Employee Benefits and Health Insurance Provisions Are Injected Into New COVID-Relief Legislation

December 30, 2020

The Consolidated Appropriations Act, 2021 (the “Act”) was signed by the President on December 27, 2020, to provide additional COVID-related relief.  The Act has a number of provisions that are relevant to retirement plans, health and welfare plans and health insurance as discussed below.


               A.        Use of Retirement Funds for Disaster Mitigation (Act, Division EE, § 302)

Taking a similar approach as was done under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), the Act relaxes certain restrictions with respect to early distributions and plan loans to allow plan participants to withdraw assets from their retirement plans and avoid related penalties.  For additional information on the CARES Act, see our March 26, 2020 OnPoint.

                         1.         Qualified Disaster Distributions

The Act waives the 10% additional tax under Section 72(t) of the Internal Revenue Code of 1986 (the “Code”) on early distributions from an eligible retirement plan for any “qualified disaster distribution” (a “QDD”).  A QDD is any distribution that is made (i) on or after the first day of the applicable incident period of a qualified disaster and before the date that is 180 days after the Act’s enactment (i.e., December 27, 2020) and (ii) to an affected individual whose principal place of abode at any time during the period is located in a qualified disaster area1 and who has sustained an economic loss by reason of such qualified disaster. An individual’s QDDs for any particular qualified disaster may not exceed $100,000 for any taxable year after taking into account the individual’s aggregate QDDs received for all prior taxable years. 

The Act permits individuals who receive QDDs to pay tax on the income from the distribution ratably over a three-year period beginning in the year of distribution, unless the individual elects to pay all tax on such income in the year of distribution.  Generally, individuals may repay any QDD at any time during the three-year period, with such repayments being treated as trustee-to-trustee transfers.

                        2.         Loans

The Act establishes a 180-day period during which the loan limits under tax-qualified retirement plans (e.g., 401(k) plans) are doubled to equal the lesser of $100,000 or 100% of the participant’s vested account balance for any plan loan made during such period.  In addition, participants eligible for a QDD (see above) with outstanding loans with a repayment due from the first day of the disaster incident period through the date that is 180 days after the last day of such incident period can delay the loan repayment for up to one year or, if later, until the date that is 180 days after the date of enactment (i.e., December 27, 2020).

                        3.         Recontribution of Home Purchase Withdrawals

The Act permits individuals, who received a withdrawal from a tax-qualified retirement plan for the purpose of purchasing or constructing a principal residence in a qualified disaster area but who were unable to do so due to the qualified disaster, to recontribute such withdrawal to an eligible plan that accepts rollover contributions.  The withdrawal must have been made during the period beginning 180 days before the first day of the disaster incident period and ending within 30 days after the last day of such incident period.  Recontributions may be made on or after the first day of the disaster incident period and before the date that is 180 days after enactment.  Like QDDs, these recontributions will generally be treated as direct trustee-to-trustee transfers.

                        4.         Plan Amendments

Generally, plans that implement one or more of these tax-qualified retirement plan provisions must adopt a retroactive amendment on or before the last day of the first plan year beginning on or after January 1, 2022 and must operate the plan consistent with the terms of the amendment during the period covered by the amendment.

                B.        Partial Terminations (Act, Division EE, § 209)

Under the Code, tax-qualified retirement plans may be treated as undergoing a “partial termination” (leading to 100% vesting of affected participants) if there is sufficient employee turnover, which under existing guidance may be presumed to have occurred if the turnover rate is at least 20% during the applicable period.  Under the Act, a plan will not be treated as having a partial termination during any plan year that includes the period from March 13, 2020 to March 31, 2021 if the number of active participants covered as of March 31, 2021 is least 80% of the active participants covered on March 13, 2020.

                C.        Miscellaneous Retirement Provisions (Act, Division N, §§ 280 and 285; Division EE, § 208)

The Act also adds provisions (i) making changes to the rules under Section 420 of the Code governing transfers from defined benefit plans to fund retiree health costs, (ii) expressly providing that money purchase plans are covered by certain CARES Act provisions relating to access to retirement assets and (iii) changing the distribution age under multiemployer plans of the building and construction industry.


