One of my all time favorite guitarists is Stevie Ray Vaughn, who died way too young.  Stevie sang a song titled “Look at Little Sister”  which I am reminded of every time I hear about the Little Sisters of the Poor litigation involving the Affordable Care Act (ACA).  And I’ve been reminded a lot since 2017 as the Little Sisters have been before the U.S. Supreme Court twice in that time.  The issue has involved the ACA’s mandate that health plans provide coverage for contraceptives, sterilization, and certain birth control, including the morning after pill, at no additional cost.

The Little Sisters of the Poor Saints Peter and Paul Home (Little Sisters), a nonprofit Catholic order of nuns, that operate homes for the elderly poor nationwide, first objected to the coverage on religious grounds in 2013.  They complained that while certain religious organizations such as churches were exempt from the mandate, the exemption didn’t apply to them as a religious nonprofit organization and even having to file an exemption certificate declaring that the requirement was against their strongly held religious beliefs and was an unconstitutional infringement by making them complicit in providing the birth control.  After defeats in the lower courts, their case reached SCOTUS in 2016 and the Supremes overturned the lower court decisions and instructed the lower courts to provide the government an opportunity to come up with a compromise to provide birth control services to the women who want them while respecting the religious beliefs of organizations like the Little Sisters.  

In October of 2017, the Trump Administration issued a broader exemption from the rule to include nonprofit organizations and for profit companies that objected on religious grounds and also expanded it to include objections on moral grounds.  Several State Attorneys General, including California and Pennsylvania, then sued maintaining that the new broader exemption must fail as the Trump Administration violated the Administrative Procedures Act (APA) in how it issued the expanded exemption without proper opportunity for public comment and that it lacked authority under the ACA or any other legislation to enact the exemption.  In 2018, the Administration reissued the exemption and published it for public comment.  The States again challenged, and a Pennsylvania District Court issued a nationwide injunction against implementation of the new exemption in January of last year.

The Administration and Little Sisters appealed the issuing of the injunction.  In July, the United States Court of Appeals for the Third Circuit upheld the Pennsylvania District Court’s granting of the injunction.  In October, the Administration and Little Sisters asked the Supreme Court to take the case and the Court agreed to look at Little Sisters again.

Oral arguments in the case were heard via conference call due to the Covid-19 Pandemic, with Justice Ruth Bader Ginsburg attending the call from a hospital bed.  On July 8, the high Court held, 7-2, that the exemption would stand, lifting the injunction.  The decision is a bit surprising considering that this alleged conservative Court has turned out not to be so conservative (or Administration friendly) in two monumental decisions from earlier this term.  On June 15, in Bostock v. Clayton County, Georgia, the Court held that gay, lesbian, and transgender individuals are protected under the Civil Rights Act’s prohibition of discrimination on the basis of sex and on June 18 the Court ruled that the Administration’s attempt to revoke the Deferred Action for Childhood Arrivals (DACA) program’s immigration relief for so-called Dreamers was arbitrary and capricious and unenforceable in Department of Homeland Security v. Regents of the University of California. 

Justice Thomas wrote the majority opinion and held that the ACA granted broad discretion to the Health Resources and Services Administration (HRSA) when it states that health plans must provide women with “preventive care and screenings . . . as provided for in comprehensive guidelines supported by HRSA.”  The discretion to define what must be covered also provides the discretion to identify and create exemptions.  Thomas then made quick work of the alleged procedural defects finding there was no prejudicial error or requirement of “open mindedness” in the APA.  Therefore, the exemptions were properly promulgated.

Justice Ginsburg wrote a scathing dissent stating that a government estimate that between 70,500 and 126,400 women would immediately lose access to free contraception as a result of the ruling.  She expressed concerns over the erosion of women rights in favor of religious right stating,

“Today, for the first time, the Court casts totally aside countervailing rights and interests in its zeal to secure religious rights to the nth degree. . . This court leaves women workers to fend for themselves, to seek contraceptive coverage from sources other than their employer’s insurer, and, absent another available source of funding, to pay for contraceptive services out of their own pockets.

