Update (1/19/21): Please note that we are actively monitoring evolving legislation and will continue to provide information as it becomes available. While we are moving swiftly to analyze and share these updates with our customers and the general public in real-time, some aspects of this article may be dated as updates continue to be announced. For more information on the stimulus plan signed into law on December 27, 2020, click here. To learn more about financial relief opportunities under the new law, click here.
Note: This article reflects updates to include the impact of the Paycheck Protection Program Flexibility Act on provisions of the CARES Act and other changes to PPP loans and forgiveness as a result of the Interim Final Rule .
- CARES Act
- Paycheck Protection Program loans
- Employee retention tax credit
- Delayed employer payroll taxes
- Retirement plan relief
- Unemployment insurance
- Recovery rebates
- Economic Injury Disaster Loan
- Diagnostic testing
What is the CARES Act?
The Coronavirus Aid, Relief, and Economic Security Act (CARES) is a financial stimulus package designed to help small businesses. You could get a loan of up to $10 million to stay afloat and help offset the financial challenges created by the COVID-19 pandemic.
As you read about these measures, while weighing decisions about what steps to take next with your business or employees, we encourage you to reflect if these forthcoming provisions can impact those choices.
There are many provisions of the CARES Act, including loan forgiveness and credit for retaining employees, and the law impacts retirement plans, health insurance, and more. This details some preliminary guidance provided by the IRS and the U.S. Department of Labor.
Small business loans with the potential of covered costs forgiven
A key piece of the largest-ever economic stimulus package in American history is the $370 billion in additional funding for small businesses, which was signed into law on April 24, 2020, after the initial $349 billion in funding was exhausted. In general, businesses with fewer than 500 employees are eligible for up to $10 million in loans, which can be used for payroll and other expenses, such as mortgage interest, rent, or utilities.
Of the $370 billion in additional funding for small businesses, the Paycheck Protection Program and Health Care Enhancement Act provides an additional $310 billion for loans under the Paycheck Protection Program. This includes $60 billion for small lenders (including state and federal credit unions, banks, and community development financial institutions), and $60 billion for the Economic Injury Disaster Loan (EIDL) program with $10 billion of that amount for EIDL grants of up to $10,000.
The loans, available at financial institutions currently extending SBA loans and other non-traditional lenders, may be completely forgiven if the employer continues to keep their employees or quickly hires back those who already have been laid off, and uses the funds for covered expenses.
On June 5, 2020, the PPP Flexibility Act was signed into law by President Trump. As part of this Act, if an employer received a Paycheck Protection Program (PPP) Loan, they can continue to defer deposit and payment of their share of social security tax until December 31, 2020, whether or not their loan is forgiven. Previously, they could only defer deposit and payment of this tax until their PPP loan was forgiven.
Note: If an employer chooses to go with the SBA’s Paycheck Protection Program loan, they cannot take advantage of the employee retention credits.
Recipients of a loan made under the PPP may be eligible for loan forgiveness in an amount equal to the sum of the following costs incurred and payments made during an up to 24-week period beginning on the date of the loan origination (not an exhaustive list):
- Payroll costs (including employer paid employee benefits and employer paid state and local taxes)
- Interest payments on any covered mortgage obligation in effect before February 15, 2020
- Payment of rent under a lease in force prior to February 15, 2020
- Utility payments for which service began before February 15, 2020
- Interest payments on any other debt obligations that were incurred before February 15, 2020
The interest rate on the loan is 1 percent which begins accruing when the loan is received. Payments of loan principal, interest, and fees may be deferred until the date on which the forgiveness amount is remitted to the lender. For any amounts not forgiven, the PPP Flexibility Act established a minimum loan maturity period of five years for new loans, instead of the current two-year deadline set by the SBA. The five-year loan maturity period applies only to PPP loans issued after June 5, 2020 (the effective date of the PPP Flexibility Act), although borrowers and lenders can agree to extend loans issued before June 5.
Learn more about loan forgiveness and check out the PPP Forgiveness Loan Estimator.
On April 14, 2020, the SBA released an Interim Final Rule regarding PPP and the impact on partnerships and self-employed 1040 Schedule C filers.
- A partnership is only eligible for one loan, not two separate ones.
- Self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized (for eight weeks, a maximum of $15,385 per individual), on a PPP loan application filed by or on behalf of the partnership. It is uncertain whether the PPP Flexibility Act changed this cap. We await further guidance.
