On March 27, 2020, the House passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which was quickly signed by President Trump. The CARES Act includes a broad range of economic stimulus and relief provisions, including up to two trillion dollars in aid to individuals, small businesses, large corporations, healthcare industry, state and local governments, education, and social safety net programs. Much of this relief is targeted at employers and employees impacted by quarantines, ordered shutdowns and declines in business related to Coronavirus.
Business Loan Programs.
The CARES Act includes two loan programs – one for small businesses and one for larger businesses – targeted at helping businesses impacted by COVID-19. These loans come with conditions that the businesses should carefully consider before applying for relief.
First, the Keeping American Workers Paid and Employed Act (Title I), allows the Small Business Administration (SBA) to provide smaller businesses with loans under the “Paycheck Protection Program.” The loans under this program are available to any company with no more than 500 employees and to larger companies in certain industries, as approved by the SBA.
Second, the Coronavirus Economic Stabilization Act of 2020 (Title IV), provides $500 billion to the Secretary of Treasury for loans, loan guarantees, and investments to eligible businesses. Those businesses include air carriers, and any other domestic businesses that have not otherwise received adequate economic relief through the CARES Act. Title IV also makes a loan facility available to nonprofit organizations and mid-size businesses with between 500 and 10,000 employees. The loan facility will offer loans with annual interest rates no higher than 2 percent and no payments due within the first six months.
Title I: Keeping American Workers Paid and Employed Act
Loans under the “Paycheck Protection Program” are available to any company with no more than 500 employees and to larger companies in certain industries, as approved by the SBA, for the purpose of covering wages to employees and payments to independent contractors as well as payment for group health benefits, any retirement benefits, and applicable state and local wage taxes. These loans waive interest for the first six months, and are eligible for forgiveness of amounts used for payroll, mortgage/rent payments and utility payments after one year if the business was in operation on February 15, 2020. Both the loans and the forgiveness program come with labor and employment conditions:
- Funds received through the Paycheck Protection Program may not be used to pay compensation to any employee receiving compensation of more than $100,000 annually.
- Wages or salaries to employees receiving compensation of more than $100,000 may be reduced without the amount of their employer’s loan forgiveness being impacted.
- The amount of loan forgiveness (up to 100%) is reduced by a proportional amount if, during the eight (8) week period commencing with the loan origination date, the employer:
- terminates the employment of employees; and/or
- decreases employee salaries.
Title IV: Coronavirus Economic Stabilization Act of 2020
Title IV provides differing loan provisions for airlines and other eligible businesses, and provisions applicable to nonprofits and mid-size businesses.
An airline or other eligible business that seeks a loan must agree to maintain current employment levels as of March 24, 2020, to the extent practicable, and, in any event, not reduce staffing by more than 10 percent before September 30, 2020.
Nonprofit organizations and mid-size businesses that seek loans are subject to much broader conditions:
- At least 90 percent of the funds must be paid to the employer’s workforce, at full compensation and benefits, until September 30, 2020.
- The employer must retain at least 90 percent of its employees as of the time the loan is received at full pay through September 30, 2020.
- The employer must sign a certification that, no later than four months after the Federal public health emergency declaration ends, it will restore to full compensation and benefits not less than 90 percent of its employees whose employment was terminated or whose compensation was reduced between February 1, 2020 and the time of the loan.
- The employer must not outsource or offshore any jobs.
- The employer must not abrogate any existing collective bargaining for the term of the loan and for two years after repayment of the loan.
- The employer must agree to remain neutral in any union organizing effort during the term of the loan.
- With a very limited collective bargaining exception, during the course of the loan and for one year thereafter, employers may not increase salaries for officers and employees whose compensation exceeded $425,000 in 2019, or offer those employees severance pay or other benefits upon termination of more than twice their maximum total compensation for the year.
- Officers and employees whose compensation exceeded $3,000,000 in 2019 may not earn more than $3,000,000 plus 50 percent of any amount of their compensation that exceeded $3 million in 2019.
