Employer's Guide to Key Provisions of the CARES Act

Last Friday, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “the Act”). The two trillion-dollar relief package includes expanded unemployment assistance for workers, relief loans (with strings attached) for businesses, payroll tax credits and deferrals, and modifications on employees’ ability to access retirement savings accounts. This article provides employers with an overview of the key provisions employers need to be aware of as we continue to confront the COVID-19 crisis.

Unemployment Assistance

Section 2101 of the CARES Act creates a Pandemic Unemployment Assistance (“PUA”) program that expires December 31, 2020. The program provides payments to individuals who are not traditionally eligible for unemployment benefits — self-employed individuals, independent contractors, individuals with limited work history, gig workers — who are unable to work because of the COVID-19 public health emergency, expands unemployment benefits, and generally broadens unemployment assistance for COVID-19- related employment loss.

How does the CARES Act expand unemployment assistance? (§§ 2102, 2104, 2107)

PUA is available to covered individuals who are unemployed, partially unemployed, or unable to work because of COVID-19 beginning on January 27, 2020 and ending December 31, 2020.

The Act provides for additional assistance beyond what an individual would receive under applicable state law. Covered individuals are eligible to receive the weekly benefit an individual would receive under applicable state law (the amount may not be less than the federally prescribed weekly benefit) and an additional $600/week, which is called Federal Pandemic Unemployment Compensation. The Federal Pandemic Unemployment Compensation applies to weeks of unemployment ending on or before July 31, 2020.

The weekly benefit amount for self-employed individuals, those in certain territories, and those who would not otherwise qualify for unemployment benefits under state law, is the amount determined pursuant to 20 U.S.C § 625.6 and the Federal Pandemic Unemployment Compensation benefit.

Who is eligible for unemployment benefits under the CARES Act? (§ 2102)

The law defines “covered individual” as anyone who “is not eligible for regular compensation or extended benefits under state or Federal law or pandemic emergency unemployment compensation under Section 2107, including an individual who has exhausted all rights to regular unemployment or extended benefits under state or Federal law or pandemic emergency unemployment compensation under Section 2107,” and who self-certifies that he/she is able and available to work but is unemployed, partially unemployed, or unable or unavailable to work because:

The individuals has been diagnosed with COVID-19 or is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
A member of the individual’s household has been diagnosed with COVID-19;
The individual is caring for a family member or member of the individual’s household who has been diagnosed with COVID-19;
The individual is the primary caregiver for a child or other person in the household who is unable to attend school or another facility that is closed as a direct result of COVID-19 and the individual cannot work as a result;
The individual is unable to reach his/her place of employment because of a quarantine imposed as a direct result of COVID-19;
The individual is unable to reach his/her place of employment because the individual has been advised by a health care provider to self-quarantine due to COVID-19 concerns;
The individual was scheduled to commence employment and does not have a job or is unable to reach his/her job as a direct result of COVID-19;
The individual has become the breadwinner or major support for a household because the head of household has died as a direct result of COVID-19;
The individual has to quit his/her job as a direct result of COVID-19;
The individual’s place of employment is closed as a direct result of COVID-19; or
The individual meets other criteria established by the Secretary of Labor.

The law also covers self-employed individuals, those who are seeking part-time employment, individuals who do not have sufficient work history, and those who would not qualify for unemployment benefits or extended benefits under state or Federal law, or pandemic emergency unemployment compensation, if those individuals meet the eligibility criteria listed above.

An individual is not eligible for unemployment benefits if he has the ability to telework with pay or is receiving paid sick leave or other paid leave benefits.

Are there caps on Pandemic Unemployment Assistance? (§ 2102)

A covered individual may receive Pandemic Unemployment Assistance for up to 39 weeks. The 39 weeks includes weeks in which the covered individual received regular or compensation or extended benefits. However, the 39-week period is extended by the number of weeks that an individual received extended benefits.

