The CARES Act: Key Provisions for Employers Impacted by COVID-19 Pandemic
On March 27, 2020, the House of Representatives passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, and President Trump quickly signed it into law. The Act provides $2 trillion in relief to address the expected economic impacts of the COVID-19 pandemic. These funds are earmarked for distribution in a myriad of ways. Several of the programs announced or expanded through the Act will impact directly American companies’ thinking about how they structure their workforce in the coming weeks.
The Act launches the Paycheck Protection Program, which makes $349 billion in loans available to small businesses to cover payroll, mortgage, rent and utility payments. With the aim of encouraging employers to stay open and keep workers employed, these loans are forgivable to the extent borrowers use the funds for payroll, mortgage, rent or utility payments during the eight (8) weeks following loan origination. Conversely, loan forgiveness is reduced proportionally based on any reduction in employee head count or pay. Borrowers who already laid off workers or reduced wages in light of COVID-19-related economic pressures still can participate in loan forgiveness provided they reverse those decisions by June 30, 2020.
The Act also makes $10 billion available for Economic Injury Disaster Loans (EIDLs) for small businesses. While the loans have favorable terms, they are not forgivable. That said, applicants can obtain an advance of up to $10,000 to use for providing paid sick leave to employees, maintaining payroll, and making rent/mortgage payments and other business expenses. The advance need not be repaid.
The Act also provides substantial expansions on unemployment benefits. The Pandemic Unemployment Assistance program extends up to 39 weeks of unemployment benefits to individuals unable to work because of COVID-19, even if they would not otherwise qualify for state unemployment benefits.
The Act also lays out federal Pandemic Unemployment Compensation, which provides American workers an additional $600 per week to the unemployment benefits they receive through state programs. The benefits provide states an ability to waive the “waiting week” requirements under their own programs, with the federal government fully reimbursing them for payment of such immediate benefits. The benefits also provide an additional 13 weeks of unemployment benefits over and above those already available through state programs.
The Act provides further financial support for states to operate short-time compensation or Work Share programs, which allow employers to cut employee hours in lieu of laying them off entirely.
The Act rolls out much-publicized stimulus payments, or rebates, directly to individual employees.
Beyond payments directly to Americans, the Act allows employees to make early withdrawals or increased loans from their 401(k) accounts, IRA accounts and qualified retirement plans.
The Act also announces an employment tax credit for employers negatively impacted by COVID-19, and it allows employers to defer up to two years payment of their share of Social Security taxes on employee wages.
Finally, the Act provides an expedited approach for employers to obtain advance refunds of the payroll tax credit for payments of emergency paid sick and family leave under the recently passed Families First Coronavirus Response Act (FFCRA).
The Act is more than 800 pages long and contains programs beyond those outlined above. Below is a more detailed summary of some the Act’s most important provisions for employers.
Title I – Keeping American Workers Paid and Employed Act
The Paycheck Protection Program
The Act provides up to $349 billion in SBA “7(a)” loans. The loans, 100% guaranteed by the federal government, are available between February 15, 2020, and June 30, 2020. Applications can be made through any third-party lender authorized to make 7(a) loans, as well as any other additional lenders the SBA or Secretary of Treasury authorizes to make these loans (which would include federally insured depository institutions, federally insured credit unions and Farm Credit System institutions).
Businesses can begin applying starting April 3, 2020, while self-employed and independent contractors can start applying April 10, 2020. There is a Paycheck Protection Program loan application already available online through the Department of the Treasury.
The loans are available to small businesses and 501(c)(3)s with fewer than 500 employees, as well as businesses otherwise deemed a “small business” by the SBA’s size standards for a particular industry. Accommodation and food service businesses with 500 or fewer employees in any one location and certain franchises also are eligible. In addition, the loans are available to sole proprietors, independent contractors and self-employed individuals. Organizations must have been in business by February 15, 2020.
Applicants must certify (1) the loan is necessitated by current economic pressures; (2) the funds will be used to retain workers, maintain payroll or make mortgage/lease/utility payments; and (3) the organization has not previously received an SBA 7(a) loan for the same purposes.
