On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES”). The law continues a series of state and federal laws and regulations that are designed to lessen the impacts of the COVID-19 pandemic on businesses and individuals. The chief components of the law include tax relief and loan programs for businesses, funding for new leave entitlements, supplemental unemployment benefits for individuals, and a relaxation on certain retirement plan rules.
The law provides support to individuals who are laid off as a result of the pandemic, as well as incentives to businesses to avoid additional layoffs. The provisions of the law are impactful as employers consider how to manage their workforce in light of ongoing business interruptions. In the coming weeks, the Department of the Treasury and the Small Business Administration will provide further detail on how this new law will be administered. This article provides an overview of the new law’s provisions. Bullard Law will continue to monitor developments and provide updates to employers.
- Paycheck Protection Program
CARES provides a variety of loans and grant opportunities. Employers should consider the following information about these new programs and contact their lender and/or financial advisor for additional details.
CARES provides increased access to loans through the Small Business Act to assist qualified businesses in paying for: certain payroll costs; costs associated with continued group health care benefits; rent, mortgage, and utility payments for the business; and interest on preexisting debt obligations. Qualified businesses include those employing fewer than 500 employees per location, including franchises and business organizations with related entities, non-profit organizations, veterans’ organizations, and tribal business concerns.
Maximum loan amounts will be for the lesser of $10,000,000 or 2.5 months of a business’s average payroll costs. Loans will be provided on favorable terms (4% interest, 10 year repayment plan, with waiver of personal guarantees, collateral, loan fees, and prepayment penalties) and administered through third-party financial institutions that administer Small Business Act loans.
Portions of loans are eligible for forgiveness up to the amount of the loan that is spent in the eight week period following the loan origination to cover certain payroll costs and other mortgage, rent, and utility payments. However, the amount available for forgiveness may be reduced if the loan amount is not ultimately used to ensure employee retention.
Economic Injury Disaster Loans and Grants
CARES also expands the availability of emergency express loans through the Economic Injury Disaster Loan (“EIDL”) program. CARES increases the maximum loan amount (to $1,000,000), authorizes loans based solely on credit score, and lifts some requirements for personal guarantees.
Additionally, eligible small businesses, non-profit organizations, and agricultural cooperatives may receive emergency grants of up to $10,000. Those entities may use grant money to assist in paying for paid sick leave to employees out of work due to the “direct effect of the COVID-19” (including qualifying leave under the Families First Coronavirus Response Act); maintaining payroll to retain employees; meeting increased costs due to supply chain disruptions; rent or mortgage payments; or repayments of obligations that cannot be met due to revenue losses.
Entities may apply for both the grants and a loan under the Paycheck Protection Program. However, grants received may reduce the amount of loan for which an entity is eligible. Additionally, the use of the funds must be separate and not used for duplicative purposes.
- Unemployment Insurance Provisions
CARES provides expansive additions to unemployment insurance and benefits through December 31, 2020, building off the benefits included in FFCRA. Click here for more information.
CARES expands the categories of individuals eligible for unemployment insurance to include workers that would normally be excluded from insurance coverage. This includes self-employed, independent contractors, and gig economy workers, along with part-time employees, people who have exhausted benefits, and individuals with an ordinarily insufficient work history.
Those seeking these enhanced unemployment benefits must certify that they are unable or limited in their ability to work because of COVID-19. The qualifying circumstances include: personal diagnosis; member of family or household diagnosis; school or care facility closure leading to need to care for children; imposition of quarantine due to public health emergency; advised to self-quarantine by a medical care provider; scheduled to start a job but unable to do so because of the public health emergency; have become major support for the household due to death of household breadwinner from COVID-19; and/or they resigned their employment due to COVID-19. Employers who layoff or furlough workers due to COVID-19-related business interruptions should ensure that their layoff notice or similar communication to workers accurately states the reason for the layoff.
Additionally, CARES provides federal funds to augment state unemployment insurance benefits. In addition to state-provided benefits, qualifying individuals may be eligible for up to $600 a week in supplemental unemployment benefits. Notably, this $600 payment is a flat amount that may be claimed by individuals receiving partial unemployment benefits as well. Because of the variability of such partial unemployment programs from state to state, we expect that Oregon and/or the Federal Government will provide additional guidance regarding eligibility in the coming weeks. CARES also provides 13 additional weeks of unemployment, for a maximum of 39 weeks of eligibility. The Federal Government is funding the full first week of unemployment for all states that waive waiting periods before issuing benefits funds.
