New Model COBRA Notices and Emergency Extensions to COBRA Deadlines Require Employers to Take Action

The Department of Labor (DOL) and other federal regulators released updates and clarifications related to employee benefits, including updates to model COBRA notices and an extension of certain statutory deadlines intended to minimize the possibility of participants and beneficiaries losing benefits during the COVID-19 pandemic. This article highlights the DOL’s recent changes and updates relating to Consolidated Omnibus Budget Reconciliation Act (COBRA).

Updated COBRA Notices

On May 1, 2020, the DOL released the first updates to its model COBRA Notices since 2014. The models are for the (i) general or initial notice (provided to employees and covered spouses within the first 90 days of coverage under the group health plan), and (ii) the election notice (provided to qualified beneficiaries within 44 days of the qualifying event resulting in a loss of coverage). The notices inform plan participants and other qualified beneficiaries of their rights to health continuation coverage upon a qualifying event. The release of these updated model COBRA notices is an important reminder for employers to ensure that plan participants receive timely and adequate information about their COBRA rights.

More Information about Medicare:  The primary update to the DOL model notice is a new Q&A section, “Can I enroll in Medicare instead of COBRA continuation coverage after my group health plan coverage ends?”, with similar content in a companion FAQ about COBRA and Medicare options.

Risk of Noncompliance

Employers do not have to use the model notices, however the DOL considers using the model notices, appropriately completed, to be good-faith compliance with COBRA’s notice content requirements. Our firm recently discussed the rapid expansion of class action litigation against employers that issued COBRA election notices that failed to follow the DOL model notice in detail. We strongly recommend that employers use the updated DOL COBRA notice forms (or some enhanced version of such notices).

If the updated model notices are not used, the employer should ensure that their COBRA notices include the most current information from the DOL. Because of the significant exposure for COBRA noncompliance, and because employers retain liability for COBRA compliance even if a third-party vendor is hired for COBRA administration, employers should have their COBRA notices regularly reviewed.

COBRA Deadline Extensions

On April 29, 2020, the DOL and Internal Revenue Service (IRS) issued a Joint Notice extending certain time frames affecting a participant’s right to continuation of group health plan coverage under COBRA after employment ends. Normally, a qualified beneficiary has 60 days from the date of receipt of the COBRA notice to elect COBRA, another 45 days after the date of the COBRA election to make the initial required COBRA premium payments, and COBRA coverage may be terminated for failure to pay premiums timely. A premium is considered timely if paid within a 30-day grace period.

The Joint Notice extends the above deadlines (and many other participant-related deadlines such as HIPAA special enrollments, claim appeals and external review filings) by requiring plans to disregard the period from March 1, 2020, until 60 days after the announced end of the National Emergency (known as the “Outbreak Period”).

Election Period Extension:  once a participant receives his or her timely COBRA election notification, the applicable COBRA deadlines are now extended until after the Outbreak Period ends. For COBRA election purposes, this means if a qualifying beneficiary receives the election notice on or after March 1, 2020, the 60-day initial COBRA election period does not begin until the end of the Outbreak Period. The participant then has another 45 days after that to make the required COBRA premium payments (that still apply back to the date on which previous employer coverage ended). The more time provided to qualified beneficiaries to elect and pay for coverage retroactive to the date coverage is lost, the greater the opportunity to game the system.

As an example, if the National Emergency period is proclaimed to end on May 31, 2020, the “Outbreak Period” will be deemed to end on July 30, 2020.  If an employee was provided a COBRA election notice on April 1, 2020, that person’s initial COBRA election deadline will be extended from the original deadline of May 31, 2020 (the 60th day from date of receipt of COBRA election notice) to a new COBRA election deadline of September 28, 2020 (i.e., 60 days from the end of the Outbreak Period).  That individual then has 45 more days to make the first COBRA premium payment for all coverage back to the original date of coverage loss.

Premium Payment Extension:  Likewise, for individuals already on COBRA, the deadlines to make required monthly premium contributions are extended until 30 days after the end of the Outbreak Period, and the guidance makes clear that an employer or health insurance carrier cannot terminate coverage or reject any claims for nonpayment of premium during this period. Such coverage termination can only occur if the individual fails to make all the required monthly premium contributions at the end of the Outbreak Period.

For example, an individual previously elected COBRA and has been paying monthly COBRA premiums since March 1, 2020. That individual does not pay applicable monthly COBRA premiums for April, May, June, or July. Under the extension guidance, the Plan must allow the individual until 30 days after the end of the Outbreak Period (or, August 29, using the dates from the prior example) to fully pay all prior months of COBRA premiums to maintain the COBRA coverage.  Health plans and insurance carriers are burdened with holding all claims submitted during the extension period to know whether coverage will or won’t be paid as required.

