Employing Alabama

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the “CARES Act.”  The Act is 880 pages long.  If you are a glutton for punishment, here is a link to the text of the entire Act: CARES Act

There are numerous provisions of the CARES Act that affect employers.  I have attempted to provide you with a “high level” summary of those provisions.  There are many aspects of the CARES Act that implicate tax law and I am not expert in that area.  If you want to take advantage of any part of the CARES Act, I strongly recommend that you consult with a tax professional as well as your attorney.  I have summarized each pertinent Section with its title and Section number.

I. Paycheck Protection Program (Section 1102 of the CARES Act)

• What does it do? This program provides Small Business Administration Loans so that eligible employers can meet payroll costs and other expenses from February 15, 2020 to June 30, 2020.  Here’s a link to a publication from the United States Chamber of Commerce which also describes the program: “Coronavirus Emergency Loans”
• Who is eligible? Business with 500 employees or less are eligible.  Other eligible businesses include: nonprofits; hospitality industry businesses with NAICS Code 72; veterans organizations; sole proprietors; tribal businesses; and, independent contractors.
• What must the loan be used for?  Any loan must be used for: payroll costs; continuation of group health care benefits; salaries, commissions or similar compensation; interest on mortgage obligations; rent; utilities; or, interest on debt incurred previously.
• What is my loan amount? The maximum loan amount is the lesser of:
  • $10 million; or,
  • Your average total monthly payroll costs (determined 1 year prior to the loan date) — multiplied by 2.5
• Do I have to give collateral or a personal guarantee?  No.
• What is the interest rate?  The rate cannot exceed 4%
• Is the loan forgivable?  Yes.  There is a math formula in the Act for calculating forgiveness.  Generally, as long as you keep paying employees at normal levels during the eight weeks following loan origination, then the amount you spend on payroll costs (excluding costs for any compensation above $100,000 annually), mortgage interest, rent payments and utility payments can be forgiven. Forgiveness may be reduced if you reduce salaries or wages.

II.  Pandemic Unemployment Assistance (Section 2102 of the CARES Act)

• What does it do?  This program provides up to 39 weeks of unemployment benefits to individuals who would not otherwise be entitled to unemployment benefits.
• Who is eligible?  Almost anyone who is out of work for COVID-19 reasons and is not otherwise eligible for unemployment benefits. This includes: self-employed individuals; independent contractors; and, individuals who have exhausted their regular unemployment benefits.  An individual who “has the ability to telework with pay” or who is “receiving paid sick leave or other paid leave benefits” does not qualify.
• How does my State get this benefit?  The benefit will be administered through State unemployment programs.  Therefore, each State must enter into an agreement with the Secretary of the Treasury to receive and disburse this benefit.
• What will the benefit be? Eligible individuals will receive unemployment benefits calculated under the “regular” provisions of State law.  In addition, through July 31, 2020, eligible individuals will receive an additional $600 per week.
• How long is the benefit available?  The 39 weeks of benefits will be available from January 27, 2020 through December 31, 2020.

III.  Emergency Increase in Unemployment Compensation Benefits (Section 2104             of the CARES Act)

• What does it do?  This program provides an extra $600 per week to employees eligible to receive unemployment compensation benefits under State law.
• Who is eligible?  Individuals who are eligible for unemployment benefits under State law are eligible for the additional $600. Even if the employee made less than $600 before going on unemployment, they will receive the full benefit.
• How does my State get this benefit?  The benefit will be administered through State unemployment programs.  Therefore, each State must enter into an agreement with the Secretary of the Treasury to receive and disburse this benefit.
• How long is the benefit available?  The benefit will be paid through July 31, 2020.

IV.  Pandemic Emergency Unemployment Compensation (Section 2107 of the                    CARES Act)

• What does it do? This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after state unemployment benefits are no longer available. 
• Who is eligible?  Individuals who have: (1) exhausted all rights to state unemployment benefits; (2) have no other right to regular compensation; (3) are not receiving unemployment compensation from Canada; and, (4) are able to work, available to work, and actively seeking work.
• How does my State get this benefit?  The benefit will be administered through State unemployment programs.  Therefore, each State must enter into an agreement with the Secretary of the Treasury to receive and disburse this benefit.
• How long is the benefit available?  The extra 13 weeks will be paid through December 31, 2020.

V.  2020 Recovery Rebates for Individuals (Section 2201 of the CARES Act)

            This is the section that has been widely publicized promising $1,200 to each qualified individual.  It is not directly employer related, so I will allow you to conduct your own homework on this one.

VI.  Special Rules for Use of Retirement Funds (Section 2202 of the CARES Act)

            Generally, employees may take a distribution up to $100,000 from their eligible retirement plan if they are diagnosed with COVID-19; have a spouse or dependent diagnosed with COVID-19; or, experience adverse financial consequences as a result of COVID-19.  Speak with you retirement plan sponsor if you or your employees want to take advantage of this benefit.

