Cares Act – Relief For Employers And Employees
This is one of a series of articles on the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion stimulus package signed into law on March 27, 2020. For a summary of the small business lending provisions please click here, for a summary of the primary tax-related provisions please click here, and for a summary of the distressed industries provisions please click here.
The CARES Act offers federal relief for employers and employees across the nation. This article summarizes certain of the key employer and employee relief provisions of the bill.
Additional Employer Payroll Tax Credits and Due Date Delays
Eligible employers may qualify for an employee retention credit equal to 50% of qualified wages paid to employees beginning March 12, 2020, through December 31, 2020, up to $10,000 per employee. The tax credit is applied against the employer’s Social Security payroll tax obligation but is reduced by any credits the employer receives under the Families First Coronavirus Response Act (FFCRA). (For more information on the FFCRA tax credits, please click here.)
If the available tax credits exceed the employer’s total Social Security tax obligation, the employer may qualify for a refund in the amount of the excess. Furthermore, the employer’s tax credits under the CARES Act may be increased by the employer’s qualified health plan expenses allocable to qualified wages paid, but employers may not receive a credit for any employee for which the employer is already receiving a credit under Code Section 51 or 45S. Employers receiving loans under the Small Business Act (SBA) provisions of the CARES Act are also not eligible for this employee retention credit. (For more information on the SBA loan provisions, please click here.)
Employers eligible for this tax credit include employers who were carrying on a trade or business during the 2020 calendar year, and either (a) whose operations are partially or fully suspended during any applicable quarter due to orders from the appropriate governmental authority limiting commerce, trade, or group meetings due to COVID-19; or (b) beginning January 1, 2020, whose gross receipts for any quarter are less than 50% of gross receipts for the same quarter in the prior year.
Furthermore, the CARES Act delays the due date for the employer’s share of Social Security taxes: 50% of the employer’s share of Social Security taxes may be deferred until December 31, 2021, and the other half may be deferred until December 31, 2022.
Unemployment Insurance Benefits Expanded
While both Nebraska and Iowa (and many other states) have offered relief to state workers on eligibility and accessibility of unemployment insurance benefits, the CARES Act expands unemployment insurance relief across the nation by offering states additional federal funding for unemployment insurance benefits offered to workers impacted by COVID-19. (For a summary of Nebraska’s and Iowa’s unemployment insurance relief, please click here.)
Under the CARES Act, states may enter into agreements with the U.S. Department of Labor to take advantage of certain increased federally-funded benefits, including the following:
- In addition to the amount determined and paid under state law, a supplementary $600 per-week emergency payment to each recipient of state unemployment insurance benefits (including Pandemic Unemployment Assistance, as described below), for up to four months.
- For states that waive the one-week waiting period for unemployment insurance benefits, a 100% reimbursement for unemployment insurance benefits, along with any added administrative costs, associated with the elimination of such waiting period.
- For employees who have exhausted the right to unemployment insurance benefits under applicable state law, an additional thirteen weeks of federally-funded unemployment insurance benefits, through December 31, 2020. This additional benefit is called the pandemic emergency unemployment compensation, and the amount of benefit will be determined based on the amount the employee would be eligible to under state law.
- For states with short-time compensation programs, a reimbursement of 100% of the amount of short-time compensation paid under the program for COVID-19-related reasons from March 27, 2020 through December 31, 2020.
The CARES Act also implements and offers federal funding for a temporary Pandemic Unemployment Assistance Program. This program runs from January 27, 2020, through December 31, 2020, and provides unemployment insurance benefits to workers who are unable to work due to COVID-19 and who are not traditionally eligible for unemployment insurance benefits, such as self-employed workers or independent contractors. Relief is not available for individuals who are able to telework or for individuals receiving paid sick leave or other paid benefits.
Permissible Withdrawals from Retirement Plan Funds
The CARES Act allows participants of qualified retirement plans (including individual retirement accounts (IRAs)) to withdraw up to $100,000 from qualified retirement accounts for COVID-19 related purposes without incurring the 10% penalty on early distributions. Any individual who receives such a COVID-19-related distribution may repay the distribution to the eligible retirement plan or IRA within three years of taking the distribution, in one or more contributions. If a participant repays the entire amount of the distribution within such three-year period, the entire distribution will be treated as a direct trustee-to-trustee transfer, meaning the participant will not be subject to the mandatory 20% tax on the distribution.
Any COVID-19-related distributions that are not repaid to the plan are not eligible for tax-favorable treatment, including rollover, so the mandatory 20% income tax will apply to the distribution. However, under the CARES Act, the participant or IRA owner may elect to include such amount in income ratably over a three-year period beginning with the year in which the distribution was taken.
COVID-19 related reasons include distributions from January 1, 2020, through December 31, 2020, to an individual (a) diagnosed with COVID-19, (b) whose spouse or dependent is diagnosed with the virus, or (c) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, working reduced hours, being unable to work due to lack of child care, closing or reducing hours of a business, or other factors as determined by the Treasury Department.
Retirement Plan Loans Expanded
Prior to the CARES Act, retirement plan loans were capped at the lesser of (i) $50,000; or (ii) the greater of fifty percent (50%) of the participant’s vested accrued benefit or $10,000. But effective March 27, 2020, through December 31, 2020, participants may elect to take a plan loan in an amount up to the lesser of (i) $100,000; or (ii) the greater of one hundred percent (100%) of the participant’s vested accrued benefit or $10,000. The Act also delays the loan repayment date by one year for any loans with due dates between March 27, 2020, and December 31, 2020.
If an employer maintains a qualified retirement plan with a loan option, the plan must be amended to adopt these loan expansion provisions by December 31, 2022, to maintain its qualified status.
Required Minimum Distributions Suspended
The CARES Act temporarily suspends all required minimum distributions due from qualified retirement plans and individual retirement accounts in calendar year 2020. Specifically, any required minimum distributions due from January 1, 2020, through December 31, 2020, are waived. Furthermore, the CARES Act provides that for any distributions that would have been treated as required minimum distributions in 2020 notwithstanding this provision, employers need not distribute a 402(f) notice to participants (related to rollover distributions).
Plan documents should be amended to adopt this suspension of required minimum distributions by December 31, 2022. Governmental plans need not adopt an amendment to account for this suspension until December 31, 2024.
Coverage of COVID-19 Testing
The CARES Act requires group health plans to cover, without any cost-sharing obligation to the employee, diagnostic testing and preventive services for COVID-19. These provisions are in line with the IRS’s guidance published on March 11 (available here).
Additionally, the CARES Act amends the Health Savings Account (HSA) rules to provide that a high deductible health plan with an HSA can cover telehealth services and other remote care services before an individual is required to reach his or her deductible.
Student Loan Payments Permitted
For employers with qualified educational assistance programs under Internal Revenue Code Section 127, the CARES Act provides a much sought-after change to permit employers to pay employees up to $5,250 per year on a tax-free basis for student loan debt expenses. Importantly, this change only applies for payments made between March 27, 2020, and December 31, 2020, but many hope this provision will be permanently adopted.
Employers with qualified educational assistance programs must amend their plans to permit these tax-free student loan payments. Employers who do not currently maintain a qualified educational assistance program may adopt such a program, but to be qualified, the program must be maintained under a written plan document and otherwise compliant with Code Section 127. We recommend consulting with your employee benefits counsel before adopting a qualified educational assistance program to ensure compliance with the Code.