Employer COBRA Notice Period Extension:  The Joint Notice potentially also allows plans, plan administrators, and employers to have extra time to provide the COBRA election notice but the guidance is unclear about how that extension period applies. Until further guidance is issued to add clarity, we recommend that employers, other plan sponsors and administrators continue to send the COBRA election notices based on existing law and rely on the extension only if necessary.

Complications will likely result under this new guidance, and thus we strongly recommend working with COBRA administrators to ensure proper compliance is maintained throughout the Outbreak Period and beyond.

Participant Options for Coverage

Lastly, the DOL updated its ongoing FAQ guidance for participants to know and understand their health insurance and other benefit rights and coverage options before, during, and after the National Emergency period ends. While this guidance is directed to participants and beneficiaries, employers may also find it instructive to ensure they are providing proper coverage alternatives.

More Information

Employers can find a consolidation of almost all the DOL’s recent COVID-19 related guidance about benefits on its website. Jackson Lewis is ready to assist all employers in making sure they understand these and other ongoing changes and updates.

Too Good to Be True? Treasury, SBA Limit Benefits of PPP Loans

Guidance issued by the Treasury Department and the Small Business Administration (SBA), the federal agency that administers the Paycheck Protection Program (PPP), demonstrates that the PPP loans, as originally thought, were too good to be true.

PPP was established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020). As enacted, the PPP provided for readily available low-interest loans potentially forgivable to the extent used for a broad range of expenditures, all of which were otherwise deductible. Further, the statute expressly provided that the amounts forgiven were not taxable as income to the borrower.  When the CARES Act was enacted, many thought that PPP was “too good to be true,” a belief validated by recent guidance issued by Treasury and SBA.

First, the SBA declared in an Interim Final Rule that no more than 25 percent of the amount forgiven can be attributable to non-payroll costs. See Q&A 2.o. in Part III of the interim final rule, Business Loan Program Temporary Changes; Paycheck Protection Program, Docket No. SBA-2020-0015, 85 Fed. Reg. 20811, 20813-20814 (April 15, 2020). This requirement is not in the statute and significantly limits the utility of the loan to employers in high-rent locations forced to lay off most of their staff due to government closure orders. The SBA’s subsequent Interim Final Rule stated that a borrower may not take multiple draws from a PPP loan to delay the start of the eight-week covered period. Together, these limitations have forced employers to decide to return the PPP loan proceeds, rather than make the expenditures and later fail to meet the forgiveness requirements.

Next, the SBA objected to the many large or publicly traded companies that applied for and received PPP loans during the initial round of funding. Despite the statute expressly making such entities eligible for PPP loans through a waiver of certain SBA affiliation rules that would otherwise disqualify them, the SBA issued two “frequently asked questions” (FAQS) reiterating that PPP loan applicants must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The FAQS went on to state that in so certifying, borrowers consider “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” The SBA takes the position that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” The SBA then provided a safe harbor for such borrowers (which were expressly eligible for PPP loans under the CARES Act) by allowing any “borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020” to be “deemed by SBA to have made the required certification in good faith.” Finally, the SBA published a FAQ stating that “[t]o further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.” These FAQs and related comments by public officials have had a chilling effect on PPP borrowers; several have reportedly returned the loan proceeds and countless others are no doubt considering doing so.

On April 30, 2020, the IRS released Notice 2020-32, which “clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the [CARES Act] and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.” This conclusion is based on section 265(a)(1) of the Code, which disallows otherwise allowable deductions (such as the payroll, rent, and utility payments for which loan forgiveness is available under the CARES Act) because such payment is allocable to tax-exempt income and therefore “prevents a double tax benefit” that would otherwise occur. While not beloved by PPP borrowers, Notice 2020-32 provides certainty on at least one open issue regarding forgiveness.

The CARES Act was enacted during an unprecedented crisis and understandably did not address every contingency. Even as the law has developed post-enactment, the PPP loans still offer significant and potentially existential benefits to borrowers. Hopefully, the SBA will issue much-needed guidance on the myriad of issues remaining open and allow borrowers to maximize their intended impact.

Please contact a Jackson Lewis attorney if you have questions.