Pension Plan Provisions
Penalty-Free Distributions from Eligible Retirement Plans
The CARES Act permits eligible retirement plans to provide Coronavirus-Related Distributions (CRDs) of up to $100,000 to participants without imposition of the 10 percent early distribution penalty. Eligible retirement plans include qualified defined contribution retirement plans, including 401(k), 403(b), and governmental 457(b) plans, and IRAs. A CRD is a distribution between January 1, 2020 and December 31, 2020, to a “qualified individual.” A qualified individual is an individual:
- who is diagnosed with the virus SARS-CoV-2 or with COVID-19,
- whose spouse or dependent is diagnosed with such virus or disease by such a test, or
- who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury
Repayment of Coronavirus-Related Distributions
Participants may repay CRDs during a three-year repayment period. Repayment of these distributions, in whole or on part, may be made to any eligible retirement plan or IRA in which they are a beneficiary and to which rollover contributions can be made. CRDs that are repaid within the three-year period will be treated as having satisfied the general 60-day rollover requirement.
Income Inclusion Over Three Years for Coronavirus-Related Distributions
CRDs will be included in a qualified individual’s taxable income proportionately over a three-year period, unless the individual elects otherwise. CRDs will not be treated as eligible rollover distributions for purposes of the mandatory 20 percent withholding and direct rollover rules, although they may be eligible for rollover treatment for repayment as indicated above.
Temporary Increase for Plan Loan Dollar Limits
The CARES Act temporarily increases the maximum amount that a qualified individual (as defined above) may borrow from a qualified retirement plan from $50,000 to $100,000. The CARES Act also temporarily increases the loan limit to 100 percent of the participant’s vested account balance, rather than the 50 percent limit under current rules. Thus, qualified individuals may now borrow the lesser of $100,000 or 100 percent of their vested account balance. The increased loan limits for qualified individuals are effective through September 23, 2020 (180 days after enactment of the CARES Act).
Extension for Loan Repayment Dates
Qualified individuals are provided a one-year extension to repay qualified retirement plan loans with due dates between March 27, 2020 and December 31, 2020. Any subsequent repayments, plus applicable interest, will be reamortized over the extended repayment period.
Temporary Waiver of 2020 Required Minimum Distributions
In recognition of stock market declines precipitated by the COVID-19 pandemic and the impact this would have for participants age 70 ½ and older taking required minimum distributions (RMDs) from depressed values in IRAs and defined contribution plan accounts, the CARES Act provides relief to these participants by allowing defined contribution plans and IRAs to waive RMDs in 2020. This waiver also applies to participants who attained age 70 ½ in 2019 but had not yet received their 2019 RMD.
Plan Amendments
Plan documents must be amended to reflect the mandatory changes and any elected optional provisions of the CARES Act by the last day of the plan year beginning on or after January 1, 2022 (i.e., for calendar-year plans, by December 31, 2022), governmental plans need to be amended by the last day of the plan year beginning on or after January 1, 2024, or a later date if prescribed by the Treasury.
Delayed Payment of Minimum Required Contributions
The deadline for making any minimum funding contributions that would otherwise be due during calendar year 2020 (including quarterly contributions due for the 2020 plan year and any final contribution due for the 2019 plan year) is extended to January 1, 2021. The amount of the minimum required contribution, however, will be increased by any interest that accrues between the original due date and the payment date at the effective rate of interest for the plan year.
A plan sponsor may also elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020 as the AFTAP for calendar year 2020. This may help a defined benefit pension plan avoid becoming subject to the funding-based benefit restrictions which, among other things, would restrict the plan’s ability to pay lump sum benefits.
Filing Deadlines
While not expressly extending the current plan reporting deadlines, the CARES Act amends ERISA to add public health emergency to the circumstances under which the U.S. Department of Labor (DOL) may postpone an ERISA filing deadline for a period of up to one year. This may signal forthcoming DOL guidance extending the Form 5500 filing deadline.
Educational Assistance Provisions
Between March 27, 2020 and January 1, 2021, employer payments of principal or interest on any qualified education loan of an employee will not be included in the gross income of the employee. The payment may be made to the employee or to a lender. The excluded payments are limited to $5,250 per calendar year per employee. All other requirements applicable to such plans are still effective.
