Some Random Employee Benefit Considerations for HR Departments Dealing with COVID-19 – Part I

Presently, many human resource departments are scrambling to address issues raised by the passage of the Families First Coronavirus Response Act (the “FFCRA”) and the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act” collectively with the FFCRA hereinafter referred to as the “COVID-19 Legislation”).  While many of the provisions of the COVID-19 Legislation are straightforward, the COVID-19 Legislation contains provisions that implicate a number of employee benefit requirements that could get overlooked.  This article reviews two disclosure requirements that have a risk of falling through the cracks.

First, Section 6001 of the FFCRA and Section 3201 of the CARES Act generally requires that most group health plans provide coverage for diagnostic testing for the detection of SARS-COV-2 and COVID-19 (hereinafter collectively “COVID-19”) without imposing any cost-sharing requirements (e.g., deductibles, copayments, or coinsurance) or prior authorization or other medical management requirements (collectively the “COVID-19 testing benefits”).  These group health plans were required to provide these “COVID-19 testing benefits” as of March 18, 2020.  Unfortunately, this effective date raises a disclosure issue.

Q&A 9 of “FAQs About Families First Coronavirus Response Act and Coronavirus Aid, Relief and Economic Security and Implementation Part 42,” April 11, 2020 identifies and provides guidance on this disclosure issue.

In relevant part, Q&A 9 notes that Section 2715(d)(4) of the Public Health Service Act and the final rules regarding the Summary of Benefits and Coverages (the “SBCs”) provide that if a plan “makes a [mid-year] material modification (as defined under Section 102 of ERISA) in any of the terms of the Plan or coverage that would effect the content of the SBC that is not reflected in the most recently provided SBC, … the Plan … must provide notice of the modification to enrollees no later than 60 days prior to the date on which the modification will become effective.”

Obviously, given the rapid adoption of the COVID-19 Legislation, it was impossible for health plan sponsors/administrators to timely update their SBCs to reflect these new “COVID-19 testing benefits.”  Q&A 9 states that the Departments (i.e., the Departments of Labor, Health and Human Services and the Treasury Department) will not take enforcement action against any plan that makes these required modifications without providing at least 60 days advance notice.

However, the Q&A states that plans “must provide notice of the changes as soon as reasonably practicable.”  Thus, human resource departments should take steps to ensure that updated SBCs or separate notices describing this expanded coverage for “COVID-19 testing benefits” are developed and distributed to health plan enrollees.

Second, Section 2202 of the CARES Act contains a number of provisions dealing with “coronavirus–related distributions” from retirement plans.  These provisions deal with a distribution made on or after January 1, 2020 and before December 31, 2020 from a qualified retirement plan that is made to a “qualified individual.”

Generally, a “qualified individual” is an individual (1) who is diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19, or (3) “who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of Treasury (or the Secretary’s designee).”  See Section 2202(a)(4)(A) of the CARES Act.

The “coronavirus-related distribution” provisions are not mandatory and plan sponsors may elect whether or not to adopt some, all or none of them.  Generally, plans may be amended retroactively for the “coronavirus-related distribution” provisions as late as the last day of the first plan year beginning on or after January 1, 2022, as long as the plans are operated as if the amendment were in effect from the effective date.

Given the period during which “coronavirus-related distributions” will be distributed (January 1, 2020 through December 31, 2020), plan sponsors will need to make a mid-year plan amendment to adopt these types of distributions.  In the case of safe harbor 401(k) plans, the mid-year amendment raises an issue as to whether the amendment will cause the plan to lose its status as a safe harbor plan (i.e., a plan exempt from certain nondiscrimination requirements).

Subject to certain exceptions, the safe harbor plan regulations require plan provisions that satisfy the safe harbor plan rules to be adopted before the first day of the plan year and to remain in effect for the entire 12-months plan year.  These regulations have been interpreted as generally prohibiting mid-year amendments to safe harbor plans.

In Notice 2016-16, the Internal Revenue Service (“IRS”) provided guidance relating to mid-year changes to safe harbor plans.  In relevant part, Notice 2016-16 provides that a change to a safe harbor plan does not violate the safe harbor requirements merely because the change is a mid-year change, provided that (a) the notice/additional election conditions are satisfied and (b) the mid-year change is not described as a prohibited change listed in the Notice.

With respect to “coronavirus - related distribution” amendments, these amendments are not of the type that are prohibited by the Notice and are analogous to the amendment to add an age 59 1/2 in-service withdrawal feature which is approved in Example 4 of Notice 2016-16.  Thus, assuming that the plan sponsor provides an updated notice which describes the “coronavirus-related distribution” feature and employees are allowed to make changes to their deferral elections in response to the mid-year amendment, the mid-year change will not violate the safe harbor plan requirements.

With respect to the notice requirements, Notice 2016-16 provides that the notice of the mid-year change should be provided at least 30 days (and not more than 90 days) before the effective date of the mid-year change.  However, the Notice states that if it is not practical for the updated safe harbor notice to be provided before the effective date of the change, “the notice is treated as provided timely if it is provided as soon as practicable, but not later than 30 days after the date the change in adopted.”

While we expect that the IRS will be relatively flexible in interpreting the timelines of updated safe harbor notices with respect to mid-year “coronavirus–related distribution” amendments, plan sponsors should address this notice issue by updating the safe harbor notice in connection with the implementation of these types of distributions (i.e., given the widespread use of volume submitter and prototype plan documents, the ability to take distributions is likely to be implemented substantially prior to the adoption of the retroactive amendments authorizing the distributions).

In summary, the COVID-19 Legislation potentially raises at least two employee benefit disclosure issues that human resource departments may need to address.

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