PPP Loan Forgiveness: Some Answers, Many Questions

Much has happened in the three-plus weeks since the Coronavirus Aid, Relief, and Economic Securities (CARES) Act was enacted on March 27, 2020.  The $349 billion dollars appropriated to the newly created Paycheck Protection Program (PPP) has been exhausted.  The Small Business Administration (SBA), the Federal agency administering the PPP, reports they have made over 1.6 million loans through nearly five thousand lenders with “net approved dollars” (net of fees paid to the originating lenders) of $342.3 billion dollars.  As of this writing, the Senate has approved legislation providing another $320 billion for the PPP and the House is expected to approve.  The President has indicated he supports the additional funding.

Many of these lenders have now disbursed funds to borrowers, triggering the eight week “Covered Period” for loan forgiveness purposes.  The cornerstone of the PPP, the loan-forgiveness provisions of the PPP provide that amounts expended for payroll costs, rent, mortgage interest, and utilities (“Eligible Expenses”) during this Covered Period are potentially forgiven.  Unfortunately, many questions remain unanswered at a time when employers need to make important decisions about their workforce and the use of the PPP funds to ensure forgiveness.

The CARES Act mandates the SBA to issue guidance on the loan-forgiveness provisions of the PPP within thirty days after enactment, or April 26, 2020.  Hopefully, this guidance will address some or all the following questions perplexing employers and their advisors:

  1. What are “costs incurred and payments made” during the Covered Period? 

Section 1106 of the CARES Act provides that a borrower is eligible for forgiveness of indebtedness on a PPP loan in an amount equal to the sum of permissible “costs incurred and payments made” during the covered period.  The phrase “costs incurred and payments made” is susceptible to at least two plausible interpretations: (a) that a cost must be both incurred and made during the covered period to be eligible for forgiveness; or (b) that a cost must either be incurred or made during the covered period to be eligible for forgiveness.  Employers need clarity on this basic provision. 

  1. What does “full-time equivalent employee” mean? 

The forgiveness provisions are not absolute; even after you decipher which “costs incurred and payments made” are eligible for forgiveness, the sum of the Eligible Expenses incurred and made during the covered period (the “Base Forgiveness Amount)” is subject to reduction or elimination based on the employer’s headcount during the covered period measured against one of two prior periods.  Specifically:

The Base Loan Forgiveness Amount is reduced by multiplying it by the following fraction:

  • The numerator of which is the average number of full-time equivalent employees per month employed by the borrower during the covered period (neither the CARES Act nor any subsequent guidance to date defines “full-time equivalent employees”)
  • The denominator of which is, at the election of the eligible recipient, either
    • the average number of full-time equivalent employees per month employed by the borrower during the period beginning February 15, 2019, through June 30, 2019, or
  • the average number of full-time equivalent employees per month employed by the borrower in January and February 2020.

For example, if an employer had 50 full-time equivalent employees during the covered period and employed 100 employees during both the period between January 1, 2020, and February 29, 2020, and during the period beginning on February 15, 2019, and ending on June 30, 2019, the Base Loan Forgiveness Amount would be multiplied by 50/100 or one-half and therefore reduced by 50%.

Unfortunately, there is no definition of full-time equivalent employees in the statute or in the other guidance issued to date.  While the typical calculation of full-time equivalent (FTE) is an employee’s scheduled paid hours divided by the employer’s hours for a full-time workweek, the rules of the Small Business Administration typically treat all employees (full time, part-time, temporary or employed on any other basis) equally.  And guidance is needed regarding the treatment of the following employees in this fraction:

  • furloughed employees
  • employees on workshare programs
  • employees on reduced schedules
  • former employees receiving severance
  • employees who voluntarily terminated
  • employees who were terminated for cause
  • employees on paid leave

Seemingly, to the extent employees or former employees are being paid amounts that qualify as payroll costs, such employees should be counted in the numerator of the reduction fraction; however, absent affirmative guidance we cannot say for sure.

Further, the provisions allowing an employer to “cure” any reductions to the Base Loan Forgiveness Amount for reductions in employees or wages between February 15, 2020, and April 26, 2020, (meaning the entire Base Loan Forgiveness Amount is forgiven) by restoring staffing levels to prior levels no later than June 30, 2020, are similarly tied to full-time equivalent employees.  As employers are facing these decisions now, prompt and clear guidance is needed. 

  1. How do employers persuade employees making more money on unemployment to return to “work” and make less money? 

As we can see from the prior question, employers need to bring staffing up to prior levels to achieve maximum loan forgiveness.  Many employers, however, had furloughed or laid off employees at the beginning of the COVID-19 pandemic.  When they receive the PPP loan proceeds and the Covered Period begins, however, many businesses remain shuttered.  Such employers will, therefore, have to pay their employees not to work.  Because of the enhanced unemployment provisions in the CARES Act, many of these employees are currently making more money not to work than they were making pre-pandemic.  Many employers are having difficulty convincing these employees to give up their lucrative unemployment benefits and are looking for ways to incentivize them to do so.

