation for Certain Businesses Benefiting Under the CARES Act

The CARES Act includes provisions that are intended to prevent government assistance from being used to increase executive compensation packages.  These provisions apply to businesses that receive loans, loan assistance, or other financial assistance under Title IV of the CARES Act (which includes financial assistance to passenger air carriers, cargo air carriers, businesses critical to maintaining national security, and certain other businesses that receive a loan or loan guarantee under the CARES Act).  These limits do not apply to businesses receiving assistance under the Paycheck Protection Program established by Title I of the CARES Act, which provides for small business loans to cover, among other things, payroll costs for employers with 500 employees or fewer.  The CARES Act places three restrictions on the amount of compensation that can be paid by any business that is subject to these limitations during the period beginning on the date that the applicable loan agreement is executed and ending on the first anniversary of the date on which the loan or loan guarantee is no longer outstanding, as follows: 

    • Limit on Compensation Increases.  No employee whose total compensation exceeded $425,000 in the 2019 calendar year may receive total compensation over a 12-month period that exceeds the amount of compensation that employee received in 2019.  For purposes of the CARES Act, "total compensation" includes salary, bonuses, awards of stock, and other financial benefits.

    • Limit on Severance Payments.  Any severance payments or benefits payable to an employee whose total compensation exceeded $425,000 in the 2019 calendar year must be capped at two times the total compensation received by that employee in 2019.

    • Limit on Total Compensation.  No employee whose total compensation exceeded $3 million in the 2019 calendar year may receive total compensation over a 12-month period that exceeds $3 million plus 50% of the amount of total compensation exceeding $3 million that he or she received in the 2019 calendar year. 

Air carriers or contractors receiving other financial relief under the “air carrier worker support” provisions of the CARES Act are subject to the compensation limits described above, except that the covered period for these businesses is the two-year period from March 24, 2020 until March 24, 2022.

Fringe Benefits/Student Loans

The CARES Act allows employers to pay or reimburse an employee’s student loan payments on a tax-free basis through a Code Section 127 education assistance plan (the maximum annual benefits under such a plan are capped at $5,250).  This applies only for student loan payments that are made by the employer after the date of the CARES Act’s enactment and before January 1, 2021, and applies to payments of principal or interest made to either the student or the lender. Any such plan would be subject to certain requirements, including not discriminating in favor of highly paid employees and the payments being made pursuant to a written plan document.

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We have a specific team of Brown Rudnick attorneys who are closely monitoring the legislation and expected guidance, and who are prepared to assist clients with all of their employee benefits and executive compensation issues.  If you have any questions regarding the content of this alert, please contact Steven Einhorn at


The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.