Is there a waiting period for benefits? (§ 2102)

No. The Act waives the waiting period for eligibility.

Is there an impact on reimbursing employers? (§ 2103)

The CARES Act authorizes the Secretary of Labor to issue guidance permitting states to provide “maximum flexibility to reimbursing employers” regarding timely payment and assessment of penalties and interest.

Must an employee be actively seeking work? (§ 2107)

The Act requires that states provide flexibility (relax) requirements that claimants be actively seeking work where the individual is unable to search for work because of COVID-19-related illness, quarantine, or movement

Relief Loans under The CARES Act for Small Businesses (“Payroll Protection Program”)

Section 1102 of the CARES Act provides emergency relief loans for employers with 500 or fewer employees. The loans can be used to cover payroll, benefits costs, rent, mortgage interest, utilities, and certain other debts incurred by the employer. Perhaps most significantly, the loans are forgivable, but the amount of forgiveness can be reduced if the employer cuts salaries or lays off personnel.

Who can be a borrower?

Businesses with 500 or fewer employees between February 15, 2020 to June 30, 2020;
- Employee means fulltime, part-time, and other basis (i.e. seasonal and temporary);
Businesses like restaurants and hotels with more than one physical location and not more than 500 employees per physical location, in accordance with SBA requirements;
Sole proprietorships;
Independent contractors; and
Self-employed individuals.

How much can you borrow?

The maximum amount a business can borrow is the lesser of:
- the average total monthly payments for payroll costs for the period of 1 year before the loan is made, multiplied by 2.5 (2.5 times the monthly average payroll expenses); or
- $10 million.

What is the application process?

Eligible businesses can apply at any SBA-approved lender. You can find SBA-approved lenders through SBA’s online Lender Match tool.
The borrower must prepare a certification for application for the loan demonstrating eligibility and amount of loan sought. The loan is 100% guaranteed by the SBA and the lender cannot require collateral, fees, or personal guarantees for the loans, which should make the application process simpler and faster.

How can I use the loan dollars?

The loan dollars must be spent on the following expenses incurred between February 15, 2020 and June 30, 2020 in order to maximize the borrower’s eligibility for loan forgiveness:

- Payroll costs, consisting of:

The sum of payments of any compensation with respect to employees that is a:
1. Salary, wage, commission, or similar compensation;
2. Payment of cash tip or equivalent;
3. Payment for vacation, parental, family medical, or sick leave;
4. Allowance for dismissal or separation;
5. Payment required for the provisions of group health care benefits, including insurance premiums;
6. Payment of any retirement benefit; or
7. Payment of state or local tax assessed on the compensation of employees; and
The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as prorated for the covered period; but

CALCULATION OF PAYROLL SHALL NOT INCLUDE:
1. The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
2. FICA/FUTA taxes ;
3. Any compensation of an employee whose principal place of residence is outside of the United States; and
4. qualified sick and family leave payments for which a credit is allowed under the Families First Coronavirus Response Act (FFCRA)
Costs related to health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
Employee salaries, commissions, or similar compensations;
Payments of interest on any mortgage obligation existing as of February 15, 2020 (note: prepayment of or payment of principal on a mortgage obligation is not permitted);
Rent (including rent under a lease agreement in effect prior to February 15, 2020);
Utilities; and
Interest on any other debt obligations that were incurred before the covered period

How does the loan forgiveness work?

Borrowers can apply for forgiveness of the amount of the loan equal to the payments made on payroll costs, payment on mortgage interest, rent, and utilities, during the 8-week period beginning on the date the loan is originated.
The forgiveness amount cannot exceed the amount of the covered loan.
The amount of forgiveness will be reduced by layoffs and/or salary and wage reductions made during the 8-week period, as follows:

For layoffs: multiply (the amount of forgiveness sought by the average number of FTE’s during the eight week period) divided by (the average number of FTE’s per month employed beginning on February 15, 2019 and ending on June 30, 6 2019; OR the average number of FTE’s per month from February 15, 2019 – June 30, 2019 (borrower’s choice)). [Seasonal employers are to use avg FT employees per month during the period from February 15, 2019 – June 30, 2019]
For wage cuts: reduce the amount of forgiveness sought by any reduction in total salary or wages paid to any employee earning less than $100k that is in excess of 25% of the total salary /wages paid to that employee during the last quarter prior to the eight-week period.