  1. Do bonuses or increases in compensation count as payroll costs? 

Both the amount of a PPP loan and the loan forgiveness provisions are based in principal part upon the employer’s “payroll costs.”  As defined in the CARES Act, payroll costs include “the sum of payments of any compensation with respect to employees that is salary, wage, commission, or similar compensation.”

Many employers are considering paying furloughed employees a bonus or increasing salary levels to incentivize them to forego their lucrative unemployment benefits and return to employment during the period between the start of the Covered Period and the time the employer’s business becomes operational again.  It is unclear, however, whether such payments will be considered payroll costs eligible for forgiveness.  While bonus payments are arguably “similar compensation,” different interpretations are similarly plausible as the absence of the term “bonus” in the payroll costs definition appears to be an intentional omission (Section 4116 of the CARES Act specifically references bonuses).  We also note that the employee retention tax credit provisions in the CARES Act (which provide a credit against employment taxes for qualified wages paid to employees) limits wages for purposes of the credit to the amount such employee would have been paid for working an equivalent duration during the immediately preceding 30 days.  SBA might take a similar approach and limit wage payroll costs to the average wages paid to the employee in a past measurement period.

  1. What about partnerships and LLCs? 

The availability of PPP loans to partnerships and LLCs and applying the loan forgiveness provisions to such entities has generated confusion from the outset.  Many believed that partners and members of an LLC could take out loans as self-employed individuals.  Subsequent guidance issued by SBA confirms that loans by partners are not permissible, and a partnership and its partners (and an LLC filing taxes as a partnership) are limited to one PPP loan.

Many questions remain, however.  For example, the SBA guidance states that “the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.”  Does this mean that a partnership with several active general partners, each of which has more than $100,000 in self-employment income, is limited to $100,000 in the aggregate?  Similar questions remain regarding loan forgiveness.

  1. Can an employer deduct payments that are eligible for forgiveness? 

When the CARES Act was enacted, the PPP loans seemed too good to be true.  The PPP provides forgiveness of the loan to the extent spent on Eligible Expenses and provides that forgiveness amounts are not taxable to the borrower for federal income tax purposes (but not necessarily for state and local income tax purposes).  The statute is not clear as to whether the borrower may also deduct these payments for Federal income tax purposes.  Generally, Section 265 of the Internal Revenue Code would preclude a deduction of the expenses due to the tax-exempt nature of the income, but clarity in future guidance would be welcome.

Response to the PPP has been overwhelmingly popular; the initial appropriation was exhausted promptly, and future appropriations are also expected to be disbursed quickly.  These loans offer a lifeline to many employers.  To achieve this intended purpose, however, employers need definitive guidance on the questions discussed above, among others.  Hopefully, the anticipated SBA guidance will provide some badly needed clarity.

Will New Stimulus Bill Include Multiemployer Pension Reform?

What could be in the next stimulus bill in response to the COVID-19 pandemic? Congress reportedly is working on a bill (dubbed “Stimulus 3.5”) that includes additional funding for the Paycheck Protection Program created by the CARES Act.  Will the new stimulus bill address long-awaited reforms to the multiemployer pension plan system?

The imminent collapse of the multiemployer pension system is well-documented. A recent report found that 114 multiemployer defined benefit plans (out of approximately 1,400 nationally), covering 1.3 million workers, are underfunded by $36.4 billion. Absent a legislative solution, most of these plans are projected to be bankrupt within the next five to 20 years. Moreover, the federal agency that backstops pension benefits — the Pension Benefit Guaranty Corporation (PBGC) — is projected to become insolvent in five years.

There have been numerous reform bills introduced in the past few years. Most recently, Senate Republicans introduced the Multiemployer Pensions Recapitalization and Reform Plan on November 20, 2019. The Democratic solution is called the Rehabilitation for Multiemployer Pensions Act of 2020, which was originally included in the House version of the CARES Act but was excised before the CARES Act was enacted on March 27, 2020.

The Republican Multiemployer Pensions Recapitalization and Reform Plan focuses on increasing the amount of the PBGC’s benefit guarantee (the maximum guaranteed benefit would increase by nearly 80 percent). Funding would come from a combination of increased PBGC premiums for multiemployer plans, and contributions from stakeholders (unions, participating employers, and retirees.) The Democratic Rehabilitation for Multiemployer Pensions Act, on the other hand, would create and fund a Pension Rehabilitation Administration within the Department of the Treasury. The agency would make loans to certain underfunded plans for 29 years on an interest-only basis. PBGC also would receive additional appropriations as needed to provide additional financial assistance to troubled plans, which would be available in addition to the above-mentioned loans.

