Late on March 26th, the Senate passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, and the House passed the measure by voice vote on March 27th. The President signed the Act later that evening, converting it into law. The CARES Act provides approximately $2.2 trillion in stimulus to the U.S. economy, and provides a multitude of ways in which the federal government will support businesses and their employees impacted by the pandemic. Key measures include direct tax rebate payments to individuals, business loans, unemployment benefits, and tax credits.
(1) Direct Payments to Taxpayers
CARES provides the following direct payments to individuals: $1,200 for single filers with adjusted gross income (AGI) below $75,000 and head of household filers with AGI below $112,500; $2,400 for joint filers with AGI below $150,000. Individuals and joint filers will receive $500 for each child (defined as a dependent under the age of 17). The payment phases out at higher income levels depending on filing status and number of children (and reaches zero, for example, for a single filer with no children and AGI above $99,000; $198,00 for those married, filing jointly). The IRS will use 2019 tax returns (or 2018 returns if the 2019 return is not yet available), Social Security benefit statements, or Railroad Retirement benefit statements (where applicable) to calculate the direct payment owed. There is no set timetable for the payments to be mailed out, but they are expected to begin as soon as possible.
(2) Business Loan Provisions
Paycheck Protection Loans
- Loans will cover payroll and other expenses from February 15th through June 30th;
- Generally, businesses with less than 500 employees will be eligible (although there will likely be some limited exceptions for hospitals);
- The loans may be used for payroll costs, healthcare plan costs, rent, utilities, and other debts incurred by the business; and
- Loan amounts will be available based on a formula. The amounts available will be the lesser of: Average monthly payroll costs during the prior year x 2.5; or $10 million.
Loan Forgiveness Parameters
- The federal government will forgive the loans in an amount equal to the amount of qualifying costs spent during an eight-week period after the origination of the loan. These qualifying costs include payroll costs (except of wages above $100,000 per employee), interest on secured debt obligations, and rent and utilities in place prior to February 2020.
- The amount of the forgiveness for the loans will be reduced if the employer: reduces its workforce during the eight-week period compared to prior periods; or reduces the salary or wages paid to an employee by more than 25% during the 8-week period after loan origination(compared to the most recent quarter).
- To substantiate an application for loan forgiveness, the loan recipient is required to provide verifying documentation of the number of full-time equivalent employees on payroll and pay rates, certify that documentation is true and accurate, and the amount for which forgiveness is requested was used to retain employees or to make mortgage, rent, or utility payments.
SBA Emergency Economic Injury Grants
- The SBA will provide emergency grants in the amount of $10,000 to certain businesses with less than 500 employees that were in operation on January 1, 2020 who have applied for an SBA economic injury disaster loan. The grant should be provided to the business within three days of applying. The applicant must provide a self-certification that it is an eligible entity to apply. Even if applicants are later not approved for the economic injury disaster loan, they are not required to repay this advance payment.
The grant must be used for allowable purposes such as:
- Providing paid sick leave to employees unable to work for COVID-19;
- Maintaining payroll to retain employment during business interruption;
- Meeting increased costs to obtain materials unavailable due to interruption in supply chains;
- Paying rent or mortgage; and
- Repaying obligations that cannot be met due to revenue loss.
Payment Subsidies for Some Loans
- SBA will pay the principal, interest and fees owed on certain qualifying loans for six months (loans under Section 7(a) of the Small Business Act, excluding the new paycheck forgiveness loan program);
- Payments will begin within thirty (30) days of the due date; and
- Payments will be applied in a manner so that the borrower is relieved of the obligation to pay.
Additional Loans for Mid-Size Businesses
While not eligible for paycheck protection loans, mid-size businesses – those with 500 to 10,000 employees – are also eligible for direct loans under the Emergency Relief and Taxpayer protections portion of the CARES Act. For a business to receive this type of loan under the Act, it must make a “good-faith certification” that it will comply with certain requirements listed in the CARES Act, including that it will remain “neutral” in any union organizing drive during the life of the loan. This certification will likely occur on a form provided as part of the application for the loan and the failure to comply with the certifications could result in the rescission of the loan.
(3) Unemployment Insurance Provisions
Increased Benefits and Coverage
The CARES Act also expands unemployment assistance by creating a Pandemic Unemployment Assistance program through December 31, 2020, with about $260 billion in funding. Highlights of the unemployment assistance include:
- Extends unemployment insurance by thirteen (13) weeks and provides a four-month enhancement of benefits;
- Makes unemployment compensation available for those not traditionally eligible for regular unemployment benefits, including those with limited work history or those who have exhausted their state unemployment compensation benefits; and
- A “covered individual” eligible for benefits includes anyone who provides self-certification that he or she is able and available to work, but is unemployed or partially unemployed due to any of the following:
- Has been diagnosed with COVID-19 or is experiencing symptoms and seeking a medical diagnosis;
- A member of the individual’s household has been diagnosed with COVID-19;
- The individual is providing care for a family member or household member who has been diagnosed with COVID-19;
- The individual is the primary caregiver for a child or other person in the household who is unable to attend school or another facility as a direct result of COVID-19;
- The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of COVID-19;
- The individual is unable to work because a health care provider has advised the individual to self-quarantine due to COVID-19 concerns;
- The individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of COVID-19;
- The individual has become the breadwinner or major support for a household because the head of household has died as a direct result of COVID-19;
- The individual must quit their job as a direct result of COVID-19; or
- The individual’s place of employment is closed as a direct result of COVID-19.