- Self-employed individuals with no employees should use 2019 IRS Form 1040 Schedule C to assist in calculating their maximum loan amount.
- Self-employed individuals with employees should also use 2019 IRS Form 1040 Schedule C, and payroll processor records containing similar information as Form 941, along with evidence of any retirement and health insurance contributions, if applicable.
The amounts eligible for forgiveness include payroll costs up to $100,000 of annualized pay per employee for the covered period, as well as covered benefits for employees (but not owners) including employer paid health care expenses and retirement contributions, and state and local taxes assessed on employee payroll paid by the employer (e.g., unemployment insurance tax).
Other amounts eligible for forgiveness include:
- Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA. In addition, payments on mortgage interest, rent payments, and utilities in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C, may be eligible for loan forgiveness.
When applying to the lender for forgiveness on a loan:
- Individuals will need to complete the PPP Loan Forgiveness Application (LFA) and submit it to their lender that issued or is servicing their loan to obtain forgiveness.
- The application has the following components: (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; (3) the PPP Schedule A Worksheet; and (4) the (optional) PPP Borrower Demographic Information Form. All borrowers must submit (1) and (2) to their lender. Employers will also need to provide support for their payroll and non-payroll costs, and full time equivalent (FTE) employee counts.
- If the self-employed have employees, they should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that correspond to the covered period.
- The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.
Employee retention tax credit
Another potential area of economic relief for qualified business owners is the employee retention credit, which gives eligible employers a tax credit for keeping workers employed during the COVID-19 crisis. Employers may be eligible for a refundable credit of up to 50 percent of qualified wages, up to $10,000 per employee annually, against applicable employment taxes.
Wages eligible for the credit are those paid after March 12, 2020, and before January 1, 2021, and can include a portion of the cost of employer provided health care.
In general, if you have 100 or fewer employees on average in 2019, the credit is based on wages paid to all full-time and part-time employees. If you had more than 100 employees on average in 2019, then the credit is allowed only for those wages paid to employees who did not work during the calendar quarter.
The credit is taken against the employer’s FICA liability. Any excess credit remaining after being applied to liability will be refunded.
Tax credit cannot be claimed if an employer also receives a PPP loan from the SBA.
To qualify for the employee retention credit, an employer must either:
- Have gross receipts below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
- Eligible employers can get reimbursed for the credit simply by reducing their required payroll tax deposits including the amounts withheld from employees’ wages equal to the amount of the credit. If your tax deposits are not enough to cover the credit, you can receive an advance payment from the IRS by submitting Form 7200.
Delayed employer payroll taxes
Employers are allowed to defer payment of the employer share of the social security tax (6.2 percent) paid over the following two years, with half the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
Employers still would be responsible for FICA tax on the employee wages.
On April 13, 2020, the IRS issued guidance and created an FAQ page to address specific issues related to the deferral.
- The IRS updated Form 941 to reflect the deferred deposits (including any beginning at the very end of Q1 on March 27). No election is required by the employer to make participation easy.
As part of the PPP Flexibility Act passed on June 5, 2020, employers who received a Paycheck Protection Program loan can continue to defer deposit and payment of their share of social security tax until December 31, 2020, whether or not their loan is forgiven. Previously, employers could only defer deposit and payment of this tax until their PPP loan was forgiven.
As a reminder, the deferred employment tax (from March 27, 2020 until Dec. 31, 2020) must be paid over the following two years, with 50 percent of the amount required to be paid by Dec. 31, 2021, and the other 50 percent by Dec. 31, 2022. We’re waiting on more guidance from the IRS around collections of the tax in 2021 and 2022.
Relief for retirement plan participants impacted by coronavirus
This provision could help employers and their employees with short-term cash flow. It includes enhanced loan availability and relief for outstanding loan payments, allows COVID-related distributions, and waives early withdrawal penalties. It also waives the Required Minimum Distribution (RMD) for the 2020 calendar year.
Withdrawals and loans from retirement plan
To qualify for the temporary changes to make an early withdrawal or get a loan from their retirement plan, an individual must satisfy one or more of the following:
- The participant is diagnosed with COVID-19.
- The participant’s spouse or dependent is diagnosed with COVID-19.
- A participant (not diagnosed) incurs financial hardship from being quarantined due to COVID-19, including furlough, lay-off, reduction of work hours, unable to work due to no child care, or participant’s own business had to close or reduce hours. Other factors may be considered as identified by the Department of Treasury.
