Coronavirus Aid, Relief and Economic Security Act (CARES)
July 28, 2020
Covid-19 is a pandemic that has generated a rapid executive and legislative response with new laws and executive orders enacted rapidly to address emerging health and economic concerns. Understanding the new laws and the impact they have on companies can be critical for business risk management.
1. What is the Coronavirus Aid, Relief and Economic Security Act (CARES)?
In response to Covid 19, on March 27, 2020, Congress passed the CARES Act which was signed into law. The CARES Act 2 is currently being discussed in Congress to extend some of the provisions of the original Act and to provide support for jobs and health care in particular. The law is a broad reaction to the economic impact of the pandemic. It includes various forms of economic assistance to employers and individuals. In includes under its relief certain forms of employer debt relief, paycheck projection to cover the cost of retaining employees, and expanded rights to unemployment compensation. The Act also provides special rules for expanded distribution of employee retirement plans and IRA’s during the pandemic.
2. WHAT IS THE PAYCHECK PROTECTION PROGRAM (PPP) OF THE CARES ACT?
The CARES Act provides cash flow assistance to business owners with 100 percent federally guaranteed loans to employers who maintain their payroll during the pandemic emergency. If the employers maintain their payroll, loans will be forgiven. To qualify, the business and entities must have been in operation on February 15, 2020. The CARES Act 2 is preparing for a second round of loans to allow employers to continue to pay workers as the pandemic continues.
The business may be for profit or a non-profit 501(c)(3), 1 501 (c)(19) veterans organization, or a Tribal business concern (431(b)(2)(c) that has fewer than 500 employees or the applicable size standard for the number of employees as contained in the North American Classification System (NAICS) industry as provided by the SBA if higher.
The program would be retroactive to February 15, 2020 in order to bring workers who may have already been laid off back onto payrolls. The loans are available for up to 2.5 times the businesses average monthly payroll during the year preceding the application. Any amount of the loan that is not forgiven would be treated as a loan for up to ten years at a maximum interest rate of 4% fixed interest rate with no prepayment or loan generation fees.
The costs eligible for payroll does not include employee/owner compensation over $100,000 or employees with a principal residence outside of the U.S.
3. WHAT ARE THE ECONOMIC INJURY AND DISASTER LOANS OF THE CARES ACT?
The CARES Act expanded the Economic Injury and Disaster Loan Program (EIDL) providing 10 billion to expand the program and provide small business owners with low-interest working capital loans. • The EIDL offers loan of up to $2 million that may be used to pay fixed debts, payroll accounts payable and other fixed bills that cannot be paid because of the disaster’s impact. The cap can be waived under certain circumstances if the business is a major source of employment in the area; or • The interest rate is 3.75 percent for small business. The interest rate for nonprofits is 2.75 percent. Loan terms and collateral requirements may apply and are determined on a case by case basis. • The EIDL loans include a $10,000 advance that does not need to be repaid with a $1000 cap per employee on the advance. • Most small businesses are eligible for EIDL loans so long as they have less than 500 employees.
4. WHAT IS THE EMPLOYEE RETENTION CREDIT OF THE CARES ACT?
Under the CARES Act, employers are incentivized to retain employees on the payroll through a 50% credit on up to $10,000 of wages paid or incurred from March 13, 2020 to December 31, 2020. To qualify the employer business must fall into one of two categories: (1) the business is fully or partially suspended by government order due to Covid-19 during the calendar quarter; (2) the employer’s gross receipts are below 50 percent of the comparable quarter of 2019. When 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.
5. WHAT RELIEF IS PROVIDED FOR RETIREMENT PLANS AND IRAS UNDER THE CARES ACT?
Section 2202 of the CARES Act provides for expanded distribution options and tax relief for qualifying retirement and IRA plans up to $100,000 related to coronavirus distributions. Generally, 401(k), 403(b) and IRAs are qualifying plans. Qualifying individuals include
Persons diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
Persons who has a spouse or dependent diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
Persons experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
Persons experiencing adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
Persons experiencing adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.
In such instances, the act allows for aa distribution from a qualified plan from January 1, 2020 to December 30, 2020 with an aggregate of up to $100,000 from all plans without a 10% additional tax on early distribution. The distributions, however, are included in income ratably over three years (starting with the year in which the distribution was received) on which income tax may be paid. An employee has the option of repaying the distribution within the three year period avoiding federal income tax on the distribution.
6. WHAT IS ROLLOVER RELIEF FOR REQUIRED MINIMUM DISTRIBUTION FOR RETIREMENT PLANS AND IRAS UNDER THE CARES ACT?
By law, account based retirement plans such as 401(k)s and IRAs must make required minimum distributions when the participant or IRA owner reaches a certain age. The precise beginning age for a required distribution depends on the circumstances and plan. Before the SECURE Act the RMDs would commence at age 70.5. The SECURE Act changed the age to 72 for individual who attain the age of 70.5 after 2019. There is an exception the timing rule for employee plan participants who continue to work past the year they turn 72.
Generally, an RMD must be taken by the end of the year in which it is required. It may be taken as a lump sum or spread across months of the year. There is generally a grace period for the first RMD until April 1 of the following year.
If an individual fails to take their RMD, they face a 50% penalty to the IRS on the distribution not taken. The problem is that taking an RMD when the investment market has declined causes a rapid drop in the plan’s account balance for people living off the account. It means taking a loss or facing a penalty. Additionally, 2020’s RMD Is based off last year’s account balance so the RMD may be out of proportion to the diminished account balance.
The response under the CARES act is that anyone who has an RMD may elect to skip the RMD and keep the proceeds in the plan without a penalty. If an RMD has been paid in 2020, the recipient may roll over the distribution received within 60 days of receipt or by July 15, 2020 assuming there has been no prior rollover within the prior 12 months. The Waiver does not extend to defined benefit plans.
Employers have the obligation of notifying participants in writing of their right to take the distribution in a direct rollover instead. Direct rollovers of eligible distributions that can be transferred between plan trustees so a recipient never deposits finds in their own account. It allows RMD to be transferred into the recipients IRA or plans.
7. WHAT UNEMPLOYMENT INSURANCE RELIEF IS PROVIDED UNDER THE CARES ACT?
The CARES Act gives states the option of extending unemployment compensation to independent contractors and other workers who are ordinarily ineligible for unemployment benefits. How the extension may apply depends on the state in which you live.
(*Note: With the CARES Act set to expire at the end of July, a new round of legislation is expected).