Individuals Ineligible for the Unemployment Assistance
- Individuals who can work remotely; and
- Individuals receiving paid sick leave or paid family and medical leave;
Other Unemployment Provisions
- State unemployment insurance providers will determine eligibility. However, states may not restrict the coverage to a more limited group of individuals than provided under federal law (Supremacy Clause). Therefore, all states are required to expand eligibility to those affected by COVID-19 as defined by the Act;
- The law provides an additional $600 per week payment to each recipient of unemployment insurance for up to four months (expires on July 31, 2020);
- The total amount of benefits will be equal to the amount determined under state law, plus an additional amount of $600 per worker per week;
- Provides an additional 13 weeks of unemployment benefits to those who remain unemployed after state unemployment benefits are exhausted (expires on December 31, 2020);
- All but eight states (Arkansas, Alabama, Florida, Idaho, Kansas, Missouri, North Carolina, and South Carolina) offer 26 weeks of unemployment insurance benefits;
- Receipt of assistance under the unemployment provisions shall not exceed 39 weeks, unless otherwise extended;
- Provides funding to pay the cost of the first week of unemployment benefits for states that choose to pay recipients as soon as they become employed instead of waiting one week before the individual is eligible to receive benefits (expires on December 31, 2020); and
- DOL has the authority to issue operating instructions or other guidance as necessary in order to implement these provisions.
(4) Other Provisions to Aid Businesses
Tax Credit for Businesses Subject to COVID-19 Closure or Reduction in Operations
- Employer tax credit equal to 50 percent of “qualified wages” paid to employees from March 13, 2020 through December 31, 2020.
- The tax credit applies against the employer portion of Social Security taxes payable on W-2 wages paid to all employees (after first applying the tax credits for payment of required sick leave and required FMLA leave).
- The tax credit is available to employers who meet either of the following conditions (“eligible employer”):
- The employer’s operations are either fully or partially suspended by a government order relating to COVID-19; or
- The employer’s gross receipts during a calendar quarter are less than fifty (50) percent of the gross receipts for the same calendar quarter during 2019.
- The tax credit is based on the qualified wages paid by an eligible employer during the calendar quarter.
- More than 100 average number of full-time employees during 2019 – qualified wages includes ONLY wages that continue to be paid to employees who are NOT providing services due to a COVID-19 suspension of business operations or the greater than 50 percent reduction in gross receipts;
- 100 or less average number of full-time employees during 2019 – qualified wages include ALL wages paid to employees regardless of whether the employee is providing services;
- In all cases, the total amount of qualified wages that can be counted for an individual employee during the entire COVID-19 period cannot exceed $10,000; and
- Wages refers to W-2 wages used to determine FICA (Social Security and Medicare) taxes but not counting FFCRA required sick leave payments and FFCRA required FMLA leave payments.
Deferral of Employer Social Security Taxes
All employers (whether affected by COVID-19) are permitted to delay payment of 2020 employer Social Security taxes as follows:
- 50 percent of the deferred 2020 employer Social Security tax is payable by 12/31/2021; and
- Remaining 50 percent of the deferred tax is payable by 12/31/2022.
(5) Retirement Plan Provisions in CARES
CARES provides some changes to retirements plans that will affect both employers and plan participants. Notable changes include the following:
- The CARES Act creates a new form of in-service distribution for participants who are affected by COVID-19. Such a “coronavirus-related distribution” (or “CRD”) is not subject to the 10% early distribution penalty under Tax Code Section 72(t), may be repaid to the plan over a three-year period, and is taken into ordinary income by the recipient over a three-year period to the extent that it is not repaid. Distributions may not exceed $100,000 per eligible participant. Significantly, this is an optionalbenefit that may be – but is not required to be – made available by plan sponsors. CRDs may be made to eligible individuals only for the period from January 1, 2020, through December 31, 2020.
- The CARES Act also provides plan loan relief for individuals affected by the pandemic. Eligible individuals are entitled to a temporary increase in the amount available as a loan (up to $100,000) for loans taken within the 180-day period following enactment of the Act. Any plan loan payment that comes due during the period beginning with the passage of the CARES Act and continuing through December 31, 2020, will be delayed for an additional year. Subsequent loan payments must be adjusted to reflect the delay and any interest that accrues during the delay.
- the CARES Act provides a waiver of any required minimum distributions that otherwise would have been due in 2020. This relief applies to qualified retirement plans (such as 401(k) plans), Code Section 403(a) and 403(b) plans, and governmental Code Section 457(b) plans.
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