Retirement plan distribution relief
This is available until December 31, 2020, and qualified participants (active, terminated or on leave of absence) can take up to a maximum of $100,000 from 401(k), 403(b), or 457 plans without a 10 percent early withdrawal penalty. They can also forego federal income tax withholding on the distribution and pay the IRS in income ratably over a three-year period with personal tax filing rather than in full for 2020.
Retirement plan loan relief
For a new COVID-19-related 401(k) loan, qualified participants are either active or on leave of absence and can get relief through September 23, 2020.
For outstanding 401(k) loans — those existing between March 27, 2020 and December 31. 2020 — qualifying participants can be active, terminated, or on leave of absence. Participants can request to delay loan repayments scheduled between March 27, 2020 and December 31, 2020 for up to one year and the timeframe begins on the first missed loan repayment date.
Note: Loan payments will continue to accrue interest during this delayed timeframe.
In addition to extending the federal tax filing deadline for Americans impacted by the COVID-19 pandemic, an emergency declaration expanded relief to include additional IRS filings, including Form 5500, Form 5500-SF and Form 8955-SSA. The deadline is July 15, 2020 and it is automatic. Taxpayers do not need to file any extension requests.
Additional guidance is forthcoming from the IRS.
Expansion of unemployment insurance
The Relief for Workers Affected by Coronavirus Act provides temporary coverage of individuals who have either exhausted their entitlement to regular unemployment compensation or those who are not eligible for regular unemployment benefits such as the self-employed and independent contractors.
Those seeking to use this benefit must demonstrate they are otherwise able to work and available to work within the applicable state law, absent of COVID-19 reasons.
There are multiple provisions covering specific eligible groups:
Pandemic Unemployment Assistance (PUA)
This program covers self-employed individuals seeking part-time employment, and those who otherwise would not qualify for regular unemployment or extended benefits under state or federal law or Pandemic Emergency Unemployment Compensation. Individuals who have exhausted all regular unemployment rights under state and federal law may also be eligible. The PUA program:
- Provides up to 39 weeks of benefits.
- Is available starting with weeks of unemployment after Jan. 27, 2020 and ending on or before December 31, 2020.
- For weeks of unemployment beginning on or after March 27, 2020, and ending on or before July 31, 2020, individuals eligible to receive PUA are also eligible to receive FPUC (see below),
- Is administered similar to the Disaster Unemployment Assistance (DUA) program.
Federal Pandemic Unemployment Compensation (FPUC)
This program provides an additional $600 per week to individuals who are collecting regular Unemployment Compensation, as well as Pandemic Emergency Unemployment Compensation (PEUC), Pandemic Unemployment Assistance (PUA), Extended Benefits, Short-Time Compensation (STC), Trade Readjustment Allowances (TRA), Disaster Unemployment Assistance (DUA), and payments under the Self-Employment Assistance (SEA) program.
Individuals do not have to separately apply for this benefit. If an individual is eligible to receive at least $1 of underlying benefits for the claimed week, the claimant will receive the full $600 FPUC.
This is available for weeks of unemployment beginning after the date on which the state enters into an agreement with the U.S. Department of Labor and ending with weeks of unemployment ending on or before July 31, 2020.
In states where the week of unemployment ends on a Saturday, the last week that FPUC is payable is the week ending July 25, 2020. For states where the week of unemployment ends on a Sunday, the last week that FPUC is payable is the week ending July 26, 2020.
It should be noted that:
- Child Support obligations must be deducted from FPUC payments in the same manner and to the same extent as they are deducted from regular unemployment compensation.
- Individuals whose underlying benefit payments are intercepted to pay debts (e.g., overpayments) are eligible for the $600 FPUC, even if 100 percent of their weekly benefit amount is intercepted. Benefits intercepted to pay debts are considered compensation for the week.
- The $600 FPUC is taxable.
Pandemic Emergency Unemployment Compensation (PEUC)
Available for weeks of unemployment after the date on which your state enters into an agreement with the U.S. DOL, this program provides up to 13 additional weeks of benefits to an individual who has exhausted their regular unemployment compensations and ends with weeks of unemployment set to end on or before December 31, 2020.
This program covers individuals who:
- Have exhausted all rights to regular UC under state or federal law.
- Have no rights to regular UC under any other state or federal law.