In her concurring opinion, Justice Kagan indicated the matter may not be completely decided yet as the states also challenged the exemption as being “arbitrary and capricious” but the lower courts did not decide that issue.  She stated, “This issue is now ready for resolution unaffected by today’s decision” and lower courts could still consider arguments that the administration didn’t engage in “reasoned decisionmaking,” when implementing the exemption, as required under federal law.  An agency can fail to apply reasoned decisionmaking by: not having a satisfactory explanation for its action; failing to draw a rationale connection between the problem it seeks to solve and the chosen solution; or when its thought process shows a clear error in judgment.  She stated,  “Assessed against that standard of reasonableness, the exemptions HRSA and the Departments issued give every appearance of coming up short.”

Thus, at least according to Justice Kagan, we may be looking at Little Sisters again! Hey, Hey, Hey!

This is the third and final installment of the effects of Covid-19 Pandemic (Pandemic) on executive compensation of private companies.  Part 1 discussed the issues of reducing compensation of Executives.  See Part 1.   Part 2 discussed issues with deferred compensation plans of Executives.  See Part 2.  This Part 3 deals with limits on compensation for businesses that avail themselves of certain relief provided under the Coronavirus Aid Relief and Economic Security (CARES) Act.  The CARES Act was signed into law by President Trump on March 27, and provided $2 trillion in emergency aid to businesses, families and individuals affected by the Pandemic. The Paycheck Protection Program (PPP) has received the most press as it is a program to provide forgiveable loans for small businesses, with less than 500 employees, to keep their employees on payroll.  While the PPP has some restrictions on compensation, the Coronavirus Economic Stabilization Act (CESA) provisions of the CARES Act impose stricter limits on businesses that obtain relief under the Main Street Lending Program.  Both limits are discussed below.

PPP Limits.  Employers that receive PPP forgivable loans are limited in their use of such funds in order for such loans to be forgiven. For example, the combined total of salary and other wages that may be paid to any one employee is capped at $100,000 on an annualized basis. Employee benefits such as paid leave, separation pay, health and other insurance premiums, and retirement contributions are not included in calculating the limit.

Additionally, the PPP’s loan forgiveness is tied to: using the loan for forgivable costs (payroll, mortgage interest, rent, utilities) in proper ratios; maintaining employees by retention or timely re-hire; and ensuring the wages of no employees who earned less than $100,000 in 2019 are reduced by more than 25%.  If this occurs, the amount of the loan that will be forgiven is reduced.  Importantly, hourly paid employees are not considered to have wages reduced if they are paid less on account of hours being reduced.  Because there is no forgiveness penalty for reducing the compensation of highly compensated employees, the PPP actually creates an incentive for employers to reduce Executive salaries over those of employees that made under $100,000 in 2019.  However, employers must take into consideration any contractual rights an Executive may have.  See Part 1.

Also, it should be noted that changes made by the Paycheck Protection Program Flexibility Act of 2020, enacted on June 5, 2020, makes it easier for employers to avoid any reduction in forgiveness by tripling the period for the borrower to incur forgivable costs from eight weeks to twenty-four.

CESA limits.  Under the CESA provisions of the CARES Act, certain specialized industries (such as airlines and businesses critical to maintaining national security) as well as other businesses with between 500 and 10,000 employees can receive a loan or loan guarantee under the Main Street Lending Program. The minimum loan is $1 million and they are not forgiveable as under the PPP.  Any business receiving such a loan is subject to limits on compensation. The restrictions apply during the period beginning on the date the loan agreement is executed and ending one year after the loan or loan guarantee is no longer outstanding (Restriction Period).

The restrictions prevent officers or employees whose 2019 total compensation exceeded $425,000 from earning any more than earned in 2019 during any 12 consecutive months in the Restriction Period. Those with total compensation in excess of $3,000,000 in 2019 actually can’t earn as much as in 2019. Their excess over $3,000,000 is restricted to 50% of the amount earned in excess of $3,000,000 in 2019.  Additionally, no officer or employee may receive severance pay or other benefits upon termination of employment which exceeds twice the total compensation received in 2019. Borrowers under the Main Street Loan Program must attest that they will follow the compensation restrictions in order to receive their loan and the restrictions are contained in loan covenants.

Presumably, if an Executive is scheduled to receive 2020 compensation that would violate the restrictions, the employer will obtain a waiver of the excess compensation or other agreement to the restrictions from the Executive as part of the application process.

