Q. Are there any COVID-related tax incentives that could benefit employers and employees?
A. Employers and employees alike continue to feel the impact of the COVID-19 pandemic. Many employers have reduced revenues and need to conserve resources. Many employees have been furloughed or permanently laid off and may need to prematurely access vested retirement benefits to make ends meet. Other employees need leave from work due to their own or a family member’s COVID-related illnesses. COVID-related tax incentives fall into two broad categories: incentives that advantage employers and incentives that advantage employees. Our Firm’s prior alert, Revised Summary of CARES Act and FFCRA Tax Credit and Payroll Tax Relief, provides an overview of the tax advantaged programs that are available to employers. These generally advantage the employer by providing a credit to the employer’s payroll taxes or by providing a low interest loan to the employer. There are also programs that an employer can implement that can save the employer money in the short- and long-term. In addition, there are programs that ease an employee’s access to amounts the employee has accrued under an employer’s tax qualified retirement program, and others that permit employers to provide employees with certain special benefits during these difficult times. Employees can even provide assistance to others impacted by COVID-19 through leave sharing/donation programs. Each program is outlined below.
Actions employers may take to preserve cash:
- Temporarily suspend matching, profit-sharing, or employer non-elective contributions to a qualified retirement plan.
- Delay required contributions to single-employer defined benefit pension plans otherwise due in calendar year 2020, provided that the delayed payments are made with interest by January 1, 2021.
Additional benefits employers may provide to employees at the employer’s expense:
- Continue to provide employees who are not actively at work with employer-provided health insurance.
- Temporarily pay 100% of health insurance premiums for employees who are not actively at work and unable to pay health insurance premiums.
- Offer educational assistance programs (or establish such programs). Employers may provide up to $5,250 per year, per employee in tax-free assistance for employees repaying student loans.
- Enhance EAP offerings to offer additional resources during COVID-19 (child-care referral sources, financial planning, psychological services, etc.).
- Implement employer-provided assistance programs such as §139 disaster relief payments, disaster mitigation payments, interest free loans, leave banks, and charitable funds.
Employer Actions that are Beneficial to Employees at Little or No Cost to Employers:
- Permit employees to make changes to their dependent care and health FSA elections. This may require a plan amendment.
- Amend plan loan provisions to permit the suspension of loan repayments due between March 27tand December 31, 2020. Loan repayments must resume no later than January 1, 2021.
- Amend plan loan provisions to increase the amount of loan to the lesser of $100,000 or 100% of the participant’s vested account balance.
- Adopt CARES Act provisions to permit coronavirus-related distributions from 401(k), 403(b) and governmental 457(b) plans up to $100,000. Such distributions are not subject to the 10% tax that is otherwise applicable to distributions before a participant attains age 59½.
- Adopt leave donation plans that allow employees flexibility described below.
Employee Actions that are Beneficial to Others: Provided an employer has adopted the applicable leave program:
- Under a medical emergency leave donation plan, employees may donate accrued paid-time off to be used by fellow employees who suffer (or whose family member suffers) a medical emergency requiring a prolonged absence from work that would result in a loss of income due to the recipient employee’s prior exhaustion of all paid leave. The donor employee does not have taxable income on the value of the leave donated.
- Under a major disaster leave donation plan, employees may donate accrued paid-time off to be used by fellow employees who have been adversely affected by a major disaster or emergency declared by the President (such as COVID-19) requiring the impacted employee to be absent from work. The donor employee does not have taxable income on the value of the leave donated.
- Under a COVID-19 leave program, employees may elect to forego vacation, sick, or personal leave in exchange for cash payments that the employer in turn makes to charitable organizations providing relief to victims of the COVID-19 pandemic. The donor employee does not have taxable income on the value of the leave donated provided the employer makes the donations prior to January 1, 2021. Further, the donor employee is not able to take a charitable contribution deduction for the cash value of the donated leave. However, the employer may be able to deduct these cash payments.
If you have any questions or require assistance in adopting and implementing any of these programs, please contact any member of the Troutman Pepper Employee Benefits and Executive Compensation practice group or the COVID-19 Response Team. We are here to help you in any way that we can. Please visit the Troutman Pepper COVID-19 Resource Center for COVID-19-related news and developments.