CARES Act Impacting Employee Benefits in the Workplace (NY)
On March 27, 2020, the President signed into law a third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748). The CARES Act provides tax relief affecting employee benefits in the workplace, including the following:
Update to Alert from 3/26/20
CARES Act Proposed Bill
In the early morning hours of March 25, 2020, the Senate announced that it had reached a bipartisan agreement on the terms of the Coronavirus Aid, Relief and Economic Security Act ("CARES" Act"). Shortly before midnight on March 25th, the passed the CARES Act bill by a unanimous 96-0 vote. It will now proceed to the House before being presented to President Trump for signature. The House is expected to vote on the bill on Friday, March 27th. We will provide additional updates to this Alert as there are further developments on the bill.
Upon review of the text of the final bill that was approved by the Senate, below are some of the highlights of the CARES Act in its current proposed state:
Unemployment Insurance Supplement: Employees who are eligible for unemployment insurance (with a current New York State max of $504/week) would receive an additional $600/week, so as to allow employees who make $57,408 or less to receive their full compensation (and some in excess of their regular compensation) for a period of up to 4 months. The unemployment period will be extended to 39 months. The one week waiting period has been waived. Although the requirement to "engage in an active search for work" has not been waived for eligibility purposes, the Act does provide that the individual states can be flexible when reviewing this criteria to recognize that individual workers' searches may be impacted by the COVID-19 pandemic.
SBA 7(a) Loan Program: Employers with less than 500 employees would be eligible for loans in an amount up to the lesser of the product obtained by multiplying the average total monthly payments for payroll costs incurred during the 1 year period before the date on which the loan is made by 2.5 OR $10M. These loans can be used to cover qualified payroll, interest on mortgage payments, rent, and utilities. For purposes of the mortgage, rent and utility payments, these would apply only to obligations that commenced before February 15, 2020- no new obligations. The covered period for purposes of the loan eligibility is February 15, 2020 through June 30, 2020.
Companies will be eligible for loan forgiveness equal to the value of the cost of the qualified expenses during the emergency with forgiveness decreasing by the formula specified below. The amount of loan forgiveness shall be calculated by multiplying the loan amount by the quotient obtained by dividing the average number of full-time equivalent employees ("FTE's") employed during the covered period by (at the election of the borrower (1) the average number of FTE's employed per month during the period 2/15/2019 through 6/30/2019; or (2) the average number of FTE's per month during the period January 1, 2020 through February 29, 2020.
The Act specifies that the percentage of loan forgiveness shall be determined without reductions in staff that occur between February 15, 2020 and 30 days following enactment of the Act, if those employees that were subject to the reduction are re-employed by June 30, 2020.
The covered period for loan forgiveness purposes (eligible expenses) is the 8 week period following the loan origination date.
The average number of full-time equivalent employee's shall be determined by calculating the average number of employees for each pay period falling within a specific month.
The amount of loan forgiveness shall also be reduced by the amount of any reduction in excess of 25% of compensation in the most recent full quarter in which the employee was paid during the covered period, for any employee who was compensated in an amount less than $100,000 annually.
The amount of the forgiveness shall not exceed the principal amount financed and specifically excludes any interest charged on the loan. Lenders will be able to charge up to 4% interest.
No collateral or personal guarantees shall be required.
The government will issue separate criteria for FDIC insured institutions to participate as lenders in this program. Lenders will be permitted only to charge minimum fees associated with such loans.
Decisions from lenders will be required within 15 days of application submission.
Any canceled indebtedness under the program shall be excluded from gross income.
Any payments due may be eligible for deferment for a minimum period of 6 months and a maximum of 1 year. Within 30 days after enactment, the government will issue guidance on the deferment process.
Direct Payments to Individuals: Individuals making up to $75,000/year would receive a check from the government for $1200. Those who file a joint return with income up to $150,000 will receive a check for $2400. There will also be payments of $500/ qualifying child (as defined in the IRC). There would be no phase in for minimum income. Phase outs would occur above the $75,000/$150,000 limits at a rate of 5% of the excess income above the threshold limits. There is also a $112,500 head of household threshold.
Waiver of RMD's: Temporarily waives the required minimum distributions for pension plans.
Waiver of Penalties for Loans from Retirement Plans: Temporarily waives existing 10% penalty for early withdrawals from qualified retirement plans up to $100,000. Increases amounts that can be taken on loans from qualified employer plans from $50,000 to $100,000. Withdrawals from retirement plans can be repaid over a period of 3 years and the income attributed to such withdrawals can be spread out over the same 3 year period.
Payroll Tax Deferral: Provides for deferral of the 6.2% payroll tax paid by both employers and self-employed individuals for Social Security (50% deferral until 12/31/21 and 50% until 12/31/22).
Net Operating Losses: Allows businesses to carry back losses for 5 years and removes the taxable income limitation for carry forwards.
Alternative Minimum Tax Credits: Accelerates the ability for corporations to use Alternative Minimum tax credits and allows businesses to claim a credit as a result.
Deductible Interest Expenses: Temporarily increases the amount of interest expenses businesses are allowed to deduct from the current 30% limitation to 50%.
Student Loans: Suspends all payments due for loans made under the Higher Education Act through September 30, 2020, during which time no interest will accrue. If the borrower will otherwise qualify under federal loan forgiveness programs, the suspended payments shall automatically qualify them for consideration and, if they qualify, shall be forgiven.
Payments Under the Families First Coronavirus Response Act: Employers will only be liable to pay to employees the maximum credit amounts ($511/day or $200/day, and applicable aggregates) that the employer can receive.