There are a number of questions regarding these restrictions that must still be answered by guidance. These include: are the restrictions imposed on a controlled group basis? What are the consequences for exceeding the limits? How is total compensation measured? Can compensation be deferred until after the Restriction Period? How to apply the restrictions to pre-existing employment agreements? Do the restrictions apply to new hires who weren’t employed in 2019? Hopefully, we will get guidance from the Treasury Department and Federal Reserve Board soon that will answer these questions.

Conclusion.  Businesses availing themselves of the relief afforded under the PPP or CESA provisions of the CARES Act must be cognizant of the effect on all compensation, including that of Executives.  Employers should also have a strategy to ensure compliance.

These three articles have demonstrated that there are a number of factors to consider when desiring to change the compensation of Executives as a result of the Pandemic.  As the personnel chiefly responsible for keeping an employer in business during these trying economic times, Executives remain highly valuable to their employers.  However, they should also be fully aware that changes may be necessary to ensure survival of the business.  Employers and Executives should consult with legal counsel regarding any proposed changes in response to the Pandemic.



When is a fiduciary breach not a fiduciary breach?  When the complaining retiree-participants do not have standing because they have not missed receiving a defined benefit pension plan payment, according to Justice Kavanaugh writing for the majority opinion of the U.S. Supreme Court in James J. Thole et al. v. U.S. Bank NA et al., decided June 1, 2020.  In a 5-4 decision, the majority ruled that defined benefit participants, who were receiving their pensions and had not missed an installment, did not have constitutional standing to bring a lawsuit challenging the actions of the plan fiduciaries under ERISA when the plan was overfunded.  The High Court upheld the decision of the United States Court of Appeals for the Eighth Circuit.

The fiduciary action complained of was plan fiduciaries investing in U.S. Bank’s own mutual funds and paying themselves excessive management fees.  Additionally, it was alleged the fiduciaries manipulated accounting rules to boost income and inflate stock prices allowing the fiduciaries to exercise lucrative stock options.  The plaintiff’s alleged those actions breached the fiduciary duties of loyalty and prudence.  Additionally, the plan lost $1.1 billion from the investments in 2008 which plaintiffs alleged was $738 million higher than a properly managed plan would have lost.  These losses cause the plan to be severely underfunded.  The complaint sought a return to the plan of the losses and removal of the current fiduciaries.  However, before the case got to trial, U.S. Bank contributed another $311 million to the plan which made it overfunded.

The gist of the ruling was that because the plan is now overfunded, there is no threat that the plaintiffs won’t continue to receive their pension payments, whether they win or lose the lawsuit.  Kavanaugh found it “of decisive importance” that the plan involved was a defined benefit plan where the risk of investment is upon the employer and a participant’s benefit does not fluctuate with the good or bad investments of fiduciaries.  He noted that the plaintiffs did not allege that the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and employer would fail. Additionally, he wrote that even if the plan were mismanaged into termination, the PBGC would take over the plan and the plaintiff’s level of benefits are fully guaranteed.

Kavanaugh wrote that defined benefit participants do not have an equitable interest in a defined benefit plan similar to that of a defined contribution plan or beneficiaries of a private trust.  Writing a scathing dissent, Justice Sotomayor took issue with this conclusion, reasoning that ERISA’s requirement that plan assets be held in a trust for the exclusive benefit of participants gives participants an equitable interest under traditional trust law, regardless of whether the plan is defined benefit or defined contribution.  Further she reasoned that a beneficiary has a concrete interest in a fiduciary’s loyalty and prudence regardless of whether the breach of these duties caused a personal financial injury to the beneficiary.  By holding the plaintiffs don’t have standing because the outcome of the suit would not change their pension benefit, the Court denies standing without examining all claims for relief.

She also maintained that even if the plaintiffs did not have personal standing they have standing to sue for restitution and disgorgement on behalf of the plan.  She said that even though ERISA and the plan document require fiduciary loyalty and prudence, the majority opinion suggests that participants should endure disloyalty, imprudence and mismanagement as long as the PBGC will guarantee the benefits.  However, ERISA was enacted with fiduciary duties to prevent plans from failing in the first place.

Sotomayor concludes that the majority opinion will encourage the very mischief that ERISA was enacted to prevent, “misuse and mismanagement of plan assets by plan administrators”.  “The Court’s reasoning allows fiduciaries to misuse pension funds so long as the employer has a strong enough balance sheet during (or, as alleged here, because of ) the misbehavior. Indeed, the Court holds that the Constitution forbids retirees to remedy or prevent fiduciary breaches in federal court until their retirement plan or employer is on the brink of financial ruin. . .Only by overruling, ignoring, or misstating centuries of law could the Court hold that the Constitution requires beneficiaries to watch idly as their supposed fiduciaries misappropriate their pension funds.”

