On March 27, 2020, the U.S. House of Representatives approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “Act”), a $2+ trillion aid and stimulus package, which includes a broad range of financial assistance and other relief for employers and employees affected by the coronavirus (“COVID-19”) crisis. The Act, which the Senate had unanimously passed two days earlier, has been signed into law by President Trump.
This Advisory highlights provisions of the CARES Act that are particularly relevant to employers as they confront the unprecedented challenges arising from the COVID-19 pandemic, such as:
Effective April 1, 2020, as we previously reported, the FFCRA requires private employers with fewer than 500 employees to provide up to 10 weeks of paid family leave and 10 days of paid sick leave benefits for eligible employees affected by COVID-19. The CARES Act reiterates that the caps on such benefits are as follows:
The CARES Act addresses the rights of rehired employees to paid family leave under the FFRCA. The latter generally requires that employees have been employed for at least 30 calendar days to be eligible for such leave. The Act now mandates that a rehired employee qualifies for paid family benefits if the worker:
The FFCRA provides a 100-percent refundable tax credit, capped at the same amounts as the leave benefits noted above, plus the cost of continuing to provide health insurance for employees on FFCRA leave. Two days after enactment of FFCRA, the U.S. Department of Labor (“DOL”), the U.S. Department of the Treasury (“Treasury”), and the Internal Revenue Service (“IRS”) issued joint guidance to allow covered employers to “swiftly” recover the costs of FFCRA leave (including health insurance). Employers may take “immediate advantage” of the paid leave credits, by “retain[ing] and access[ing] funds that they would otherwise pay to the IRS in payroll taxes.
The CARES Act codifies and expands on this process of “advance refunding of credits”:
In anticipation of the credit . the credit may be advanced, according to forms and instructions provided by the Secretary [of the Treasury], up to an amount calculated … through the end of the most recent payroll period in the quarter.
Accordingly, employers may simply retain, as their FFCRA credit, otherwise-owed payroll taxes up to an amount equal to the costs they incurred in providing FFCRA leave (i.e., leave pay plus the cost of health insurance for employees on leave), up to the mandated caps. Per the joint guidance, if such retention of payroll taxes is insufficient to cover the costs of FFCRA leave, “employers can seek an expedited advance from the IRS by submitting a streamlined claim form” (which will be released shortly).
Of note, the joint guidance also advises that the DOL will issue a 30-day “non-enforcement order” to allow employers time to come into compliance with the FFCRA.
Finally, the Act directs the Treasury to waive any penalty an employer may have been subject to for failure to pay sufficient payroll taxes, if the Treasury “determines that such failure was due to the anticipation of the credit allowed” under the FFCRA.
As of March 13, 2020, through December 31, 2020, eligible employers can receive a 50-percent refundable payroll tax credit on the first $10,000 of qualified wages (and health benefits) paid to an employee (or incurred) during that time period. An employer is eligible for the credit if:
The CARES Act sets forth discrete criteria, depending on the size of the employer’s workforce, to determine if wages qualify for the tax credit:
The Act also allows employers and self-employed individuals to defer payment of their share of the Social Security tax on employee wages owed for 2020 until December 31, 2021 (when half of the amount deferred must be paid), and December 31, 2022 (when the remainder is due).
Albeit short-term, the CARES Act provides significantly enhanced unemployment benefits. The most significant unemployment insurance (“UI”) sections are:
To understand the enormity of the enhancements created by the CARES Act, it is helpful to have a point of reference. Traditionally, each state determines its own UI eligibility levels, benefit payments, and the duration of benefits, and there is a vast discrepancy amongst the states. For example, the current maximum weekly benefit payment in Connecticut ($631), New Jersey ($713), New York ($504) and Florida ($275) vary greatly. Further, the duration of the benefits in Connecticut, New Jersey, and New York is 26 weeks, while in Florida, it is 12 weeks. The majority of the states, however, provide average benefits in the range of $300 to $500 for a maximum of 26 weeks. Typically, UI is not available to individuals who are self-employed, unable to work, voluntarily quit, were fired for misconduct, or refused to accept a job without good reason.
Under the Act, nearly all individuals receiving unemployment benefits will get a temporary emergency weekly benefit increase of $600. This increased benefit is fully funded by the federal government and available until July 31, 2020. This supplemental benefit will not have a retroactive effect for any unemployment checks already distributed by a particular state.
In practical terms, some UI recipients will receive more than double their normal weekly benefit (and, in some instances, triple) for up to 18 weeks. As a result, during this period, some recipients will likely be receiving more money than they earned when they were employed.