The bills sharply diverge on withdrawal liability. Under the Republican approach, more employers would ultimately end up paying withdrawal liability; the bill would provide for five years of withdrawal liability payments for plans that are up to 139-percent funded. The mass withdrawal rules would be repealed, and the maximum withdrawal liability payment period (for terminated plans and plans in critical and declining status) would be 25 years.

Under the Democrat proposal, all employers who withdraw from a plan within 30 years of the date the plan received a loan would be treated as having withdrawn in a mass withdrawal; such employer would be subject to potentially infinite withdrawal liability payments.

This is a fluid and evolving situation. We will continue to monitor and report developments. If you have questions, please contact a Jackson Lewis attorney.

IRS Extends the Form 5500 Due Dates for Some Employee Benefit Plans

The Internal Revenue Service has broadened the filing and payment relief provided under prior guidance. IRS Notice 2020-23 postpones, among other relief, the due date for employee benefit plans required to make the Form 5500 series filings due on or after April 1, 2020, and before July 15, 2020.  Plans with original due dates or extended due dates falling within this period now have until July 15, 2020, to file their information reports.

Plan Administrators with original (un-extended) filing due dates falling within this announced 2 ½ month period who need additional time to file may request extensions by filing Form 5558 by July 15, 2020.  However, the extended due date will not be later than what it would have been absent this relief.

The chart below highlights the plans with a plan year-end which may benefit from Notice 2020-23 and have until July 15, 2020, to complete the required filing.

Notice 2020-23 invokes the Rev. Proc. 2018-58 section about Postponements for Federally Declared Disasters, which also states, “whatever postponement of the Form 5500 series filing due date is permitted by the IRS under section 7508A will also be permitted by the Department of Labor and PBGC for similarly situated plan administrators and direct filing entities.”

The PBGC acknowledged this IRS notice in its own Disaster Relief Announcement but reminded filers there are certain actions listed on the PBGC’s Exception List that do not automatically qualify for the relief.  The Exception List comprises actions that the PBGC views as creating a high risk of harm to plan participants.  For those actions, the PBGC will consider relief on a case-by-case basis.  For example, the PBGC filing relief may help those defined benefit plan sponsors recently engaging in significant layoffs who now need to file a PBGC Reportable Event due to a single cause active participant reduction.

IRS Notice 2020-23 also applies to the Form 990 series of filings that apply to tax-exempt trusts described in Internal Revenue Code Section 501(c)(9), referred to as VEBA (voluntary employees’ beneficiary association) trusts, among others, due on or after April 1, 2020, and before July 15, 2020.   The due date for these information reports is extended as well to July 15, 2020.

Jackson Lewis is staying on top of all of the COVID-19 related legislation and guidance affecting employers.  Contact a Jackson Lewis attorney with your questions.

Critical Qualified Plan Fiduciary Issues For Employers To Consider In Light Of Covid-19

With the business disruptions and market turbulence being wrought by COVID-19, many employers sponsoring qualified retirement plans are facing key decisions about their 401(k), profit sharing, defined benefit, and cash balance plans.  From considering potential cost-savings measures such as suspending safe harbor contributions to a 401(k) plan and/or discretionary contributions to a profit sharing plan, to addressing participant requests for distributions and investment education/advice, to considering pension “de-risking” strategies such as realigning trust investments to hedge against volatility and the risk of significant losses, to considering the freezing of participation in and/or benefit accruals under defined benefit and cash balance plans, to addressing stock repurchase liability for terminated employees exercising the “put option” in employee stock ownership plan (“ESOP”)-owned companies (part or full ownership), employers have their hands full these days.

Many of these issues implicate fiduciary considerations under the federal pension law, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  Given that employers typically are the named fiduciaries of their qualified plans for ERISA purposes, it is imperative they make any cost-savings and market volatility-related decisions, given the fiduciary requirements of ERISA.  These requirements require employers to act for the exclusive benefit of plan participants and their beneficiaries, make decisions prudently, diversify plan assets to protect against significant losses, and follow the plan documents (insofar as they do not violate ERISA).  In addition, plan fiduciaries must not engage in acts of self-dealing and other prohibited transactions.  Violations of ERISA’s fiduciary requirements can expose employers to liability under ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), and participant lawsuits.