Conclusion.  This case will likely chill participant suits alleging fiduciary duty breaches in defined benefit pension plans.  Even if the plan is underfunded, provided the employer can afford to contribute to the plan to cause the plan to be overfunded before trial, the fiduciaries will be able to have the suit dismissed.  More importantly, and disturbing, is the fact that the case appears to enable (if not encourage) defined benefit plan fiduciaries to ignore their duties of loyalty and prudence without concern for personal liability as long as the employer can cure any underfunding caused by the breaches.  However, the U.S. Department of Labor still has standing to bring a suit against such fiduciaries, but this decision removes the private cause of action by participants in this context that is an essential part of the ERISA scheme.



Executives often participate in various nonqualified deferred compensation plans designed to reward upper management.  These can be simple plan designs such as electively deferring a portion of their salary or bonus until a later year.  Or the plan can be more complicated such as awards of phantom stock or stock appreciation rights that will pay compensation to the Executive at a future date based on the value of the employer where the number of units awarded depend on the Executive meeting certain performance goals.  These deferred compensation arrangements generally must comply with Internal Revenue Code section 409A unless exempted.  Failing to comply causes the Executive to be subject to income tax on the deferred compensation as soon as the right to receive it is non-forfeitable.   Such taxable amount is also subject to an additional 20% federal tax and California imposes its own 5% additional tax.

Ceasing Deferrals.  An Executive experiencing financial difficulties as a result of the Covid-19 Pandemic (Pandemic), may desire to stop any elective deferrals of compensation into a deferred compensation plan in order to have more “take home” pay.  However, Code section 409A has strict rules regarding making deferrals and changing them.  First, an elective deferral must generally be made before the end of the year prior to the year in which the compensation is earned.  Additionally, unlike elective deferrals into a 401(k) plan which can be stopped at any time, a deferral of compensation into a plan subject to Code section 409A generally cannot be altered once made for the year.  Thus, had an Executive elected to defer 10% of 2020 salary in an election made prior to the end of 2019, the Executive cannot cancel such deferral in 2020 without violating Code section 409A.  The exception to this rule is if the plan permits deferral elections to be cancelled as the result of an unforeseeable emergency discussed further below.

Unforeseeable Emergency Distributions.  An Executive may also wish to access compensation previously deferred to relieve financial stress caused by the Pandemic or medical expenses resulting from COVID-19.  Code section 409A governs what events may give rise to a distribution under a deferred compensation arrangement.  These are: separation from service, death, disability, a specified date, a change in control, and an unforeseeable emergency.  The triggering events permitted by the plan must be set forth in the written plan document.  Code section 409A also contains a prohibition against accelerating payment of deferred compensation even if it means the Executive receives less than deferred by taking a “haircut” penalty.  This is prohibited due to several highly publicized corporate abuses involving haircuts before Code section 409A was enacted.

Circumstances caused by the Pandemic might be eligible as an unforeseeable emergency If that triggering event is permitted under the plan document.  If the deferred compensation plan does not already provide for such a triggering event, it may be amended to add it.  A distribution on account of an unforeseeable emergency is different than hardship distributions permitted in a 401(k) plan.  Additionally, the CARES Act permitted 401(k), and other types of qualified plans, to specifically permit distributions to participants affected by COVID-19.  However, deferred compensation plans for Executives are not permitted to allow COVID-19 specific distributions and unlike hardship distributions from 401(k) plans, there are no safe harbor rules that an employer may rely on, when determining whether an Executive  experienced an unforeseeable emergency.  Whether this has occurred is based on the facts and circumstances.

Code section 409A defines an unforeseeable emergency as extraordinary and unforeseeable circumstances beyond the control of the employee that causes the employee severe financial hardship that cannot be alleviated by (1) compensation or reimbursement received from insurance companies or otherwise, (2) liquidation of the employee’s assets, or (3) ceasing future deferrals of compensation.  Specific examples of unforeseeable emergencies include:

  1. The employee’s (or the employee’s spouse’s, beneficiary’s or dependent’s) illness or accident.
  2. Imminent foreclosure or eviction of the employee’s primary residence.
  3. The need to pay medical expenses (including nonrefundable deductibles) or prescription drug medications.
  4. Other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the employee which cannot be relieved through the employee’s other resources.

