Late in the afternoon on Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act—the “CARES Act.” The CARES Act is a $2 trillion, bi-partisan, economic relief package aimed at helping American businesses and individuals impacted by the COVID-19 crisis. The legislation is vast—over 800 pages—and we expect the CARES Act will be fine-tuned by agencies, such as the Small Business Administration and Department of the Treasury, by way of compliance guidelines and regulations in the weeks to come. In the meantime, significant provisions designed to help employers and workers are highlighted below.
A $350 billion fund is allocated for the Small Business Administration (“SBA”) to provide Section 7(a) loans of up to $10 million per business. These loans create incentives for businesses to minimize lay-offs and compensation reductions.
The loans are available for businesses with 500 or fewer employees, food services, or accommodation businesses (e.g., restaurants and hotels) with no more than 500 employees per location, sole proprietors, independent contractors, and the self-employed. The loans are available to cover employee wages, certain benefits, interest on mortgage and rent payments, interest on other debt incurred before February 15, 2020, and other specified costs. The loans have a maximum interest rate of 4% and, unlike other types of SBA loans, loans under this program eliminate requirements for personal guaranty and collateral.
Small business loans under this program must be read together with the loan forgiveness program which has the effect of turning some or all of the loan into a grant. These small business loans have forgiveness provisions that apply to the amount spent during the eight weeks after origination for payroll, interest on mortgages, rent payments, and utilities. However, the amount of loan forgiveness will be reduced by:
Employers can mitigate against reductions in loan forgiveness by rehiring employees to eliminate any reduction in FTEs by June 30, 2020, and/or eliminating any reduction in employee salary or wages by June 30, 2020.
Notably, the CARES Act has a provision expressly excluding any amount of loan forgiveness under this program from gross income.
The CARES Act makes some notable changes to the SBA’s Economic Injury Disaster Loans (“EIDLs”.) Chief among them, EIDL eligible recipients have been expanded to include Tribal businesses, non-profits, sole proprietors, and independent contractors, in addition to businesses with 500 or fewer employees. Loans under $200,000 can be approved without a personal guarantee, and the SBA can approve loans based solely on a credit score or other alternative methods. Grants of up to $10,000 are also available to spend on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments, and/or debt obligations that cannot be met due to revenue loss. Notably, an organization may receive a cash grant even if it does not ultimately receive a loan.
Emergency Relief Loans are also available to mid-size and large businesses from the $500 billion fund that will be overseen by the Treasury Secretary. These loans come with restrictions on paying dividends and repurchasing stock, and restrictions on compensation for certain officers and employees. The fund is also intended to provide for low-interest loans for businesses and nonprofits with between 500 – 10,000 employees, as long as the organization retains 90% of its current workforce and meets other criteria regarding employees and restrictions on dividends and stock repurchases.
The CARES Act permits employers and self-employed individuals to defer the employer’s portion of federal Social Security taxes on employees’ wages from March 27, 2020, through December 31, 2020 (the “deferral period”). The Act provides that 50% of the employer’s portion of the Social Security payroll tax accrued during the deferral period is due on or before December 31, 2021, with the remaining 50% due on or before December 31, 2022. Taxpayers are not eligible for this relief if they received loans under the Small Business Act and such loans were forgiven under the CARES Act.
The CARES Act provides for a payroll tax credit from March 13, 2020, through December 31, 2020, for 50% of qualified wages of each employee (not to exceed the amount of payroll taxes for all employees after other credits are applied). Qualified wages include health insurance up to $10,000 per employee each quarter. The credit applies to employers whose operations were fully or partially suspended because of a COVID-19 related public health order, or whose gross receipts declined by more than 50% when compared to the same quarter last year. For employers with more than 100 full-time employees, the credit is limited to wages paid while employees were not performing services due to COVID-19. For employers with 100 or fewer full-time employees, the credit is for all wages.
The CARES Act made a few clarifying changes to the Families First Coronavirus Act (“FFCRA”.) Namely, an employee who was laid off on or after March 1, 2020 who worked for the employer at least 30 of the last 60 calendar days prior to layoff and is rehired may be eligible for Expanded FMLA Leave. The CARES Act also adopts earlier IRS guidelines that allow eligible employers who pay qualifying FFCRA Emergency Paid Sick Leave or Expanded FMLA Leave under FFCRA to retain an amount of the payroll taxes equal to the amount of qualifying leave that they paid, rather than depositing with the IRS.
The CARES Act provides that agencies may reimburse government contractors for any paid leave that a contractor provides to keep its employees or subcontractors in a ready state, where the employees cannot perform work on a site that has been approved by the Federal Government, including a federally-owned or leased facility or site, due to facility closures or other restrictions, and who cannot telework because their job duties cannot be performed remotely during the public health emergency, up to September 30, 2020. Reimbursement must be at the minimum applicable contract billing rates and can be for a maximum of an average of 40 hours per week. The reimbursement must be reduced by the amount of credit a contractor is allowed pursuant to the FFCRA.
Contractors may be able to seek equitable adjustments to their contracts under this provision and should begin accounting for all eligible costs and working with subcontractors to do what is necessary to obtain an adjustment.
In addition to the well-publicized individual tax rebates, the CARES Act offers other important assistance to individuals. Two of the more significant provisions are dramatic expansion of unemployment insurance benefits, and rules making early withdrawals and loans from retirement funds less burdensome.
In the wake of a record number of unemployment claims and the likelihood that such claims will continue to surge due to the spread of COVID-19, the CARES Act expands who is eligible for unemployment benefits and enhances those benefits.
Under the pandemic unemployment assistance program, the criteria for individuals eligible for unemployment benefits are expanded to include business owners, sole proprietors, independent contractors, freelancers, so-called “gig workers,” and workers with an insufficient work history—individuals who would otherwise not qualify for unemployment benefits.
The Act provides up to 39 weeks—an additional 13 weeks—of unemployment assistance from January 27, 2020, to December 31, 2020. In addition to regular unemployment benefits, eligible individuals will also receive Federal Pandemic Unemployment Compensation, a federally-funded $600 payment each week for up to four months.
Federal money is also made available to states for the funding of state-enacted “short-time compensation” programs where employees will receive partial unemployment benefits if the employer reduces employees’ work hours instead of laying them off. States that do not apply a one week waiting period before providing benefits to covered individuals will receive federal funding to cover that first week of benefits.
The CARES Act permits individuals to withdraw up to $100,000 from tax-deferred retirement accounts from January 1, 2020, to December 31, 2020, without incurring an early withdrawal penalty. If the money is returned to the account within three years, individuals can avoid taxes on the withdrawal. In situations where the money is not returned, the individual is allowed three years to pay taxes on the withdrawal. In addition, the Act also raises the limit on the amount that can be borrowed from 401(k) accounts from $50,000 to $100,000.
Workers who are eligible for the withdrawal and loan programs include those who have been diagnosed with the virus and those who have had a spouse or dependent diagnosed with the virus, along with anyone who “experiences adverse financial consequences” because of the virus, such as layoffs, reduction in work hours, or being unable to work due to lack of child care.
* * * * *
The CARES Act’s provisions will be important for many employers and workers who are currently making important decisions during this public health emergency. We will provide further updates as information becomes available.
If you have questions or concerns related to the COVID-19 crisis and your workforce or any other employment matter, we are here to help. Please reach out to the Rogers Joseph O’Donnell attorney with whom you regularly work, or the authors of this legal update.