The reduction of forgiveness can be avoided if employees or salary cuts are restored by June 30, 2020.

How long do I have to pay back the unforgiven portion of the loan?

The loan reverts to a maximum 10-year loan with maximum 4% interest.
Deferment provisions:

From February 15, 2020 until June 30, 2020, the SBA will require lenders to provide complete payment deferment relief for borrowers with loans made or pending prior to March 27, 2020 for a period of not less than 6 months, including payment of principal, interest, and fees, and not more than 1 year.

One other note to keep in mind: businesses that received an economic injury disaster loan during the period of January 31, 2020 and ending on the date a loan from this program is made available are permitted to apply for a PPP loan.

Relief Loans under The CARES Act for Employers With 500 to 10,000 Employees

Section 4003 of the CARES Act creates direct loan opportunities for businesses (including non-profits) with between 500 to 10,000 employees. The loans will have an annualized interest rated of no more than 2%, and payment of both principal and interest is deferred for the first six months after the loan is made.

However, to receive these loans, businesses will have to make certain certifications concerning their labor an employment practices. The failure to comply with the certifications could result in the rescission of the loan. Among other things, the business must certify that:

It intends to retain at least 90% of its current workforce at full compensation and benefits until September 30, 2020;
It intends to restore at least 90% of its workforce that existed as of February 1, 2020 and restore all compensation and benefits in effect on that date to those employees no later than four months after Health and Human Services declares an end to the public health emergency related to COVID-19;
It will not “outsource or offshore” jobs for the term of the loan and for two years after completing repayment of the loan;
It will not “abrogate” an existing collective bargaining agreement for the term of the loan and for two years after completing repayment of the loan; and
It will remain “neutral in any union organizing effort for the term of the loan.”

These restrictions appear to be pretty draconian. A prohibition on outsourcing would seem to preclude a loan recipient from contracting out any work currently done by its employees, including services such as IT, benefits administration, and facilities maintenance. The prohibition on the abrogation of collective bargaining agreements appears to bar an employer faced with a downturn in business from seeking mid-term contract modifications. And, perhaps most significantly, the requirement of “neutrality” in a union organizing campaign would prevent the employer from opposing any effort by a labor organization to organize its workers. This last requirement appears to fly in the face of Section 8(c) of the National Labor Relations Act, which gives employers the right to communicate their views about unions to employees as long as the communications do not contain threats of reprisals, threats of force, or promises of benefits. The neutrality requirement, moreover, may extend into formal representation proceedings, not merely employer statements during union organizing campaigns.

Relief Loans under The CARES Act for Employers of Any Size

Section 4003 of the CARES Act also authorizes the Treasury Secretary to make loans to “eligible businesses” of any size. An “eligible business” is defined as a U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under Title IV of the CARES Act.

An eligible business must certify that it is a U.S. domiciled business that has significant operations in and a majority of its employees based in the U.S. Further, the employer must not have credit otherwise reasonably available to it. The loan’s duration is required to be as short as practicable and no longer than five years.

However, as is the case with the loans for medium-sized businesses, the CARES Act places significant restrictions and obligations on eligible businesses that borrow under this program. From the date of the loan agreement until one year after the loan is no longer outstanding, employers:

Are prohibited from engaging in stock buybacks unless contractually obligated;
Are prohibited from paying dividends;
Must maintain, to the extent practicable, employment levels as of March 24, 2020, and retain at least ninety (90) percent of employees as of that date until September 30, 2020;
Are prohibited from increasing the compensation of any employee who earns more than $425,000 (including salary, stock and bonuses and other financial awards) or from offering them significant severance or termination benefits (cannot exceed twice what was received by that employee in 2019); and
Officers and employees whose total compensation exceeded $3 million in 2019 may not receive more than $3 million in compensation, plus 50 percent of the amount over $3million that individual received in 2019.