Clearly the Pandemic is an event out of the control of an Executive.  However, to permit a distribution, the deferred compensation must be needed because the Executive has no other resources to use such as savings or ceasing elective deferrals into the deferred compensation plan or a 401(k) plan.  Therefore, it will likely be difficult for an Executive to meet this burden, and get a distribution, especially if there is money available under a 401(k) plan or the emergency can be met by ceasing deferrals to the 401(k) plan and the deferred compensation plan.

Plan Termination.  Another way that Executives could receive their deferred compensation early without a triggering event would be for the employer to terminate and liquidate the plan (and all like it).  However, this would not likely help an Executive that is feeling financial stress due to the Pandemic because of the requirements of the termination.  First, the employer cannot terminate the plan proximate to the employer experiencing a financial downturn.  Thus, this option is likely not available if the employer is suffering economically as a result of the Pandemic.  Second, once terminated, the plan may not make liquidating distributions to participants for 12 months but must make all distributions within 24 months of the termination date.  Additionally, the employer cannot adopt a replacement plan for 3 years.

Conclusion.  Code section 409A limits the ability of Executives to use deferred compensation plans to alleviate financial hardships derived from the Pandemic.  Given the potential tax consequences, Executives and employer-administrators should be very careful about requests to access deferred compensation due to the Pandemic.

Rank and file employees who may have lost their job or had hours reduced probably don’t care about the effects of the economic downturn resulting from the COVID-19 Pandemic (Pandemic) on executives and key management employees.  However, business owners who have provided such employees with employment agreements, deferred and/or incentive compensation, and perhaps equity or phantom equity compensation do have an interest in the effects of the Pandemic on these employees. This article is Part 1 of a series of blog articles that will address implications the Pandemic may have on executives and key employees in private companies (Executives).  In Part 1 we discuss how employment agreements of Executives will play an important role in any attempt to reduce their compensation and/or adjust incentive compensation.

Reducing Executive Pay.  Employers are reducing their workforce and reducing working hours for employees due to both government orders and the economic fallout from the Pandemic.  Many Executives have employment agreements with their employer.  These often set forth the Executive’s base salary and various forms of bonus or incentive compensation.  While the agreement may provide that the employment is “at will” and it may be terminated by either party with or without cause, it also often provides for severance pay if the agreement is terminated by the employer without cause.  Also, many agreements provide the Executive can receive the severance pay if the Executive terminates the agreement for “good reason”.  Good reason is usually defined to include an employer initiated material change in the circumstances of the Executive’s employment including changes in duties, pay, or place of performance.

Therefore, if the employment agreement permits the employer to reduce the Executive’s salary and other compensation, doing such may give the Executive good reason to terminate the agreement triggering a severance pay obligation.

Some employment agreements may not be “at will” but have a term and cannot be terminated early without cause such as committing a crime or fraud. Typically, doing so requires payment of the Executive’s compensation to the end of  the term even if no longer performing services.

For these reasons, any employment agreements should be reviewed before any attempt to reduce compensation thereunder.  They will likely require the Executive’s agreement to a change.  Many Executives are voluntarily agreeing to a reduction in compensation during these extraordinary times as a sign of good faith.  In either case, the terms of the reduced pay should be negotiated and an amendment to the employment agreement setting forth the terms should be drafted and executed.  This amendment should also provide a mechanism for compensation to return to normal, as well.  It should also be remembered that if the amendment provides that some or all of the reduction in compensation will be paid to the Executive at a future time when the Pandemic is over, that this may be a deferred compensation arrangement that is subject to Internal Revenue Code section 409A, if the compensation is paid in a subsequent year.

Changing Incentive Compensation.  Executives often have certain incentive pay arrangements such as bonuses based on the performance of the business.  A simple example would be that the Executive will earn a bonus equal to 10% of all sales revenue over 105% of the previous year’s sales.  The Pandemic’s effect on the business may be such that it is impossible for the Executive to earn this bonus.   Nonetheless, the Executive may be working even harder just to keep the business afloat during these difficult times.

The employer could simply take the position that if the sales didn’t increase no bonus is due.  Or the employer could take the opportunity to work with the Executive to amend the incentive compensation formula to a more realistic goal or simply substitute a simpler cash bonus instead.