Some of the most important fiduciary issues an employer may wish to consider in light of COVID-19, and depending on the type(s) of qualified plan(s) it sponsors, are:

  1. Plan Document Issues. It can be very risky for an employer to make a cost-saving or market volatility-based decision without reviewing the applicable plan documents.  For instance, the statement of investment policy or funding policy for a defined benefit pension plan may require a more aggressive ratio of equity to fixed income investments than an employer may desire in light of COVID-19.  Changing the investment mix without changing the statement of investment policy or funding policy exposes an employer to liability for not operating the plan in accordance with the governing plan documents.
  1. Target Date Fund “Expectation” Issues. During the 2008 financial crisis, many 401(k) and profit-sharing plan participants were stunned to learn that, at the target retirement date, the target date fund (“TDF”) still invested heavily in the generally higher investment risk equity market (for instance, 60% in equities and 40% in fixed income instruments).  The TDF investment “glidepath,” and particularly, whether the TDF is a “to” fund (most conservative mix of underlying investments attained at the target retirement date) or a “through” fund (most conservative mix of underlying investments attained over a pre-determined number of years starting at the target retirement date), are key investment elements to communicate to plan participants.
  1. Participant Education and Investment Advice Issues. With many 401(k) and profit-sharing plan participants clamoring for enhanced investment education and even investment advice, an employer needs to be careful that its service provider knows the difference: Whereas investment education implicates relatively few fiduciary issues, investment advice for a fee implicates numerous fiduciary issues.  If an employer is considering providing investment advice for a fee to plan participants, it will need to address its oversight responsibilities regarding such advice, and whether an applicable exemption from ERISA’s prohibited transaction rules applies.
  1. Soft and Hard Freeze Issues under Defined Benefit/Cash Balance Plans. The decision on whether to implement a participation freeze (“soft freeze”) and/or a benefit accrual freeze (“hard freeze”) is not a fiduciary act.  Implementing such a decision is a fiduciary act.  An employer considering such an action is well-advised to consult both legal counsel and its actuary.
  1. Put Option Issues for ESOP-Owned Company. It may sound simple, but if a terminated participant has the right to “put” his or her shares of the company to the ESOP for cash within 60 days following termination of employment, what happens if the company does not have the cash to pay for the shares?  Is it permissible to use a valuation date other than the last day of the immediately preceding plan year (e.g., December 31, 2019, for a calendar year plan), i.e., a more current date in 2020 that presumably reflects the recent COVID-19-related market contraction?  These are thorny issues.

These five fiduciary issues require extreme care in their proper navigation.  Often, plan documents and service provider agreements will need to be reviewed and/or amended.  In all instances, a proper balancing of legal and business risk will be essential.  Please contact your Jackson Lewis benefits attorney to discuss any of these issues and how we can help you in these difficult times.

Do Employers Count Employees of Foreign Affiliates When Determining Eligibility Under the Paycheck Protection Program?

Applicants in the Small Business Administration’s (SBA) Business Loan Programs (which include the Paycheck Protection Program (PPP)) are generally subject to the affiliation rule in 13 CFR Section 121.301, subject to certain statutory waivers.  These rules provide that in determining a concern’s size, the SBA counts the employees of both the concern whose size is at issue and all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.  Based on this language, an employer would be required to count all employees (including those of foreign affiliates) in determining whether an entity has 500 or fewer employees for the PPP.

Yet in an Interim Final Rule, the SBA has indicated that an entity generally is eligible for the PPP if it, combined with its affiliates, has 500 or fewer employees whose principal place of residence is in the United States.  This language in the Interim Final Rule directly conflicts with the way employees are counted under the affiliation rules in 13 CFR Section 121.301.

We are hoping that the SBA will provide clarifying guidance, but it appears (at least for now) that domestic entities with a foreign affiliate(s) who previously thought they did not qualify for the PPP because of being required to count foreign employees may indeed be eligible for loans under the PPP.

The CARES Act Effect on Retirement Plans

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  The Act largely stabilizes fragile industries, provides loans and tax credits to businesses tied to their retaining their workforces during these uncertain times, and offers additional unemployment relief to employees hurt by COVID-19.  But the CARES Act does more.  It significantly loosens the restrictions on loans and distributions from retirement plans, along with providing funding relief for defined benefit plans, giving employers important options to consider in these times of need.

These provisions are optional.  Employers are not required to implement these new features.  However, some aspects of the rules already may be captured in employer plans through the plans’ rollover contribution rules.  Further, plan recordkeepers have started proactively implementing these changes programmatically, providing employers only with brief “opt out” periods.  Thus, although retirement plans are not top of mind these days, employers should not deprioritize the review of plan-related communications from plan recordkeepers during this time, as they may contain important CARES Act details.