- Are not receiving compensation under the Unemployment Compensation laws of Canada.
- Are able to work, available for work, and actively seeking work.
Additional guidance is needed on how payments to states will be administered.
These are direct payments to individuals based on their 2019 tax filing returns, or their 2018 tax filings if 2019 has yet to be filed. The rebates equal $1,200 per person ($2,400 for married taxpayers filing jointly) and $500 for each dependent child under the age of 17. These amounts are tiered and will phase down for higher-income taxpayers.
When determining the credit, the following criteria is used:
- S. residents who have an adjusted gross income (AGI) of $75,000 ($150,000 married filer; $112,500 head of household filer) or less on their tax filing qualify for the full rebate amount, based on filing status.
- AGI more than $75,000 ($150,000 married filer; $112,500 head of household filer) will have their rebate amount reduced by $5 for every $100 over the threshold.
- Once AGI reaches $99,000 ($198,000 married filing jointly, $136,500 head of household), the rebate will no longer be applicable.
Additionally, to be eligible for the rebate, an individual must have a work-eligible social security number and cannot be claimed as a dependent on someone else’s tax return. Non-resident aliens are not eligible.
Economic Injury Disaster Loan (EIDL)
Small businesses can access working capital through the SBA, up to $2 million, to help overcome temporary loss of revenue caused by the COVID-19 pandemic. An Economic Injury Disaster Loan (EIDL) also provides an advance of $10,000 upon request when applying for the loan, and advance funds do not have to be repaid even if the request for an EIDL is declined.
Under the recent PPP and Health Care Enhancement Act, an additional $50 billion was allocated for the EIDL program and $10 billion for EIDL grants.
The advance payment may be used for providing paid sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses.
Emergency EIDL loans have a covered period from Jan. 31, 2020 to Dec. 31, 2020.
Eligible entities include:
- A business with no more than 500 employees.
- Any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor.
- A cooperative with no more than 500 employees.
- A tribal small business concern with no more than 500 employees.
- An agricultural enterprise with no more than 500 employees.
The SBA has waived some of its traditional requirements during the covered period, including any personal guarantee on advances and loans below $200,000, that an applicant needs to have been in business for the 1-year period before the disaster, and that they have access to credit elsewhere.
Small businesses that have existing non-disaster loans will also get some relief. The SBA will pay principal, interest, and associated fees owed on existing covered loans for a six-month period starting at the next payment date. The SBA will do the same for existing loans under deferment, beginning with the first payment after the deferral period, and for new loans obtained within six months of the enactment of the CARES Act.
Clients with existing covered loans should contact their lender directly for additional details regarding this SBA subsidy program.
Coverage of COVID-19 diagnostic testing
There are several provisions of the CARES Act that have an impact on individual and group health insurance coverage related to COVID-19 diagnostic testing.
Tests will be covered at no charge to individual and group health members if tests are approved by the FDA, the developer has requested emergency use authorization from the FDA, the test was developed in and authorized by a state, or if tests are deemed appropriate in further guidance.
Plan members should not be charged for any qualified coronavirus preventative service, including immunization to prevent/mitigate the spread of coronavirus once an approved vaccine is available.
Individuals who have an HSA-qualified high deductible health plan (HDHP) may be able to receive telehealth services, including telehealth visits unrelated to COVID-19, pre-deductible. There is a safe harbor that allows HDHPs to cover any telehealth or remote care services before the deductible for plan years beginning on or before Dec. 31, 2021.
For health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement accounts (HRAs), many non-prescription over-the-counter medical products are now included as qualified medical expenses, effective for any expenses paid after Dec. 31, 2019.
The Paycheck Protection Program and Health Care Enhancement Act, enacted April 24, 2020, allocated $25 billion for testing and a national testing strategy.
What’s next for the CARES Act
Further guidance is needed to let companies such as Paychex know how to completely interpret the law. Paychex will continue to monitor legislation and provide additional information. Be confident that our compliance and legal teams are in active communication with our contacts at the Small Business Administration and the IRS and will update you as soon as more instructions are available.
This article was originally published March 27, 2020, when the CARES Act became law, with updates on April 17 and June 8.
June 10, 2020: The passage of the PPP Flexibility Act on June 5, 2020 modifies certain provisions related to the forgiveness of loans under the Paycheck Protection Program, allowing recipients of loan forgiveness under the PPP to defer payroll taxes.