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Insights Insights
| 5 minutes read

The CARES Act and Employee Benefits

We have prepared this alert for our clients based primarily on questions we have received on the some of the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

This is a summary of the big picture as of the above date. Because many questions are extremely fact-sensitive, going deep into the details is beyond the scope of this alert. We will be happy to go deeper into the details for anyone who wants to contact us.

Payroll Protection Program Loans

How much is available for loans under the Payroll Protection Program?

Currently $349 billion is available for loans under the Payroll Protection Program, but the media reports that the Treasury Department will ask Congress to authorize up to an additional $250 billion.

How are loan applications processed?

First-come. First-served.

Is our company eligible for a loan?

Yes. Your company will be eligible for a loan as long as it employs 500 or fewer employees who reside in the U.S. or your company operates in an industry for which the SBA has other employee-based size standards and your company meets those standards.

What will the company need to agree to do to get a loan?

The company among other things will need to agree to use the loan proceeds to retain workers in the U.S. and maintain its U.S. payroll and to make interest payments on an existing mortgage or lease and utility payments on existing arrangements.

Is there a cap on the size of the loan?

Yes. For example, if you use the payroll-based formula set forth in the CARES Act, the cap is 2.5 times the company’s average monthly “payroll” for the last 12 months or $10 million, whichever is less. The loan application form states that the “last 12 months” can be 2019.

Can contributions made by the company during the “last 12 months” to our 401(k) plan be counted in our computation of “payroll”?

Based on the definition of “payroll” in the SBA’s loan application form and in the SBA’s interim final rule released on April 2, 2020  on the Payroll Protection Program, we believe that the answer is “yes”.

Is there a cap on an employee’s compensation which can be included in the computation of “payroll”?

Yes. The payroll computation cap is $100,000 per employee. However, there is no cap on how much the company can continue to pay an employee. This is one difference between loans under the Payroll Protection Program in Title I of the CARES Act and financial assistance for a business under Title IV of the CARES Act, where a cap on compensation paid will be a condition to the assistance once the programs start to operate.

Will the company have to repay the loan?

Yes, unless the loan is forgiven. The loan can be forgiven to the extent the proceeds are used during the 8 week period following the date of the loan to make payroll payments and to a limited degree make interest payments on existing mortgages and to make rent and utility payment under existing arrangements.

What is the interest rate on the loan to the extent that it’s not forgiven?

One percent.

401(k) Plans

The CARES Act allows a 401(k) plan (and other defined contribution plans) to provide for special withdrawal and loan provisions. Is a company required to amend its 401(k) plan to include these provisions?

The short answer is “no.” The special rules are permissive. You do not need to amend your 401(k) plan to allow for these withdrawals or loans.

If a company elects to do so, what are the special plan withdrawals and loans rules?

A plan may allow an eligible individual (a) until December 31, 2020 to make a withdrawal from his vested account balance under the plan in the aggregate amount of $100,000 or (b) until the end of the 180-day period which started on March 27, 2020 (the date the President signed the CARES Act) to get a loan equal to the lesser of $100,000 or 100% of the eligible individual’s vested account balance (reduced by any then outstanding loan).

Could the plan set caps which are below $100,000?


Are there any adverse tax consequences to an eligible individual who makes a withdrawal?

No. In fact the CARES Act waives the otherwise applicable 10% tax penalty for withdrawals by an eligible individual who is under age 59-1/2. In addition, an eligible individual may elect to spread out the income inclusion of such withdrawal ratably over three years.

Does a withdrawal or loan have to repaid?

A withdrawal does not have to be repaid but, if an individual wants to repay a withdrawal, the CARES Act gives the individual a right to repay the withdrawal if he does so within 3 years. On the other hand, a loan has to be repaid in 5 years but an individual can defer the repayments for one year, although interest will continue to accrue on the loan balance for that one year.

Who is an eligible individual?

Generally, an eligible individual is a person (or his spouse or dependent) who is impacted by the coronavirus either by having been tested positive for the virus or experiences financial consequences due to quarantine, being laid off, furloughed, loss of hours, etc.

How does the company know an individual is an eligible individual?

The company can rely on the individual’s certification to the effect that he is an eligible individual.

How quickly do plans need to be amended to provide for withdrawals or loans?

The CARES Act gives a company until the end of the 2022 plan year to amend the plan. However, the CARES Act requires that the company administer the plan in accordance with the procedure the company followed to process the withdrawals or loans. The rub here is that most 401(k) plans today are prototype plans, which can only be amended by the prototype plan sponsor. Accordingly, if a company is interested in providing for CARES Act withdrawals or loans, we recommend contacting the prototype plan sponsor to discuss the options which will be provided by the prototype plan sponsor. Unilaterally amending a prototype plan will result in the loss of the benefits associated with a prototype plan.

Do the IRS’s “required minimum distribution” rules apply in 2020 for a 401(k) plan?

No, not unless the participant wants to receive his or her required minimum distribution for 2020.

Group Health Plan

Did the CARES Act affect our group health plan?

Yes.  For example—

Diagnostic Testing For COVID-19. The CARES Act clarified that your group health plan must cover all testing for COVID-19 without a co-pay requirement, including tests without an emergency use authorization.

Vaccines. Your group health plan must cover without a co-pay any COVID-19 vaccine that has in effect a rating of “A” or “B”.

HSA Coverage for Telehealth Services. High deductible health plans with health savings accounts may cover telehealth services without requiring that the minimum deductibles otherwise applicable be met.

HSAs and FSAs to purchase Over-the-Counter Drugs and Menstrual Care Products. HSAs and FSAs may be used to purchase over-the-counter drugs without a prescription and to purchase the whole range of menstrual care products.

If you want to discuss any of the foregoing, please contact either Jan Marsh at or Don Kohla at


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