An overview of the key changes follows:

COVID-19 Related Distributions (CRD) – Sec. 2202(a) allows participants to have greater access to their retirement funds.  Qualified participants are no longer subject to the 10% excise tax applicable to early withdrawal if the withdrawal is a CRD of no more than $100,000.  The Act defines a CRD as:

  • Distributions made from an eligible retirement plan
    • IRA
    • Tax-qualified retirement plans
    • Tax-deferred annuities 403(b) plans
    • Section 457(b) governmental sponsored deferred compensation plans
  • During 2020
  • To a “qualified participant”:
    • Diagnosed with COVID-19
    • Spouse or dependent diagnosed with COVID-19 or
    • Furloughed, laid off, reduced hours or unable to work because of COVID-19

Plan Administrators may rely on the participant’s certification as satisfaction of the criteria for eligibility.  At the participant’s election, the CRD distribution either will:  (A) not be taxable to the participant, subject to the participant repaying the amount to an eligible retirement plan any time within the immediately following 3- year period in one or more payments; or (B) taxed ratably over a 3-year period.  Either way, these distributions will not be subject to mandatory 20% tax withholding but will be subject to 10% withholding unless voluntarily waived by the participant.

The devil is in the details here.  Additional guidance is needed to determine exactly how this option is to be effectuated, administered, and reported.  Further, employers will need to balance employees’ need for resources against the impact of depleting retirement savings in a down market, among other considerations.

Plan Loans – Sec. 2202(b) provides qualified participants with more plan loan flexibility.  The CARES Act doubles the amount available for plan loans taken during the 180-day period beginning on March 27, 2020, to the lesser of $100,000 or 100% of their vested account balance.  Qualified Participants must meet the same criteria for a loan as required for an early distribution above.

Sec. 2202(b) also provides qualified participants with loans in effect on or after the CARES Act enactment date of March 27, 2020, that would otherwise be due between March 27, 2020, and December 31, 2020 to suspend their loan repayment obligations for one year, akin to the rules involving suspensions for military leaves or unpaid leaves of absence.  The interest continues to accrue during the suspension period and the statutorily allowed maximum of 5 years for repayment does not include the year of suspension.

The CARES Act provisions affecting plan loans modify provisions in Section 72(p) of the Internal Revenue Code.  If the loan does not meet the requirements of Section 72(p) and the implementing regulations, it is treated as a distribution and thus taxable.  But a plan could always impose more rigorous requirements.

Thus, even though the CARES Act modifies these plan loan rules, employers, committees, or administrators can decide whether or not to implement them.  When making this decision, consideration should be given to factors such as a participants’ ability to repay loans of this size and whether payroll and recordkeeping systems are in place to administer suspended loan repayments.

Required Minimum Distributions (RMD) – Sec. 2203 allows plans to waive RMDs otherwise due for 2020 for those participants reaching age 72 during 2020.  This change is akin to the RMD suspension rules that date back to 2009.

Important Note About Plan Amendments:  Employers desiring to implement any of the CARES Act changes discussed above will need to amend their retirement plans, as needed, to incorporate these provisions with operational compliance in the interim.  The deadline for these plan amendments will not be earlier than the last day of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022, for calendar year plans).

DOL authority to determine filing deadlines – Sec. 3607 extends the DOL’s authority to defer for up to 1 year any deadline date set by ERISA (which may include notices, filings, etc.) for reasons because of public health emergencies such as the COVID-19 pandemic.

Defined Benefit Plans’ Funding Rules for Single Employers – Sec. 3608 relaxes the minimum funding rules by extending the due date for all contributions (including quarterly contributions) originally due in 2020, until January 1, 2021.  The extended payment is adjusted for any interest accrued.  Plans also may use the adjusted funding target attainment percentage (AFTAP) from the last plan year ending before January 1, 2020, in applying the Internal Revenue Code Section 436 benefit restrictions.

Education Assistance – Sec. 2206 allows an employer to include payments to of an employee’s qualified education loan, principal, and interest, as part of education assistance under Internal Revenue Code Section 127.  The total allowed annual amount of $5,250 does not change.

Executive Compensation – Sec. 4004 addresses parameters to which companies must comply to receive certain emergency direct lending relief through the CARES Act.

We are available to help you evaluate whether any of these options will help your company achieve its business goals.  There are many factors to consider.