Conclusion.  While the economic downturn resulting from the Pandemic has serious effects on businesses that may cause them to consider adjusting Executive compensation and perks, the Executive likely has legal rights which should be considered.  For this reason, employment agreements and incentive compensation documents should be reviewed with legal counsel to minimize the risk of unintended adverse consequences.  Stay tuned for Part 2 dealing with the effects of the Pandemic on deferred compensation arrangements of Executives.

The California Secure Choice Retirement Savings Investment Board has filed a Notice of Proposed Emergency Regulation Action with the Office of Administrative Law (OAL) to adopt emergency regulations to amend the current CalSavers regulation to extend the June 30, 2020 registration deadline for Eligible Employers with more than 100 employees to September 30, 2020.  Currently, employers with more than 100 employees that don’t otherwise offer a retirement plan must register with CalSavers, the state’s payroll deduction IRA program, by June 30, 2020 and automatically enroll employees  or face penalties.

Under its Finding of Emergency, the Board stated that the extension is necessary to provide California employers additional time to respond to the COVID-19 pandemic and prepare for their registration deadline.  The Board believed that keeping the June 30 deadline would unduly burden employers experiencing hardship due to the COVID-19 pandemic.

Once the proposed amendment is submitted to the OAL, there will be an opportunity for public comment.  The Notice, Proposed Regulation, and finding of Emergency can all be found on the state Treasurer’s website at

On April 1, 2020, the Howard Jarvis Taxpayers Association filed a Notice Of Appeal with the United States District Court for the Eastern District of California, indicating that it is appealing the court’s March 10, 2020 dismissal of the Association’s lawsuit alleging that CalSavers, California’s mandated payroll deduction IRA program, was preempted by ERISA.  See CalSavers Not Preempted By ERISA! The appeal is to the United States Court of Appeals for the Ninth Circuit.

The decision last month was the second time the Eastern District had dismissed the case.  The Association originally filed suit in 2018 and the court dismissed it with leave to amend in March of last year.  See CalSavers Saved From ERISA Preemption By District Court.  The Association filed an amended complaint in April of 2019 and the United States Justice Department filed a statement of interest in September, agreeing with the Association that CalSavers was preempted. See HJTA Files Amended Complaint Challenging CalSavers Program and Friday the 13th Unlucky for CalSavers as U.S. Maintains Law is Preempted by ERISA.

The Notice of Appeal does not indicate the basis for the appeal.  One would expect the Justice Department to remain interested in the appeal.


On March 27, the House of Representatives passed, and within hours President Trump signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a 2 trillion dollar stimulus and relief statute with several measures to help individuals and businesses cope with the economic issues resulting from the COVID-19 Pandemic.  The Senate had passed the bill on March 25.  The Act includes two major changes to the rules surrounding participants accessing funds under certain retirement plans and IRAs as a result of the Pandemic.   These are: the ability of “eligible employees”: to withdraw funds from the plan during 2020 on an advantageous basis as an eligible Coronavirus-Related Distribution (CRD); and the ability to borrow more money from the plan on more favorable terms, if the plan permits participant loans.  These two provisions are discussed below.


The CARES Act permits eligible retirement plans to allow CRDs of up to $100,000 from the date of enactment to the end of 2020 to an eligible individual.  An eligible individual is one: 1) Who is diagnosed with the SARS-CoV-2 virus or coronavirus disease 2019 (COVID-19) because of testing positive for the virus or disease; 2) Whose spouse or dependent is so diagnosed; or 3) Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors determined by the Secretary Treasury.  The Plan Administrator can rely on an employee’s certification that the employee satisfies the requirements to be an eligible individual.

CRD withdrawals are not subject to the 10% penalty for early withdrawal, or 20% federal income tax withholding.  Also, while subject to income tax, the taxes are spread over 3 years unless the participant elects to pay sooner.  Most importantly, the withdrawals can be re-paid to the plan over 3 years from the date of distribution.  Repayments can even be made to another employer’s plan that permits roll overs should the employee change jobs.

An eligible retirement plan is defined as any qualified retirement plan maintained by the employer (which includes pension plans), section 403(a) and 403(b) plans, and section 457(b) plans of governmental employers and IRAs.