Retirement Plans

The CARES Act includes a number of temporary changes to some of the rules for retirement plans designed to provide individuals with access to these funds. Title II of the CARES Act creates a new penalty-free coronavirus-related distribution option and expands the availability of plan loans. Eligible retirement plans include 401(k) and profit-sharing plans, 403(a) and (b) plans, 457 plans, and IRAs. These changes are not mandatory, meaning that in the case of employer-sponsored plans, employers will have to decide whether to make these new options available to employees. The good news is that implementing the changes will not require amendments to plan documents right away. Section 2202(c). Retirement plans that operate in accordance with the CARE Act have until the last day of the plan year beginning on or after January 1, 2022, to make CARE Act amendments. For governmental plans, the deadline is two years later.

Ordinarily, if an individual takes a distribution from a qualified retirement plan before reaching age 59 1/2, there is penalty tax due equal to 10% of the taxable amount. Section 2202(a) of the CARES Act waives the 10% penalty for taking an early distribution if the distribution is “coronavirus-related.” Under Section 2202(a)(4)(A) a coronavirus-related distribution is a distribution made to: an individual if they or their spouse are diagnosed with the coronavirus SARS-Co-V-2 or with coronavirus disease (COVID-19) by a CDC-approved test; someone who experiences adverse financial consequences as the result of a furlough, layoff, or reduction in hours; or to someone who is unable to work due to lack of childcare due to the virus. An individual who owns or operates a business and closes or reduces hours due the virus or COVIA-19 is also eligible for a coronavirus-related distribution. A retirement plan administrator may approve a coronavirus-related distribution by relying on an employee’s certification that the employee meets one of the conditions for eligibility. The Secretary of Labor may expand the list of affected individuals, and changes may be coming.

The waiver of the 10% penalty applies to coronavirus-related distributions of up to $100,000 taken between January 1, 2020 and December 31, 2020. For employers who sponsor more than one plan, the $100,000 limitation is a limit on aggregate distributions to one employee. A coronavirus-related distribution may be repaid over three years, in one payment or in installments, to any eligible retirement plan in which the employee participates. The repayments will be treated like rollover contributions. For coronavirus-related distributions that will not be repaid, the income tax on the distribution may be paid over three years beginning in 2020, rather than all at once in the year of receipt.

Section 2202(b) of the CARES Act also raises the limit for loans from qualified plans to $100,000. The $100,000 limit applies to loans made with 180 days of the effective date of the CARES Act. During this period, participants may borrow up to the lesser of $100,000 or 100% of the present value of their vested benefit. Participants are usually limited to borrowing the lesser of $50,000 or 50% of the present value of their vested benefit. For loans already outstanding, payments due before December 31, 2020 may be delayed for up to one year, provided interest on the loan will continue to accrue during the delay and repayment schedules will be adjusted to reflect the increased amount due.

Section 2203 provides a one-year delay for required minimum distributions (RMDs). In the absence of this delay, participants in 401(k) and profit-sharing plans, 403(a) and (b) plans, 457 plans, and IRAs would have to begin taking minimum distributions from their retirement plan accounts no later than April 1 of the year in which they turn age 70 ½. The delay applies to both 2019 RMDs due by April 1, 2010 and 2020 RMDs. This means that if a participant has already begun taking RMDs or reached age 70 ½ in 2019, their RMDs are waived for 2020.

Finally, Section 3203 of the CARES Act provides some relief to employers who sponsor defined benefit pension plans. Employers make contributions to these plans, and ordinarily there are deadlines for required minimum contributions and funding any shortfalls from previous years. The deadline to pay 2020 minimum funding contributions was extended until January 1, 2021. Plan sponsors will, however, owe interest on any delayed contributions.

