CARES Act Provides Relief to Distressed Employers and Workers Amid COVID-19 Crisis
Author: Rena Pirsos, XpertHR Legal Editor
March 31, 2020
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on Friday, March 27, 2020, aims to help employers keep workers on their payrolls while businesses across the nation suffer due to the ongoing coronavirus (COVID-19) crisis.
The CARES Act includes tax credits to help employers impacted by the pandemic and relief regarding unemployment insurance, employer-provided education assistance, small business loans and employee benefit plans.
Employee Retention Credit
Under the CARES Act, employers that experience COVID-19-related partial or total interruptions to business due to orders from an appropriate government authority, but that continue to pay employees during the interruption, are eligible for an employee retention credit equal to 50% of qualified wages paid, up to $5,000. Employers whose gross receipts decline by 50% compared to the same quarter in the previous calendar year are also eligible for the credit.
The employee retention credit applies to wages paid between March 13, 2020, through December 31, 2020. Excess credits are refundable to employers.
Which wages are considered qualified depends on the number of employees an eligible employer had during 2019:
- If an employer had more than 100 full-time employees (i.e., employees who work 30 hours a week) on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter due to COVID-19, limited to 30 days per employee.
- If an employer had 100 or fewer full-time employees on average in 2019, the credit is based on wages paid to all employees, regardless of whether they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.
The following limitations apply to the employee retention credit:
- The credit is unavailable to an employer that takes out a federally guaranteed loan to meet payroll, rent or other expenses;
- An employer cannot take compensation deductions for the same wages;
- The credit is reduced by the paid leave credit under the Families First Coronavirus Response Act (FCRA);
- An employer that claims the Work Opportunity Tax Credit cannot take the employee retention credit against the same wages; and
- An employer that takes the 12.5% credit for providing paid family and medical leave to their employees cannot take the credit against the same wages.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns (i.e., IRS Form 941) beginning with the second quarter.
If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Form 7200 may also be used to request an advance payment of the tax credits for qualified sick and qualified family leave wages.
The employee retention credit applies to wages paid after March 12, 2020, through December 31, 2020, after which it sunsets.
Deferred Social Security Tax Deposits
The CARES Act also allows employers to postpone deposits of the employer's share of Social Security taxes, up to the $137,700 wage base, through December 31, 2020. Deferred taxes must be paid in two installments: the first is due by December 31, 2021, and the second is due by December 31, 2022. Deferral is not available to employers that take out federally guaranteed loans that are eventually forgiven.
Expanded Educational Assistance
The CARES Act temporarily expands the definition of employer-provided educational assistance to include qualified (i.e., tax-free) student loan payments made to employees or employees' lenders during 2020. The payments are subject to the overall cap of $5,250 per employee, per year, and include both the principal and interest on student loans that are eligible for the student loan interest deduction under Internal Revenue Code § 221(d)(1).
The provision applies to any student loan payments made by an employer on behalf of an employee after March, 27, 2020 (the date of enactment of the CARES Act), and before January 1, 2021.
The CARES Act clarifies the following two provisions of the FFCRA:
- For purposes of the expanded Family and Medical Leave Act, employees can qualify for paid leave if they were (i) laid off on or after March 1, 2020, (ii) had worked for at least 30 of the last 60 calendar days and (iii) are rehired; and
- The IRS will advance the refundable portion of the Social Security and Medicare tax credit available to employers that provide paid leave to employees.
Unemployment Insurance Enhancements
The CARES Act enhances the existing traditional unemployment insurance (UI) program and makes UI available for individuals who are not traditionally eligible for it (e.g., independent contractors, self-employed individuals and individuals with limited work history).
Employee Benefits Provisions
The CARES Act makes changes to certain rules related to employee benefit plans. For example, it impacts group health plans with requirements related to coverage of COVID-19 testing, preventative services and vaccines. It also relaxes certain rules for high-deductible health plans, health savings accounts and health flexible spending accounts.
Additionally, there are several provisions affecting retirement plans. For example, consistent with relief provided during other disasters, the law allows employees to access their 401(k) accounts without liability for the 10% penalty on early distributions related to COVID-19.
Small Business and Other Industry Loans
Finally, the CARES Act extends emergency grants and federally guaranteed loans to help eligible small employers (i.e., those with fewer than 500 employees) maintain their payrolls and cover other expenses while shuttered during the pandemic. This Paycheck Protection Program (PPP) is available from February 15, 2020, to June 30, 2020.
Loan proceeds can be used for payroll, mortgage interest or rent, health-care benefits payments, utility payments, and certain other costs. The loans are forgivable, in an amount equal to the total amount of such costs incurred or payments made during the eight weeks after loan disbursement, if the employer maintains its employment and wage levels.
However, employers that participate in the PPP may not defer payment of the employer share of Social Security taxes that is otherwise permitted under the CARES Act.
Among other types of business loans and debt relief, the CARES Act also provides for $500 billion in loans for airlines and large corporations.