Local governments can use the CARES Act to help employees affected by COVID-19

While many city and county workers are battling on the front lines of the COVID-19 pandemic, most employees are also affected by uncertainty, stress and issues related to the pandemic closer to home. Most local governments employ public health workers charged with treating COVID-19 patients. Other essential government workers continue to perform critical functions to keep residents safe, and ensure basic services aren’t interrupted. But city and county workers in all roles may be struggling on a personal level to deal with the effects of COVID-19, especially when it comes to their finances.

Financial Worries Related to Job Loss or Reduced Hours

As local governments work to address budgeting issues that will result from significantly reduced tax revenue due to “shelter-in-place” orders, government service changes could lead to furloughs and layoffs for employees at all levels. Even if their jobs aren’t eliminated, employees could have their work hours reduced. Other workers may need extra time off to care for children who would usually be at school, day care or summer camp. Workers who are diagnosed with COVID-19, or have a spouse or child who is diagnosed with the virus, will be absent from work at least for the minimum period of self-isolation or a quarantine order and may run out of paid leave.

The CARES Act Includes Retirement Plan Options for Local Governments

One of the federal “stimulus” bills, known as the CARES Act, includes several options that local government employers can use to provide financial assistance this year to employees in need as a result of the COVID-19 pandemic. The CARES Act, which was modeled on Hurricane Katrina relief in 2005, lets employers with retirement plans change certain plan rules so that employees affected by the pandemic can benefit financially. There are two groups of employees who can qualify for help under the CARES Act: (1) employees who are themselves diagnosed, or have a spouse or dependent who is diagnosed with COVID-19, and (2) employees who experience adverse financial consequences as a result of COVID-19 due to being quarantined, being furloughed or laid off, having their work hours reduced, being unable to work due to lack of child care, or closing or reducing hours of their own business.

Cash Distributions from Retirement Plans

The first tool provided by the CARES Act is a cash distribution from the qualified employee’s retirement plan: this is called a “coronavirus-related distribution” or CRD. Retirement plans that allow distributions to active employees can pay out a CRD any time in 2020 to employees who qualify for one of the two COVID-19 related reasons described above. On top of providing ready access to cash, a CRD also provides employees with major tax benefits.

First, the distribution is not subject to the 20 percent tax withholding that usually applies to retirement plan distributions. If a 10 percent tax penalty usually would apply to the distribution, because of the employee’s age and plan type, that penalty tax will not apply either. Employees who receive a CRD can choose to include the amount in their taxable income over three years, instead of paying taxes on the full amount for 2020. And employees can repay some or all of the CRD within the next three years, giving employees an opportunity to restore their retirement account. From the employer’s perspective, one extra advantage is that employees can self-certify that they meet the CRD requirements, so the administrative recordkeeping burden is low. The total amount of CRDs an employee can receive from all of the employer’s plans is capped at $100,000.

Generally, CRDs are more likely to be paid from defined contribution or deferred compensation plans, rather than pension plans, which typically prohibit any kind of distribution while employees are still working. But for employees covered by a pension plan who lose their job and apply for a refund of their own pension plan contributions, the payout of those contributions could be treated as a CRD. In that case, the payment would not be subject to the 20 percent tax withholding that usually applies, and the employee can elect to include the amount of the distribution in their income for tax purposes over three years.

Higher Retirement Plan Loan Amounts and Delayed Loan Repayments 

For governmental retirement plans that permit participant loans, the CARES Act provides two additional options for giving employees affected by COVID-19 a financial break.

First, the maximum amount that qualified employees can take out in a plan loan can be increased. Usually, the amount of a retirement plan loan is capped at either 50 percent of the employee’s account balance, or $50,000, whichever is less. For loans taken out before September 23, 2020 by employees who qualify under the CARES Act, the maximum loan amount can be increased to 100 percent of the employee’s account balance, or $100,000, whichever is less.

The second option for employers is to allow loan repayments to be delayed for qualified employees affected by COVID-19. Under this option, for any loan payment with a due date that falls between March 27, 2020 and December 31, 2020, the payment can be delayed for up to one year. The employee will owe additional interest on the delayed payments, but will have more time to repay the loan after the loan repayments start up again.

Communicating with Employees

Employers that adopt any or all of the CARES Act options for providing financial aid to qualified employees affected by COVID-19 will need to spread the word to employees who can benefit from these temporary changes to the employer’s retirement plan. Staff and outside advisors who work with the employer’s retirement plan can help craft employee communications, and answer questions about next steps. While every employer’s situation is different, the CARES Act may give some cities and counties an easy, low-cost way to help certain employees affected by COVID-19.

Liz Masson is a partner at Hanson Bridgett.