Payroll Tax Credits and Deferrals

The CARES Act includes a payroll tax credit for eligible employers. The credit is allowed against social security taxes (IRC Sec. 3111(a)) or Railroad Retirement Tax Act taxes (IRC Sec. 3221(a)) and is available for up to 50% of “qualified wages” (capped at $10,00 per employee) paid after Mar. 12, 2020 and before Jan. 1, 2021.

Single Employer

Employers treated as a single employer under IRC Section 52(a) or (b) or Section 414(m) or (o) are treated as a single employer for purposes of this section.

Eligibility

Eligible Employers
- Any employer that was carrying on a trade or business during 2020, and with respect to any calendar quarter for which:
  - operations were fully or partially suspended due to a COVID-19 government order, or
  - gross receipts declined by 50% versus the same calendar quarter the prior year. Eligibility continues until gross receipts for a quarter are greater than 80% versus the same calendar quarter in the prior year.
- Tax-exempt organizations

Employers Not Eligible
- Federal or State employers, including any agency or instrumentality, are not eligible for the payroll tax credit.
- Employers who receive a SBA Loan under the Paycheck Protection Program of the CARES Act are noteligible for the payroll tax credit.

Option To Elect Out
- Any eligible employer may elect not to take the payroll tax credit.

Credit Amount

For each calendar quarter that an employer is eligible, the employer may receive a payroll tax credit equal to 50% of qualified wages paid after Mar. 12, 2020 and before Jan. 1, 2021.
The total amount of qualified wages per employee for all calendar quarters is capped at $10,000.
If the payroll tax credit amount exceeds the employer’s liability for the quarter, the excess will be refunded.

Qualified Wages

Qualified wages depend on the employer’s average number of full-time employees in 2019:
- For eligible employers with more than 100 full-time employees, the payroll tax credit can only be claimed to the extent wages are paid to employees who are not able to work as a result of a COVID-19 government shut down order.
- For eligible employers with fewer than 100 full-time employees, the payroll tax credit can be claimed for all wages paid to employees during the period the employer remains eligible for the credit.

Special Considerations:
- Qualified wages include health plan expenses allocable to wages under an employer sponsored health plan.
- Wages for which the payroll tax credit is sought cannot exceed the amount the employee would have earned during the 30 days immediately preceding the eligibility period.

Other Credits Impact

Wages used for the payroll tax credit cannot be taken into account for the employer credit for paid family and medical leave under IRC Sec. 45S.
The payroll tax credit is reduced by any credits taken under subsections (e) and (f) of IRC Sec. 3111 (credit for employment of qualified veterans and for research expenses of qualified small businesses) as well as sections 7001 and 7003 of the Families First Coronavirus Response Act (payroll credits for required paid sick leave and family leave).

Penalties Waived

Penalties for an employer who fails to pay relevant payroll taxes based on reasonable anticipation of the payroll tax credit may be waived.

CARE Clarifications to FFCRA – Eligibility for Emergency Paid Leave

The CARE Act also clarifies which employees are entitled to emergency paid leave under the Families First Coronavirus Relief Act (“FFCRA”) that takes effect on April 1, 2020. Under the original version of the FFCRA, an employee was eligible for emergency paid leave only after being employed by the employer at least 30 days.

The CARE Act expands eligibility to include employees who were laid off on or after March 1, 2020, who had worked for the employer for at least 30 of the last 60 days prior to being laid off, and were rehired by the employer. For example, suppose an employee was hired by an employer on January 1, 2020 and was continuously employed until being laid off on March 3, 2020. If this employee were to be subsequently rehired by the employer after April 1, 2020, then the employee would not have to wait 30 days to be eligible for emergency leave. Instead, the employee would be immediately eligible for emergency leave from the date of rehire.

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Employer’s Guide to Key Provisions of the CARES Act