                 A.        Flexible Spending Arrangements (Act, Division EE, § 214)

The Act temporarily relaxes certain of the restrictions on flexible spending arrangements (“FSAs”).  The Act permits plan participants to carryover (rather than forfeit) unused benefits or contributions in health and dependent care FSAs from 2020 to 2021 and from 2021 to 2022 and to make a mid-year prospective change in FSA contribution amounts for plan years ending in 2021 without regard to any change in status.  Cafeteria plans are also permitted to adopt an extended grace period of 12 months (instead of 2-1/2 months) for 2020 and 2021 during which employees may request reimbursements with respect to such years and to allow participants who ceased participating in a cafeteria plan during 2020 or 2021 to continue to claim reimbursements under a health FSA (similar to the rules for dependent care FSAs) through the end of the plan year in which such participation ceased (taking into account this extended grace period).  For dependents that aged out during the last plan year with a regular enrollment period ending on or before January 31, 2020 of a dependent care FSA, the Act increases the age threshold of a dependent from 13 to 14 and allows employees with unused balances for such plan year to receive reimbursements with respect to that unused balance in the following plan year.  Sponsors of cafeteria plans that implement any of these provisions must adopt a retroactive amendment by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective and must operate the plan consistent with the terms of the amendment from the effective date of the amendment through the date the amendment is adopted.

                B.        No Surprises Act2 (Act, Division BB, §§ 101-118)

The Act includes a set of provisions intended to protect patients from surprise medical bills, including surprise air ambulance bills.  Among other things, these provisions address: (i) health insurance and health plan requirements regarding surprise medical billing, (ii) an independent dispute resolution process, (iii) transparency regarding in-network and out-of-network deductibles and out-of-pocket limitations, (iv) the authority to promulgate a rule to protect against provider discrimination, (v) consumer and patient protections, (vi) continuity of care for patients whose provider changes network status and (vii) the requirement for health plans to maintain a price comparison tool and accurate in-network provider directory and database.

                C.        Transparency in Healthcare (Act, Division BB, §§ 201-204)

The Act amends certain provisions under the Public Health Services Act, the Employee Retirement Income Security Act of 1974 and the Code in an effort to promote transparency with respect to certain healthcare information.

Group health plans and health insurance companies are prohibited from entering into agreements with health care providers, network or association providers, third-party administrators or other service providers that would directly or indirectly restrict such plan or issuer from providing provider-specific cost or quality of care information or data.

The Act requires brokers and consultants to make certain disclosures to employer-sponsored health plans and to enrollees in the individual market, including a description of services to be provided to the plan and all direct and indirect compensation reasonably expected to be received in connection with such services.

Group health plans or health insurance companies that provide both medical and surgical benefits and mental health or substance use disorder benefits and that impose nonquantitative treatment limitations (“NQTLs”) (e.g., limitations on in-patient facilities) on mental health or substance use disorder benefits must perform comparative analyses of the design and application of NQTLs and provide such analyses upon request.

The Act also requires group health plans and health insurance companies to file a report that, among other things, provides information about prescription pharmacy benefits and prescription drug costs.


                A.        Student Loan Repayments (Act, Division E, § 120)

The Act extends through 2025 the CARES Act provision allowing employers to repay the qualified education loans of their employees up to an annual maximum of $5,250 per employee.  This provision applies to payments made after December 31, 2020.

                 B.        Specific Group Insurance Payments as Payroll Costs (Act, Division N, § 308)

The Act amends the definition of payroll costs for purposes of the Paycheck Protection Program to include the payment of group life, disability, vision and dental insurance benefits.



1) A “qualified disaster area” is any area with respect to which a major disaster was declared by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during the period beginning on January 1, 2020 and ending 60 days after enactment (i.e., December 27, 2020) and for which the incident period for such declaration began on or after December 28, 2019 and before the date of enactment (i.e., December 27, 2020).  A qualified disaster area does not include any area declared a major disaster only by reason of COVID-19.  A list of major disaster declarations by state can be found on the FEMA website: https://www.fema.gov/disasters/disaster-declarations.

2) The No Surprises Act is the short title for Title I of Division BB of the Act.

3) We have previously discussed provisions of the CARES Act relating to employee benefits in our March 26, 2020 OnPoint and our April 21, 2020 OnPoint.

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