We will continue to monitor progress of the CARES Act and will keep you updated as additional developments occur.
 As set forth both in the text of the final bill passed by the Senate.
CARES ACT IMPACTS EMPLOYEE BENEFITS IN THE WORKPLACE
On March 27, 2020, the President signed into law a third coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, H.R. 748). The CARES Act provides tax relief affecting employee benefits in the workplace, including the following: High Deductible Health Plans and Changes to HSA/FSA/HRA Rules
An individual must satisfy certain requirements in order to deduct contributions to an HSA, including that the individual be covered under a high deductible health plan (HDHP) meeting certain minimum deductibles and maximum out-of-pocket expenses requirements. Pursuant to Notice 2020-15, the IRS has already provided that a HDHP will not lose its status merely because the plan provides medical care services and items purchased related to testing for and treatment of COVID-19 without requiring a deductible. The CARES Act expanded the flexibility for HDHPs—effective March 27, 2020, and continuing for plan years beginning on or before December 31, 2021, HDHPs may provide telehealth and other remote care services without requiring a deductible.
In addition, the CARES Act allows account-based plans to reimburse the costs of over-the-counter medication without a prescription. Expenses for menstrual care products have been added as a qualified medical expense eligible for reimbursement. For HSAs and Archer MSAs, the provision is effective for amounts paid after December 31, 2019. For FSAs and HRAs, the provision is effective for expenses incurred after December 31, 2019.
Temporary Waiver of RMDs
A retirement plan or IRA owner must take required minimum distributions (RMDs) annually once the owner reaches age 72. However, the CARES Act temporarily waives RMDs from 401(k) plans (as well as other defined contribution plans and IRAs) for participants who are required to receive such distributions in 2020. The waiver does not apply to required beginning dates in calendar years after 2020.
Waiver of 10% Excise Tax
Generally, a distribution from a qualified retirement plan such as a 401(k) plan or an IRA will be subject to a 10% excise tax for early distributions unless the distribution qualifies for an exception. The CARES Act provides that the excise tax does not apply to any coronavirus-related distribution.
A coronavirus-related distribution means any distribution made during 2020 from an employer qualified retirement plan or IRA to an individual:
Who is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention;
Whose spouse or dependent is diagnosed with such virus by such test; or
Who experiences adverse financial consequences as a result of being quarantined, being furloughed, laid off, having work hours reduced due to the virus, being unable to work due to lack of child care, or closing or reducing hours of a business owned or operated by the individual due to the virus.
The administrator may rely on an employee's certification that he or she satisfies these conditions. The aggregate amount of all coronavirus-related distributions from all plans maintained by an employer (including any member of the employer's controlled group) to an individual cannot exceed $100,000 in 2020. Coronavirus-related distributions from employer qualified retirement plans are not subject to required income tax withholding.
Unless they elect otherwise, individuals who receive a coronavirus-related distribution will include the amount of the distribution ratably in income in 2020, 2021 and 2022. Individuals may avoid this income recognition by repaying the distribution to the retirement plan within three years of receipt, which repayment will be treated as a tax-free transfer to the recipient plan. A coronavirus-related distribution cannot be rolled over tax-free to another employer qualified retirement plan or IRA.
Loans from Qualified Plans
Plans may increase the amount of loans available to and delay repayment of outstanding loans for employees who are eligible to receive coronavirus-related distributions. Specifically, the CARES Act provides that, during the 180-day period following March 27, 2020, such employees may receive plan loans that do not exceed the lesser of $100,000 (increased from $50,000) or 100% (increased from 50%) of the present value of the employee's nonforfeitable accrued benefit under the plan. The CARES Act also allows the due date for the repayment of any outstanding plan loans occurring between March 27, 2020, and December 31, 2020, to be delayed for one year. Plans adopting this provision must adjust subsequent repayments appropriately to reflect the delay in repayment and any interest accruing during the delay.
The CARES Act infused $500 billion into the Treasury Department's Exchange Stabilization Fund for purposes of making loans, loan guarantees, and other investments to US businesses, states, and municipalities impacted by the coronavirus pandemic in 2020. In addition to other requirements, businesses that receive a loan or guarantee from the Fund under Section 4003 of the CARES Act must limit compensation for highly compensated employees from the date of the loan or guarantee agreement until one year after the loan has been repaid (the "Restricted Period").
Specifically, officers and employees with 2019 total compensation exceeding $425,000 may not receive compensation or termination pay that exceeds twice that amount during any consecutive 12 months in the Restricted Period. Officers and employees with 2019 compensation exceeding $3 million may not receive compensation of more than $3 million plus 50% of the amount his or her 2019 compensation exceeded $3 million during any consecutive 12 months in the Restricted Period. Total compensation includes salary, bonuses, awards of stock, and "other financial benefits" provided by a business to its officer or employee.
Further guidance will be needed to address many open questions, including the scope of "other financial benefits" in determining total compensation. For example, the CARES Act does not address whether compensation earned but not paid during the Restricted Period will be subject to this compensation limit. It remains to be seen whether deferring compensation will be a viable way to comply with the compensation limits; in such case, companies should consult their tax advisors regarding whether other laws apply, including but not limited to Section 409A of the Internal Revenue Code.
Note that companies that decide to take advantage of the coronavirus-related distribution and loan provisions must amend their plan documents by December 31, 2022 for calendar year plans. HSAs, FSAs and HRAs should similarly ensure that their plan documents allow the reimbursements now permitted by the CARES Act.
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