Eighth Circuit Rules on ERISA’s “Church Plan” Exemption


On March 27, 2020, the Eighth Circuit in Sanzone v. Mercy Health, 2020 U.S. App. LEXIS 9537 (8th Cir. March 27, 2020), ruled on several key issues on the “church plan” exemption to ERISA.  As background, beginning in 2013, plaintiff’s counsel filed ERISA class-action cases across the country challenging the application of ERISA’s “church plan” exemption to non-profit church-affiliated hospital organizations.   In 2017, the Supreme Court ruled in Advocate Health Care Network v. Stapleton, 137 S. Ct. 1652 (2017), that ERISA’s “church plan” exemption includes plans maintained by a church-affiliated organization whose principal purpose is the funding or administration of that plan. This meant that plans of non-profit church-affiliated hospitals, social service organizations, schools and the like could qualify for this exemption if they meet these statutory requirements.

Plaintiffs have also asserted the “church plan” exemption violates the Establishment Clause of the First Amendment.  Although the Advocate Supreme Court adopted a broad construction of the “church plan” exemption, it did not address this issue; subsequently, the U.S. Government filed a brief in Sanzone v. Mercy Health arguing the “church plan” exemption fully follows the First Amendment.

After Advocate, plaintiff’s counsel has continued to pursue cases challenging what is a “principal purpose organization,” including what is required to “maintain” a plan, and whether the “church plan” exemption violates the Establishment Clause of the First Amendment.

Sanzone v. Mercy Health Ruling

The Eighth Circuit addressed these issues in Sanzone.  The focus in Sanzone (as in other post-Advocate “church plan” cases) is on whether a hospital’s internal benefits committee constitutes a principal purpose organization. Consistent with rulings by other courts, the Eighth Circuit said yes, applying ordinary meanings to the statutory terms “maintain” and “organization.”

First, the Eighth Circuit looked to dictionary definitions to conclude “maintain” means “to continue something” or “to care for (property) for purposes of operational productivity.”  The court held the internal benefits committee met this definition, i.e., the committee was responsible for plan administration and interpretation, and had all discretionary authority to carry out the provisions of the plan.

Second, the Eighth Circuit again looked to dictionary definitions to conclude “organization” means “an administrative and functional structure” or “a group of people who work together in an organized way for a shared purpose.”   The court concluded the internal benefits committee met this definition, as it was a group of people who worked together for a shared purpose.

Finally, the Eighth Circuit addressed the Establishment Clause issue. The district court had dismissed this constitutional claim for lack of standing, i.e., for lack of an impending redressable injury from current plan underfunding.  The Eighth Circuit noted plaintiff’s claimed injury was broader than that and remanded for the district court to consider whether deprivation of ERISA protections would constitute a sufficient injury to confer standing.


The Eighth Circuit’s ruling that an internal benefits committee is sufficient to qualify for the “church plan” exemption follows rulings by other courts and provides helpful guidance to assist church-affiliated non-profits in maintaining this exemption for their plans. These cases provide examples of “best practices” that can assist church-affiliated organizations in complying with this exemption.

On the constitutional Establishment Clause challenge, the Eighth Circuit has rejected the no-standing ground adopted by other courts, which had allowed them to avoid ruling on the merits of this issue.  This means Sanzone may become the “test case” on this issue.  While resolving constitutional issues can be difficult to predict, based on our work defending other church-affiliated organizations on this issue, we believe that there are sound defenses to this constitutional challenge.

COVID-19 Update – Ohio Issues FAQs on Health Insurance Flexibility for Employers

As previously discussed, the Ohio Department of Insurance (ODI) issued guidance pursuant to Governor Mike DeWine’s emergency declaration and order from March 9, 2020. Under Bulletin 2020-03, the ODI lifted certain restrictions for group health plans, limited premium increases, and expanded the rules for the continuation of coverage. Recently, the ODI issued FAQs to clarify its Bulletin.

In its FAQs, the ODI sought to clarify the types of applicable health plans affected by the Bulletin and provided much needed clarification relating to the 60-day grace period for premium payments.

Under the FAQs, the ODI explained the Bulletin applies only to fully insured employer group health plans and not self-insured plans, except Multiple Employer Welfare Arrangements and several non-federal governmental plans. In addition to major medical plans, the Bulletin also applies to supplemental plans and limited duration plans issued to employers.

The ODI also addressed open issues relating to the deferral of premium payments. Under the FAQs, insurers must accommodate employers by extending premium payment due dates or waiving late or reinstatement fees in instances when employers are unable to make premium payments due to COVID-19-related disruptions. The recent guidance from the ODI does not change the rules for retroactive termination or rescission at the end of the grace period.

Perhaps most notably, the FAQs clarified the reference in the Bulletin to “insureds” when providing for the 60-day grace period for premium payments. The FAQs make it clear that the premium payment grace period applies to insurers providing coverage to employer group health plans regulated by the ODI. The ODI left it up to the individual employer as to whether or not to provide employees with a grace period to pay insurance premiums.