CARES also provides additional funding and support for states utilizing short-time compensation or workshare programs. These programs provide financial support to employees whose hours have been reduced but are still working for their employer under state-administered workshare programs.
- Rebates and Other Individual Provisions
In addition to supporting businesses through loans and tax credits, CARES contains a provision for direct payments to individuals. The individual payment is $1,200 for each adult ($2,400 for joint filers) and $500 for each child, delivered via direct deposit or check. Eligibility for the payments begins to phase out for taxpayers earning more than $75,000 per year ($150,000 for joint filers; $112,500 for single heads of households), based on the taxpayers 2019 adjusted gross income.
While commonly reported as simply a cash payment to individuals, these payments are technically tax credit advanced on 2020 tax obligations.
Additionally, the deadline for individual taxpayers to file their 2019 taxes has been delayed by three months to July 15, 2020. If your organization’s accounting or finance department typically receives many employee inquiries leading up to the typical April tax deadline, it should account for a similar surge of inquiries in the midst of the summer months this year.
Paid Leave Tax Credits
- Paid Leave Tax Credits, Payroll Tax Credits, and Deferral
CARES clarifies the mechanism for federal funding of the new entitlements contained in the Families First Act through tax credits up to the cap on such benefits, as well as which employees will qualify for paid leave.
As a reminder, the FFCRA requires certain public and private employers with fewer than 500 employees to provide each eligible employee (unless excluded as a healthcare provider or an emergency responder) with up to 12 weeks of emergency paid family and medical leave under the Family Medical Leave Act (“FMLA”) for COVID-19-related school/childcare closure, after the first 10 days of unpaid leave (Days 11-60: pay at regular rate; capped at $200/day and $10,000 in the aggregate) and emergency paid sick leave (80 hours for a full-time employee capped at either $200/day and $2,000 in the aggregate, or $511 per day and $5,110 in the aggregate, depending on the allowable reason for the leave). The FFCRA provides for a 100% refundable tax credit on payroll costs up to the caps listed above plus certain costs of health insurance for employees on leave.
CARES provides for a mechanism for the Department of the Treasury to provide “advance refunding” of this credit to businesses up to an amount calculated through the end of the most recent payroll period in the quarter. If additional funds are needed, employers may seek an expedited advance from the IRS. CARES also provides for relaxed enforcement rules as employers adjust to the new rules, including provisions for a 30 day “non-enforcement order” and penalty waivers for failure to pay sufficient payroll taxes in reliance on anticipated credits.
CARES also provides that certain recently laid-off employees may be rehired and become eligible for paid leave. Importantly, CARES expanded the definition of employees eligible for emergency paid FMLA under FFCRA to include employees laid off after March 1, 2020, and who had worked for 30 of the last 60 calendar days prior to layoff.
Accordingly, employers who completed layoffs in anticipation of COVID-19-related business impacts may wish to reevaluate their strategy for navigating the next several months. Under certain circumstances, the tax credits under CARES may allow employers to rehire employees who wish to immediately take paid family leave at minimal cost to the employer.
Payroll Tax Credits
CARES also offers payroll tax credits to qualifying employers who retain and pay wages to qualifying employees, despite business interruptions or a decline in gross receipts due to COVID-19. The tax credit may be claimed for up to 50% of wages paid (up to $10,000 of qualified wages) during quarters in which COVID-19 negatively impacts a business in two ways.
First, to be a qualifying business, an employer’s business operations must have been directly impacted by the pandemic. Employers may qualify for the tax credits if their operations are suspended or curtailed because of orders from a governmental authority related to COVID-19. Oregon employers who have altered their operations in response to Governor Brown’s “Stay Home, Stay Safe” Order
likely will qualify based on this criteria.
Second, to be a qualifying business, an employer’s business income must have suffered as a result of the pandemic. Employers may qualify for the tax credits if they experience a decline in gross receipts of greater than 50%, as compared to the same quarter in the prior year. Even if government orders are lifted for a quarter, an employer still will qualify for this credit if their gross receipts are less than 80% of their gross receipts in the same quarter of the prior year. Significantly, employers who are nonprofit 501(c)(3) organizations are exempt from this second requirement.
Qualifying employers receive a credit based on the qualifying wages paid to qualifying employees. Qualifying wages include only up to $10,000 in wages paid to each employee between March 13, 2020 and December 31, 2020. The law distinguishes between employers of over 100 employees (large employers) and employers of 100 or fewer employees (small employers). A large employer’s qualifying wages are only those wages paid to employees who are not providing services to the business because it has curtailed operations due to a COVID-19-related circumstance. In contrast, a small employer’s qualifying wages include all wages paid to employees regardless of whether they provide services to the employer. Wages include certain health benefit payments made on behalf of an employee.