In addition, Section 2102 provides relief for individuals who (i) have exhausted their UI benefits, (ii) are not eligible for emergency UI under Section 2107 (discussed below), and (iii) are not otherwise traditionally eligible to receive UI benefits (i.e., those who are self-employed and independent contractors, as well as individuals who were scheduled to begin working at a job but are now unable to because of COVID-19). Such individuals who are unemployed between January 27, 2020, and December 31, 2020, because of COVID-19 will receive a weekly benefit equal to the amount that would normally be provided under state law (with a minimum equal to 50 percent of the average weekly payment of regular compensation in the state), plus $600 (as provided by Section 2104), and any post-enactment additional increase that may be provided. For the self-employed, residents of territories other than Puerto Rico or the District of Columbia, and others who would not normally be eligible, the weekly benefit amount is the weekly minimum (50 percent of the average regular compensation in the state) plus $600. The result is that many who historically could not obtain unemployment compensation are now eligible to receive up to 39 weeks of benefits fully funded by the federal government.
Finally, the Pandemic Emergency Unemployment Compensation program (Section 2107) provides for an additional 13 weeks of benefits for those individuals who have exhausted the maximum UI benefits available for the benefit year under the state program (for example, 26 weeks in New York, or 12 weeks in Florida), so long as the individual is able to work, available to work, and is actively seeking work. The weekly benefit mirrors Section 2104 (the state amount plus the additional $600). These additional 13 weeks of benefits are at no cost to employers or the state, as they will be funded by the federal government.
As part of its “paycheck protection” program, the Act provides $349 billion in assistance through federally guaranteed loans to small businesses and nonprofit organizations. To encourage companies to bring back workers who have already been laid off, the program is retroactive to February 15, 2020, and extends to June 30, 2020. The loan can be used broadly for business purposes, including payroll costs, mortgage and rent payments, or utility payments, as well as:
The maximum loan amount is the lesser of (i) $10 million or (ii) two-and-a-half months’ payroll (salaries, leave, taxes, insurance, etc.), calculated by the business’s average total monthly payments for payroll costs incurred during the previous one-year period.
While, generally, only small businesses that employ fewer than 500 employees (including sole proprietors, independent contractors, and other self-employed individuals) are eligible for this program, there are exceptions. For example, restaurants and hotels that employ not more than 500 employees per physical location also are eligible to receive a single loan if they operate under the North American Industry Classification System (“NAICS”) code 72. Further, the loan may be available to other businesses in certain industries that otherwise meet the definition of “small business concern” under the Small Business Administration Act. In certain instances, those businesses can have up to 1,500 employees and still be deemed a “small business concern.”
This program would remove the “credit elsewhere” test. That test can be onerous because it requires a company seeking a loan to establish that it cannot obtain the requested funds from alternative sources without undue hardship.
Significantly, no collateral or personal guarantee will be required for the loan. Companies do not have to prove hardship; they must only provide a good faith certification of economic conditions that make the loan necessary.
As an incentive to bring employees back to work, companies are eligible for loan forgiveness equal to the amount they spend over the eight-week period after the origination date of the loan. Those “forgiven” amounts include payroll costs (up to $100,000 of wages as prorated for the covered period), utility payments, and rent and mortgage interest payments in force or incurred before February 15, 2020. The amount of loan forgiveness can be reduced if the loan recipient fails to substantially maintain existing employment and compensation levels, according to specific calculations set forth in the Act. Companies that rehire previously laid-off workers will not be penalized for having a reduced payroll at the beginning of the loan period.
Companies will be required to provide documentation to their lenders of their payments during this relevant period.
The loans have a maturity date of a maximum of 10 years from the date loan forgiveness is applied for, and the interest can be no greater than 4 percent (but banks may set lower interest rates).
The Act also tasks the Treasury Secretary with “endeavor[ing]” to implement a program to help “midsize businesses,” defined as businesses with between 500 and 10,000 employees. The loans will have a maximum interest rate of 2 percent. To be eligible, the business must certify, among other things, that:
The CARES Act includes various provisions that will impact the design and administration of tax-qualified retirement plans and certain compensation arrangements. For example, the Act:
The CARES Act restricts executive compensation that may be paid by an eligible business that receives certain loans authorized by the Act for a period of time.
These and related provisions of the CARES Act are discussed more fully in the Epstein Becker Green Act Now Advisory “The CARES Act: What Employers Need to Know (Part II): Impact on Certain Retirement and Group Health Plans, and Executive Compensation.”
In connection with the CARES Act, employers should do the following:
For more information about this Advisory, please contact:
