Category Archives: COVID-19 Benefits Issues

CARES Act Student Loan Benefits Can Aid Employees of Essential Businesses

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In these troubled times, not all employers are eliminating benefits and reducing staff – essential businesses such as healthcare providers, grocery and pharmacy chains, high-tech and certain nonprofit organizations such as food banks, are actually adding staff (with Amazon and Walmart being obvious examples).

Those essential businesses that are adding to payroll or are asking extraordinary efforts from their existing employees should consider making tax-advantaged payments towards employees’ student loans through a new CARES Act measure made available from March 27, 2020 (the CARES Act adoption date), through the end of this calendar year. The CARES Act provision is not in any way limited to essential employers, but by necessity these may be the only employers who are in a financial and staffing position to give the measure serious consideration at this time.

The measure is an add-on to existing Section 127 of the Internal Revenue Code which currently allows employers to provide eligible employees with tax-free educational assistance of up $5,250 per year provided certain conditions are met.  Section 127 plans are sometimes referred to as qualified educational assistance programs or EAPs.  Permitted types of educational assistance include tuition, fees, and books, for a broad range of educational pursuits, including graduate degrees, which need not be directly job-related.  Employers can pay the amounts directly to educators or can reimburse employees after the fact.

Under Section 2206 of the CARES Act, the annual maximum benefit remains the same, but “educational assistance” is expanded to include direct payment or reimbursement of principal and interest payments to a provider of any qualified education loan as defined under 26 U.S.C. 221(d).  Notably, the CARES Act does not change the maximum annual budget.  In other words, employers could “spend” the $5,250 per year for a single employee three different ways:

  • by using the entire budget for tuition;
  • by using the entire budget for student loan payments; or
  • by making a combination of tuition payments and student loan payments, with the total not exceeding $5,250.

There are some other requirements to offer this benefit. There must be a written plan document that sets forth the following information:

  • the group of employees eligible to receive benefits, which must not discriminate in favor of highly compensated employees, defined as those owning more than 5% of the employer company, or earning in excess of $125,000 in 2019;
  • the types of benefits offered, e.g., tuition assistance, student loan repayments, or either/both, subject to the dollar limit;
  • the annual dollar limit (currently $5,250 is the maximum amount but an employer can choose a lower amount); and
  • any applicable limitations on benefits, such as the requirement to pay benefits back in the event the employee leaves employment within one year after receiving the tuition or loan repayment assistance. Some tuition assistance programs may also impose a requirement that a certain grade level be attained.

In addition:

  • benefits must be 100% employer-funded, and not in any way offered as an alternative to employees’ existing or additional cash compensation; and
  • there must be substantiation of use of the tax-qualified dollars for permitted tuition or student loan repayments.  This may be automatic where the employer makes direct payments to educators or student loan vendors, but additional steps are needed if these amounts are reimbursed after employees incur them directly.

The CARES Act is drafted in a way that suggests an employer must have an EAP in place, to which this new feature is added, but employers should be able to adopt an EAP this year, and either limit it to student loan repayments, or make it a traditional educational assistance program with student loan repayments one of the forms of educational assistance, alongside qualifying types of tuition, fees, etc.

Although this measure is meant to sunset at the end of this year, if there is meaningful uptake by essential employers there is a greater chance that it could be extended, perhaps indefinitely. Especially if the annual dollar limit is adjusted upwards to track inflation (or, better yet, the more rapidly increasing inflation in education costs), tax-advantaged student loan repayments could remain a useful means of attracting and retaining qualified employees both during and after the COVID-19 pandemic.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Andre Hunter, Unsplash.

 

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Filed under CARES Act, COVID-19 Benefits Issues, Fringe Benefits, Student Loans

Layoffs, Reductions in Force, and 401(k) Plans

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Many business owners, employment law counsel and benefit advisors are grappling with reductions in force/layoffs due to the unprecedented business and economic impact of COVID-19. I wanted to flag for you, briefly, a retirement plan compliance issue that these staff reductions can trigger. The rule applies to all qualified retirement plans not just 401(k) plans; special issues exist if your client has a defined benefit/pension plan, or if it has collectively bargained benefits.

The issue is this: the IRS established in Revenue Ruling 2007-43 that when employer action – including as a result of an economic downturn – results in 20% or more of the plan population being terminated from employment, then a presumption arises that everyone affected must be fully vested in their employer contributions under the plan. This is called a “partial plan termination.”

This is relevant only if the retirement plan has employer contributions, such as matching or profit sharing contributions, that are subject to a vesting schedule. Safe harbor contributions are always 100% vested as are employee salary deferrals.

The way the employer determines the 20% threshold is as follows:

  • Start with the number of participants on the first day of the plan year which will also be the number of participants on the last day of the prior plan year, on Form 5500. For 401(k) plans you look at who is “eligible” to make salary deferrals not just those who actually make salary deferrals or otherwise have a plan account.  (IRS Q&A with ABA from May 2004, Q&A 40).
  • Add new participants (eligibles) added during the plan year in progress.
  • Take that total number, and divide by the number of participants (eligibles) experiencing employer-initiated termination of employment.
  • In all cases, count both vested and nonvested participants (eligibles).

If you are at 20% or more you have a presumed partial termination. Certain facts can rebut this presumption such as very high normal turnover but this message is meant to address reductions in force related to COVID-19 which are employer-initiated due to outside forces and thus the presumption would likely not be rebuttable.

If you meet or exceed 20% then all persons directly terminated by the employer during the year must be fully vested in their employer contributions. The IRS also recommends you fully vest collaterally-affected employees such as those who leave voluntarily, as often those voluntary departures are triggered by concern over the company’s future in light of the involuntary terminations. Even if the reduction in plan population is under 20%, a potential partial plan termination may have occurred depending on all of the facts and circumstances.

The period of a partial termination may exceed a single plan/calendar year in some cases but in the instance of COVID-19, with any luck, we will only be looking at 2020.

Fully vesting folks does not cost the employer money because the money is already in the plan. However if this is not done correctly it is a complicated and expensive fix “after-the-fact.”

Generally there is not a requirement to notify participants of full vesting as a result of partial termination at the employer level but it might be mentioned in distribution paperwork according to the practices of the client’s plan recordkeeper.

Partial terminations raise a number of other ERISA compliance issues – as does the COVID-19 crisis as a whole – so let me know if questions arise.

Wishing all readers safe passage through the next weeks and months.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Markus Spiske, Unsplash.

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Filed under 401(k) Plans, COVID-19 Benefits Issues, ERISA, Profit Sharing Plan