Enhanced Loan Provisions

The CARES Act allows eligible plans to make participant loans to any eligible individual (as defined for CRDs above) in a maximum amount of the lesser of $100,000 or the present value of the participant’s vested benefit under the plan.  This is double the maximum for normal participant loans.  An eligible plan for these loans is any qualified plan, or a 403(a) or 403(b) plan, but not 457 plans.

In addition, for any participant loan of an eligible individual that is outstanding as of the date of enactment of the Act (March 27, 2020), the loan repayments to be made through December 31, 2020 are delayed for one year.  The subsequent remaining loan repayments are re-amortized to account for the delay and interest earned during the delay.

Amendments Needed.

A plan would have to be amended to permit such CRDs or loans. However, the CARES Act permits employers to implement the CRDs and loans in operation and wait to amend the plan until the last day of the first plan year beginning on or after January 1, 2022, or a later date if prescribed by the Secretary of the Treasury.


These provisions are a welcome addition to help employees have access to their retirement savings, if necessary, to tide them over during the COVID-19 Pandemic.  They have many advantages over the traditional hardship withdrawals that could be taken if the plan permits.  The principal advantage is that they avoid the leakage in retirement savings of traditional withdrawals  because, unlike traditional withdrawals, they can be re-contributed to the plan.  Hopefully, the Pandemic will be over in a few months and the economy will return to normal allowing those employees taking advantage of these new CARES Act provisions to repay the money to the plan to be used for retirement.





If you’ve been wondering why I haven’t posted about the effects of COVID-19 on employee benefits it’s because I’ve been practicing social network distancing.  Just kidding. While we await Congress to pass and the President to sign the 2 trillion dollar stimulus package known as the CARES Act, I thought I would point out how 401(k) or 403(b) plans that permit hardship withdrawals under the federal disaster safe harbor can now permit such withdrawals for employees suffering a financial hardship as a result of COVID-19.

While the President declared the COVID-19 Pandemic a national emergency on March 13, it is not a declared national disaster yet.  However, the President declared California, Washington, and New York as major disaster areas on March 22.  Subsequently, the states of Iowa, Louisiana, Texas, Florida, North Carolina and New Jersey have been declared disaster areas and more states are likely to be so declared.  These declarations qualify residents of these states and employees of employers in those states to qualify for a hardship distribution for losses as a result of the virus, if the plan has adopted the federal disaster safe harbor.

If a plan uses the facts and circumstances test instead of the safe harbor, withdrawals for substantiated financial hardships resulting from COVID-19 are subject to the plan administrators approval, but should be approved.

However, such hardship withdrawals cause leakage in retirement savings as they cannot be re-contributed to the plan.  Additionally, the withdrawals are subject to income tax and the 10% early withdrawal penalty if the participant is under age 59 1/2.  The CARES Act proposal permits plans to allow for COVID-19 related distributions of up to $100,000.  Such withdrawals are not subject to the 10% penalty and the income tax consequences can be spread over 3 years.  Most importantly, the withdrawals can be re-paid to the plan over 3 years and can even be made to another employer’s plan that permits roll overs should the employee change jobs.  A plan would have to be amended to permit such distributions.  Given the advantages of the CARES Act, it may be well worth it to wait for it to become law which should be any day now.

Stay well.

On March 10, 2020, the United States District Court for the Eastern District of California once again dismissed the lawsuit by the Howard Jarvis Taxpayers Association (HJTA), challenging CalSavers as being preempted by ERISA.  CalSavers is California’s mandated auto-enrollment payroll deduction IRA program that requires employers of a certain size, that don’t provide their employees with a retirement plan, to automatically withhold contributions from such employee’s pay and pay them into IRAs managed by CalSavers.  Employees can opt out.

HJTA originally filed suit in May of 2018, alleging that the program was preempted by ERISA.  However, the court granted CalSavers’ motion to dismiss in March of last year but gave HJTA leave to amend the complaint.  HJTA filed an amended complaint in April of 2019 and CalSavers again moved to dismiss.  The District Court again dismissed the case despite the fact that the United States Department of Labor filed a statement of interest last September, siding with HJTA that the law was preempted by ERISA.  The court found that CalSavers  is not an employee benefit plan under ERISA because it is not maintained by an employer and it does not “relate to” an employee benefit plan because it does not impose any additional reporting, administration, or burdens on employers that maintain ERISA plans.

This case is not only a victory for CalSavers but also other states with similar programs.