VII.     Exclusion for Certain Employer Payments of Student Loans  (Section 2206                 of the CARES Act)

Many employers establish plans under which they can provide tax-free payments for an employee’s education up to a value of $5,250.  The CARES Act expands that benefit to loans that were taken by employees to pay for education.  In short, employers can help pay for the past education of employees.  Until January 1, 2021, employers can pay the employee, or their lender, for any principal or interest of a qualified education loan incurred by the employee for education of the employee.  The total amount that can be paid is $5,250.00.  

VIII.   Employee Retention Credit to Employers Subject to Closure Due to COVID-                 19 (Section 2301 of the CARES Act)

• What does it do? This section provides a payroll tax credit for 50 percent of qualifying wages paid by employers to employees during the COVID-19 pandemic. In short, it is an incentive for an employer to retain employees – even though the employer is losing business because of COVID-19.
• Who is eligible? The tax credit is available to employers whose: (1) operations were fully or partially suspended because of an order limiting commerce, travel, or group meetings  due to COVID-19; or, (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
• There is a wage limit. There is a limit to the amount of wage per-employee upon which an employer can take the tax credit. The cap, per-employee, is $10,000 in wages.  In other words, the maximum tax credit per employee is $5,000.00
• What kind of benefit is provided? Eligible employers will receive a credit against employment taxes for each calendar quarter in an amount equal to 50% of the qualified wages for each employee.
  • • For employers with more than 100 employees, the tax credit is only available for wages paid to employees who are not actually working because of the business slowdown.
    • For employers with 100 or fewer employees, the tax credit is for all wages paid to employees.
• Over what period is the benefit paid? Qualifying wages paid from March 12, 2020, to December 31, 2020 are eligible for the credit.
• Limitations on the tax credit. Employers cannot take this tax credit if they are also taking advantage of the small business interruption loan. The amount of the tax credit is also reduced to the extent that the employer is already taking a tax credit for paid leave under the Families First Coronavirus Response Act.  (Here are links to two discussions of that Act: (1) FFCRA Paid Leave and (2) IRS Tax Credits for Paid Leave.)  The credit is also reduced to the extent the employer is already taking a credit for employment of qualified veterans and credit for research expenditures of qualified small businesses.

VIII.   Emergency Relief and Taxpayer Protections (Section 4003 of the CARES Act)

This wide-ranging section provides the Treasury Secretary with broad authority to make loans or loan guarantees to states, municipalities and eligible businesses.  Subsection (c)(3)(D) authorizes the Secretary to create a program to assist mid-size businesses and imposes employment restrictions under any such program.

• Which businesses are eligible?  The Secretary’s program will provide low-interest loans (less than 2% per annum) to eligible business, including non-profits, with between 500 and 10,000 employees.  No payment of principal or interest will be required for the first six months of the loan.
• Are there any strings attached?  Yes. Any business applying for the loan must make a “good faith certification” of the following ten conditions:

1. 1.  the uncertainty of economic conditions makes to loan necessary to support ongoing business operations;
   2.  the funds it receives will be used to retain at least 90 percent of the recipient’s workforce, at full compensation and benefits, until September 30, 2020;
   3.  the recipient intends to restore not less than 90 percent of its workforce that existed on February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than 4 months after the termination date of the COVID-19 emergency;
   4. the recipient is an entity or business that is domiciled in the United States with significant operations and employees located in the United States;
   5. the recipient is not a debtor in a bankruptcy proceeding;
   6. the recipient is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States;
   7. the recipient will not pay dividends with respect to the common stock of the eligible business, or repurchase an equity security that is listed on a national securities exchange of the recipient or any parent company of the recipient while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
   8. the recipient will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan;
   9. the recipient will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan; and,
   10. the recipient will remain neutral in any union organizing effort for the term of the loan.

       •  What is impact on compensation of officers and employees?  If a business accepts one of these loans, limitations will be placed on highly-paid officers and employees. Officers or employees that received $425,000 or more in compensation in calendar year 2019 will have their future compensation capped at the amount they received that year.  That compensation cap will remain in place while the loan is in effect and an additional year after the loan or loan guarantee is no longer outstanding.  During that same period, severance or other termination benefit will be restricted to twice the total compensation received during 2019.

There are additional restrictions if the officer or employee made more than $3,000,000 in 2019.  Their compensation is limited to: (1) $3,000,000; plus, (2) 50 percent of the excess over $3,000,000 received in 2019.  For example, if the employee made $10,000,000 in 2019, the compensation would be limited to: (1) $3,000,00; plus (2) $5,000,000 (50% of $10,000,000).