Available loan amounts are 2.5 times an applicant’s defined monthly payroll costs up to $10 million. For going concerns, the payroll costs are the average monthly payroll costs during the prior year. For newer businesses, the payroll costs are measured as the average payroll in January and February 2020. Payroll costs include most forms of employee compensation, employee benefits and state or local payroll taxes; they do not include any individual employee’s compensation beyond $100,000, income taxes, compensation to employees outside the United States, or sums paid for sick and family leave programs under the newly announced FFCRA.
In addition to making mortgage/rent/utility payments or interest payments on existing debt obligations, the loans can be used to pay payroll costs. Such payroll costs can include not only traditional salaries, wages and commissions but also payment of paid-time-off benefits, payment required for the provisions of group health benefits and payments of state or local payroll taxes. Compensation to any one individual is limited to $100,000. Payments to employees residing outside the United States or for emergency paid sick and family leave under the FFCRA are outside the program.
The Paycheck Protection Program provides for loan forgiveness equal to the amount spent by the borrower during the eight weeks following loan origination on payroll costs and certain mortgage, rent or utility payments. Current Department of the Treasury guidance suggests at least 75% of the forgiven amount must have been used for payroll given the anticipated high subscription to the program. The loan forgiveness will be reduced proportionally based on any reduction in the employee head count compared with the prior year and reduction in pay of employees beyond 25% of their prior-year compensation. Borrowers who already laid off workers or reduced wages in light of COVID-19-related economic pressures still can participate in loan forgiveness. Specifically, reductions between February 15, 2020, and April 30, 2020, do not count if they are reversed by June 30, 2020. Canceled indebtedness will not be included in a borrower’s taxable income. Loan forgiveness will be requested through the lender servicing the loan.
In addition, the loans are eligible for complete deferment of principal, interest and fees for six months to a year. The interest rate on the loans is 4%.
Emergency EIDL Grants
The Act authorized up to $10 billion for emergency Economic Injury Disaster Loans (EIDLs) to businesses impacted by COVID-19. Applications can be made directly to the SBA
The EIDL grants are available to businesses with 500 or fewer employees and a number of other types of organizations.
The EIDL grants are capped at $2 million, subject to a waiver if the business is a “major source of employment.” The amount is tied to the amount of the “substantial economic injury,” which factors in business interruption insurance or other recoveries. The interest rates on the loans maxes out at 4% but could be lower depending on SBA rates.
These EIDL grants can be used for traditional EIDL uses (e.g., working capital to carry the business during the emergency) as well as an expanded list of uses, including providing paid sick leave to workers, maintaining payroll, making mortgage/rent payments and meeting increased costs to obtain materials through a disrupted supply chain.
Notably, applicants can seek an advance of up to $10,000 (which must be paid within three days), which can be used for providing paid sick leave to employees, maintaining payroll, making rent/mortgage payments and other business expenses. The advance need not be repaid, even if the applicant is denied the EIDL loan. If the applicant moves to obtaining a 7(a) loan under the Paycheck Protection Program, the $10,000 advance is reduced from the amount of the available loan.
Title II – Assistance for American Workers, Families and Businesses
Unemployment Insurance Provisions
Pandemic Unemployment Assistance: The Act extends up to 39 weeks of unemployment benefits to individuals who are not otherwise eligible for or have exhausted all rights to unemployment benefits who are otherwise able and available to work but are unemployed, partially unemployed or unable to work because the worker:
Has COVID-19 or symptoms and is seeking a diagnosis
Has a family member diagnosed with COVID-19
Is providing care to a family member or member of the household who has COVID-19
Has a child whose school or day care is closed due to the COVID-19 public health emergency, and the school or day care is necessary for the person to work
Cannot get to work because of a quarantine
Is ordered by a health care provider to self-quarantine
Was scheduled to start a job but cannot because of COVID-19 restrictions
Has become the head of household because a spouse died from COVID-19
Had to quit a job because of COVID-19
Cannot go to work because the workplace is closed due to COVID-19.
These benefits are available to self-employed individuals, independent contractors, persons without a sufficient work history or persons who otherwise would not be eligible for unemployment benefits. The benefits here track state-calculated benefits for workers, plus an additional $600. Payments can apply retroactively from January 27, 2020, and run through December 31, 2020. Persons who telework with pay or are receiving emergency paid or family leave through the FFCRA cannot participate in these benefits while they telework or receive leave benefits.
Federal Pandemic Unemployment Compensation: Individuals receiving unemployment insurance through existing state programs are eligible for an additional $600 per week through July 31, 2020.