Health Plan Provisions
Telehealth Services Exemption
For plan years beginning on or before December 31, 2021, a high deductible health plan (HDHP) may provide coverage for all telehealth and other remote care services before the plan’s deductible is satisfied. Providing coverage for such services before satisfaction of the deductible will not disqualify a participant from participating in a health savings account (HSA). The CARES Act expands upon previous guidance from the IRS, which had limited this HDHP telehealth exception to COVID-19 testing and treatment.
Rapid Coverage of Preventive Services and Vaccines for Coronavirus
The CARES Act requires group health plans and health insurers to cover, without cost-sharing, any qualifying coronavirus preventive services. Qualifying preventative services are items, services, or immunizations that are intended to prevent or mitigate COVID-19 and that are:
- evidence-based items or services that have been given an “A” or “B” recommendation by the US Preventive Services Task Force, or
- an immunization that is recommended by CDC’s Advisory Committee on Immunization Practices.
The requirements with respect to a qualifying coronavirus preventive service take effect fifteen business days after the date on which a recommendation is made relating to such preventive service.
Over-the-Counter Products
Health plans, HSAs and Archer MSAs may reimburse expenses for over-the-counter drugs other than insulin without a prescription. As a result, individuals do not need a prescription to obtain reimbursement from, for example, a health FSA for over-the-counter medication.
Unemployment Provisions
“Relief for Workers Affected by Coronavirus Act” (Title II of the CARES Act) expands unemployment insurance and benefits for workers unemployed as a result of specified COVID-19 related reasons.
Pandemic Unemployment Assistance
Effective January 27, 2020 through December 31, 2020, the Pandemic Unemployment Assistance program (the “Program”) covers individuals who would not otherwise be eligible for unemployment insurance and benefits, provided they are able to self-certify that they are unemployed, partially unemployed, or unable or unavailable to work because:
- They have been diagnosed with COVID-19 or are experiencing symptoms of COVID-19 that require a medical diagnosis.
- A member of their household has been diagnosed with COVID-19.
- They are providing care for a family member or member of their household who has been diagnosed with COVID-19.
- A member of their household for whom they are the primary caregiver is unable to attend school or another facility that has been closed as a direct result of the COVID-19 public health emergency and because of this closure they are unable to work.
- They are unable to work because of a quarantine imposed as a result of the COVID-19 public health emergency.
- They are unable to work because they have been advised to self-quarantine by a healthcare provider.
- They were scheduled to start a job but are unable to do so as a result of the COVID-19 public health emergency.
- They have become a “major support for a household” because the head of the household has died as a direct result of COVID-19.
- They quit their job as a direct result of COVID-19.
- Their place of employment is closed as a direct result of the COVID–19 public health emergency,
Individuals who are able to telework with pay or who have received paid sick leave or other paid leave benefits are ineligible to receive assistance under the Program. Covered individuals include the self-employed, independent contractors, gig workers, part-time employment seekers, those who lack sufficient work history, and those who have exhausted their unemployment benefits under existing programs.
Covered individuals may receive assistance under the Program for a maximum of 39 weeks, including any weeks for which the covered individual received regular unemployment benefits provided under Federal or State law. Existing waiting periods established by state unemployment laws do not apply to this Program.
The amount of benefit provided to a covered individual under the Program is equal to the amount of unemployment benefit the covered individual would otherwise be entitled to under Federal or State law plus an additional amount referred to as Federal Pandemic Unemployment Compensation in the amount of $600 per week.
Emergency Unemployment Relief for Government Entities and Non-Profits
The Treasury will pay states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur to pay for all unemployment benefits through December 31, 2020.
Emergency Increase in Unemployment Compensation Benefits
“Federal Pandemic Unemployment Compensation” provides an additional $600 per week to recipients of unemployment insurance or Pandemic Unemployment Assistance for a period of up to four months. The Federal Pandemic Unemployment Compensation will not count as income for purposes of determining eligibility for Medicaid and the State Children’s Health Insurance Program (CHIP).