Deferral of Tax Payments on Wages
To facilitate employers taking advantage of the tax credit, the law waives penalties for a qualifying employer’s failure to make payroll tax deposits when issuing wage payments to employees. However, the law provides that employers who choose to continue to make such deposits are eligible for tax refunds on any overpayment, after the tax credit is applied.
In order to further alleviate pressure on qualifying employers to meet payroll, CARES permits employers to defer payment of the employer’s share of the Social Security tax on employee wages. Half of the deferred payments must be made by December 31, 2021, with the remainder due by December 31, 2022. This relief is also afforded to self-employed individuals.
Employers may not be qualifying employers if they have taken advantage of certain federal loan programs or debt relief programs in the past. Additionally, a qualifying employer may not claim double credit as to employee wages that are already subject to tax credits under some existing federal programs.
- Retirement Plans and Distributions
Employers should be aware of several provisions related to retirement plans. The plans impact employer obligations and opportunities regarding employer administered plans.
Retirement Plan Documents May Need to be Amended
CARES includes several provisions intended to help employers who sponsor retirement plans and retirement plan participants remain financially viable through the pandemic. Most affected employers will need to amend their plan documents by December 31, 2022 in recognition of these changes in order to ensure that employees can take advantage of the provisions of CARES.
Required Minimum Distributions
Prior to CARES, defined contribution plan accounts of participants aged 70.5 years (as of 12/31/19) were subject to annual Required Minimum Distributions (“RMD”). Defined contribution plans include 401(k), profit sharing, 403(b) and 457(b) plans, and some traditional IRAs.
Under CARES, RMDs are not required in 2020. This change is intended to avoid forcing individuals to sell stocks, bonds and other investments held in their accounts at a time when prices may be depressed (i.e., to avoid selling low). Individuals who already took a 2020 RMD will be permitted to rollover the amount into another account, which ordinarily is not permitted.
Prior to CARES, when an individual received a distribution from an employer sponsored retirement plan or an IRA, the distribution must be recognized as taxable income in the year of the distribution and may be subject to an excise tax.
Under CARES, Coronavirus-Related Distributions (“CRD”) of up to $100,000 made in 2020 are not subject to an excise tax and can be reported as income spread over a three year period. Additionally, any amount of a CRD that is repaid within three years will not be treated as taxable income. Furthermore, federal laws that generally prohibit distributions of certain amounts to participants who remain employed by the plan sponsor and have not yet obtained age 59½ have effectively been suspended.
CRDs include distributions to plan participants because the plan participant or the participant’s spouse or dependents have been diagnosed with COVID-19 or the participant experienced an adverse financial consequence due to coronavirus (such as reduced hours or being laid off, inability to obtain child care leading to a loss of hours or employment, or the closure of a business). Note that a COVID-19 diagnosis must be obtained through the use of a CDC-approved test and that a retirement plan administrator may rely on a participant’s self-certification that the participant meets the conditions for the CRD.
Many retirement plans permit participants to borrow against their own vested plan account balance, which federal law limits to the lesser of $50,000 or 50% of a participant’s vested account balance. Under CARES, those limits have been increased to the lesser of $100,000 or 100% of the participant’s vested account balance. Additionally, qualified participants may delay certain loan payments by up to one year.
Pension Plan Funding and Benefit Restriction Relief
Employers sponsoring single-employer pension plans have been granted extended deadlines to deposit minimum funding contributions due in 2020. However, interest will continue to accrue on the minimum contribution amount until it is actually deposited. In addition to the delayed deadline to make contributions, single-employer pension plans may avoid benefit restrictions that ordinarily would be triggered by a change in the plan’s adjusted funding target attainment percentage.
Pension Plan Rules for Certain Charities
Under existing federal law, pension plans sponsored by cooperatives and small employer charities are permitted greater flexibility with regard to minimum funding standards, asset valuation rules, required contributions, and liquidity requirements. Under CARES, these favorable rules have been extended to certain §501(c)(3) charities.
We are monitoring developments and anticipate further Department of the Treasury and Small Business Administration guidance in the near future. For additional information, please feel welcome to contact any Bullard Law attorney or a member of our COVID-19 team which includes Kathryn Hindman, Maryann Yelnosky, Francis Barnwell, Kent Pearson, and Kara Backus.
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