Temporary Full Federal Funding for First Week of Compensable Regular Unemployment Without a Waiting Week: States may waive their “waiting week” and pay unemployment benefits immediately upon individuals’ first week of unemployment. States receive full reimbursement for the unemployment benefits paid.
Pandemic Emergency Unemployment Compensation: Individuals who exhaust a state’s maximum benefits are entitled to an additional 13 weeks of benefits through December 31, 2020, payable through the state’s unemployment program. The additional benefits are available to those who are “able to work, available to work, and actively seeking work.” The benefits are calculated similarly to the expanded benefits on existing benefits, with individuals earning their state’s calculated benefits plus $600.
Temporary Financing of Short-Time Compensation Payments in States with Programs: Through December 31, 2020, states with short-time compensation programs or “Work Share Programs” – where employers reduce employee hours as an alternative to layoffs and unemployment makes up part of the wage loss – may obtain federal funding for 50% of the costs the state incurs, with employers being fully reimbursed for the costs associated with retaining employees at reduced hours.
Rebates and Individual Provisions
Recovery Rebates for Individuals: Individual taxpayers will receive a stimulus check, couched as rebates or credits against 2020 taxes, based on their adjusted gross income reported on their 2019 tax returns. If returns have not yet been filed, 2018 returns will be used.
Individuals with an adjusted gross income below $75,000, or $112,500 for head of household filers, will receive $1,200. Married couples filing jointly with an adjusted gross income below $150,000 are entitled to $2,400. Certain parents of children under 17 will receive $500 per child. These payments are reduced $5 for each $100 an individual exceeds these thresholds. The payments completely phase out for single filers with incomes exceeding $99,000, head of household filers with one child at $146,500 and joint filers with no children at $198,000. Individuals must have a valid Social Security number to receive payments.
Special Rules for Use of Retirement Funds & Increased Participant Loan Limits and Repayments: 401(k) plan participants and IRA account holders may take distributions for qualifying reasons up to $100,000 without incurring the 10% penalty tax for in-service distributions. Such person, their spouse or their dependent must be diagnosed with SARS-CoV-2 or COVID-19 or otherwise experience financial consequences of being quarantined, furloughed or laid off due to COVID-19 or unable to work because of a work closure or a child’s school/day care closing. Individuals may pay the tax on the distribution over a three-year period ending in 2022 or repay it by that date and avoid the taxation.
Persons also may draw increased loan amounts from qualified retirement plans through December 31, 2020, up to the lesser of $100,000 of their account balance or $100,000. Loans may be repaid over a six-year period, and the repayment period for an outstanding loan is tolled through December 31, 2020.
Employer Payments of Student Loans: Employers can pay up to $5,250 during 2020 for an employee’s outstanding student loans, and such payment is tax free to the employee.
Employee Retention Credit: The Act provides an employee retention tax credit to businesses negatively impacted by the COVID-19 pandemic.
Eligible employers are those who were carrying on a business in 2020 that fully or partially suspended operations due to governmental orders limiting commerce, travel or group meetings or whose gross receipts are less than 50% of their gross receipts for the same quarter in the prior year (and continuing until those gross receipts reach 80% of gross receipts for the same quarter in the prior year).
The tax credit applies against employment taxes and equals 50% of the qualified wages paid for each employee between March 13, 2020, and December 31, 2020. For employers with 100 or fewer employees, all wages paid qualify for the credit. For employers with more than 100 employees, qualified wages are only those paid to employees who are not providing services due to the suspension of business or drop in gross receipts. Qualified health plan expenses are included in qualified wages. The amount of qualified wages for each employee for all quarters may not exceed $10,000. Wages taken into account for emergency paid sick/family leave under the FFCRA are not included in qualified wages.
Delay of Payment of Employer Payroll Taxes: Employers may defer payment of employer share of Social Security tax on employee wages. The deferred amounts must be paid within two years (half by December 31, 2021, and the other half by December 31, 2022).
Title IV – Economic Stabilization and Assistance to Severely Distressed Sectors of the U.S. Economy
Advance Refunding of Credits
The Act provides that employers may receive an advance refund of the payroll tax credit announced in the FFCRA from the Treasury instead of waiting to be reimbursed at year-end. The IRS just published Form 7200 for employers to request these “Advance Payments of Employer Credits Due to COVID-19.”