Pandemic Emergency Unemployment Compensation
The CARES Act provides an additional 13 weeks of unemployment compensation, through December 31, 2020, to all individuals who otherwise would be ineligible for such compensation because they have exhausted all rights under existing unemployment compensation programs with respect to this benefit year, provided they: (i) have no rights to regular unemployment compensation under any applicable state or federal law, (ii) are not receiving unemployment compensation under Canadian law, and (iii) are able, available and actively seeking work. The unemployment compensation payable under this Section includes the unemployment benefit the individual would otherwise be entitled to under existing programs plus the amount of Federal Pandemic Unemployment Compensation.
Employer Tax Provisions
Employee Retention Credits
The CARES Act provides a FICA tax credit for employers equal to 50 percent of the “qualified wages” paid between March 13, 2020 and December 31, 2020. To be eligible a business must:
- be fully or partially suspended due to an order from a governmental authority limiting travel, commerce or meetings during the applicable calendar quarter, or
- suffer a decline in gross receipts of 50 percent or more during a calendar quarter when compared to the same quarter during the previous year.
“Qualified wages” are wages paid beginning in the first calendar quarter during which either of the above conditions occurs and continues until the first calendar quarter following (i) the lifting of full or partial business suspension or (ii) the calendar quarter that the gross receipts of the employer are greater than 80 percent of the gross receipts for the same calendar quarter in the prior year. For tax exempt 501(c)(3) organizations, all wages paid between March 13, 2020 and December 31, 2020 can be qualified wages.
For employers with more than 100 full-time employees, qualified wages include only wages paid to employees for periods when such employees are not performing services as a result of the business suspension or significant decline in gross receipts. For employers with 100 or fewer full-time employees, all employee wages paid during the qualifying period are deemed to be qualifying wages.
A credit of 50% of the first $10,000 of compensation paid to an eligible employee during a quarterly period may be applied against the employer portion of FICA tax liability for the applicable period. This credit is not limited to the FICA taxes attributable to the qualified wages; rather, it can be applied against all of the employer’s FICA taxes for such period. Further, the credits are refundable; to the extent that an employer’s allowable credits exceed its payroll tax liability for the applicable period (the employer can obtain a cash refund). The Treasury is directed to develop rules allowing for the credits to be advanced by allowing an employer to retain amounts withheld from employees.
The qualified wages cannot exceed the amount an employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period during which qualified wages can be paid. Employer contributions to a health plan can be included in qualified wages to the extent that such contributions are allocable to the qualified family leave wages.
Employers that are part of a controlled or affiliated group are treated as a single employer for purposes of the credit. Governmental employers are not eligible for this credit.
Employers are not eligible for the credit if they receive a small business loan pursuant to the CARES Act. Likewise, employers may not claim credits for (i) any amounts used to determine such an employer’s credit under Internal Revenue Code Section 45S, which allows employers to claim a tax credit for family leave wages if the employer has a written family leave policy in place that meets certain requirements or (ii) any employee for whom a work opportunity credit is claimed.
Delay of Payment of Employer Payroll Taxes
The CARES Act allows an employer to defer payments of the employer portion of the Social Security Tax and allows a self-employed individual to defer 50 percent of their Social Security tax. The deferred taxes must be paid over the following two years, with 50 percent to be paid by December 31, 2021 and the other 50 percent by December 31, 2022. Employers that are granted loan forgiveness under the Small Business Act loan program (discussed above) created by the CARES Act are not eligible for this deferral.
Advancement of FFCRA Tax Credits for Paid Sick Leave and Family Leave
As addressed in our Alert dated March 23, 2020, the Families First Coronavirus Response Act (FFCRA) provides federal payroll tax credits for paid sick leave and family leave required by the FFCRA for employers with 500 or fewer employees and paid between April 1, 2020 and December 31, 2020. The CARES Act amends the FFCRA to allow the Treasury to promulgate rules for the advancement of such credits by allowing an employer to retain amounts withheld from employees.
Conclusion
With the uncertainty surrounding businesses today and the variety of opportunities and questions presented in the CARES Act and prior stimulus, employers have difficult decisions ahead. McMahon Berger is available to counsel employers on these and other issues in this difficult time.
The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years, and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.
