CARES Act Explained By A PEO
The Coronavirus Aid, Relief, and Economic Security (CARES) Act builds on the previous federal laws passed in response to COVID-19.
The CARES Act allows small and medium sized businesses to receive federal loans (in some cases forgivable) to cover payroll and other expenses. It aims to boost the economy with provisions that impact unemployment insurance, business loans, employer-sponsored health insurance, retirement savings, and employer-provided education assistance.
It also expands unemployment benefits for workers impacted by the outbreak, while extending unemployment eligibility to many who are otherwise not regularly entitled to receive such benefits.
CARES ACT -Employee Payroll Tax Credit for Employee Retention
The Employee Retention Credit has been expanded and extended. The credit is equal to 70% of the qualified wages paid to employees after December 31, 2020 and before July 1, 2021. Qualifying wages are capped at $10,000 per quarter. Previously the credit was 50% of the qualified wages with the $10,000 cap being an annual cap, not quarterly. So the total value of the tax credit has been increased significantly. Previously, businesses that received a PPP Loan were not eligible for the ERC. That changed with the Continuing Appropriations Act, 2021. The qualifications of the credit are:
- 500 or less employees (previously 100 employees or less for qualifying wages to be for employees working)
- Operations are fully or partially suspended due to orders from an appropriate government authority due to Covid-19, or the gross receipts for the calendar quarter are less than 80% of the same calendar quarter in 2019. Since the business will not know what their gross receipts will be in Q1 , 2021, there is a safe harbor for the gross receipts test. Employers are allowed to use the prior calendar quarter for the test – so Q4 2020 gross receipts must be less than 80% of the gross receipts for Q4 2019.
The CAA also provides for recipients to receive a second PPP loan, referred to as a “second draw”. To qualify, businesses will need to show a decline in gross receipts by 25% or more for one quarter in 2020 over the same quarter in 2019. So the conundrum will be, should our clients apply for a second draw or take the employee retention credit? That will be up to each of them to decide. The funding for the second draw is $284 billion compared to $525 billion in loans in 2020. The solution will be the client can elect the employee retention credit and if a second PPP loan is approved, the credit can be turned off.
CARES ACT- Payroll Tax Holiday – Deferral of Employer Share of Social Security Tax
Employers may defer payment of their portion of Social Security taxes.
Payment schedule for deferred taxes:
- 50% due 12/31/2021
- 50% due 12/31/2022
Employers that received the SBA Paycheck Protection Loans that were forgiven are eligible for this deferral. The amount of the deferral will not be known until June 30, 2021.
CARES ACT – Paid Leave for Rehired Employees
The CARES act amends the FMLA to extend paid leave to employees who (1) were laid off after March 1, 2020, (2) had worked for the employer for at least 30 of the last 60 days, and (3) were rehired by the employer.
CARES ACT – Pandemic Unemployment Assistance Program
- The CARES Act expands unemployment assistance by creating a Pandemic Unemployment Assistance Program through 12/31/2020
- For weeks of unemployment, partial unemployment, or inability to work caused by COVID-19 between January 27 and July 31.
- States are receiving funding from the US Government to extend the benefits period by 13 weeks.
- The Act provides covered individuals with unemployment benefit assistance when they are not entitled to any other unemployment compensation or waiting period.
- The weekly benefit amount will be determined under state law plus an additional $600 for up to 39 weeks
CARES ACT – Direct Payments to Individuals
- Individuals earning less than $75,000 ($150,000 for married couples) will receive a $1,200 direct payment from the federal government. Families in that earning threshold will also receive $500 for each child. Must have a Social Security Number to be eligible.
- The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
CARES ACT – Special Rules for Use of Retirement Funds
- The 10% early withdrawal penalty from qualified retirement accounts is waived for distributions up to $100,000 if a withdrawal is for a coronavirus-related distribution (this is all encompassing – anyone that experiences adverse financial consequences as a result of Covid-19
- The income tax attributable to coronavirus related distributions is paid over 3 years
- Taxpayers may re-contribute the funds withdrawn for a coronavirus-related distribution within three years without regard to that year’s cap on contributions.
CARES ACT- Unemployment Insurance
- Creates a new Pandemic Unemployment Assistance program (through December 31, 2020) to help those not traditionally eligible for Unemployment Insurance (UI), including self-employed individuals, independent contractors, those with limited work history and those who are unable to work as a result of the coronavirus public health emergency. Pays 50% of the unemployment insurance costs incurred by state, local and tribal governments and non-profit organizations, not part of the UI system.
- Provides additional $600/week payment to each UI or Pandemic Unemployment Assistance recipient through the end of July 2020.
- Provides funding for the 1st week of unemployment for states to waive the traditional “waiting week” before benefits begin.
- Provides an additional 13 weeks of unemployment to help those who remain unemployed after weeks of state unemployment are no longer available.
- Provides states with temporary, limited flexibility to hire temporary staff or re-hire former staff to quickly process unemployment claims.
- Provides funding to states to help them maintain short-time compensation programs to prevent layoffs, as well as expand these work sharing programs in the future.
Additional CARES ACT Unemployment and Q & A
CARES – Health Care
- Clarifies that all testing for COVID-19 is to be covered by group and private insurance plans (fully insured and self-insured) without cost sharing- no deductible; coinsurance or copays. Coverage extends to any services or items provided during a medical visit—including an in-person or telehealth visit to a doctor’s office, an urgent care center, or an emergency room—that results in coronavirus testing or screening. This coverage requirement began on March 18 (when Families First Coronavirus Response Act was enacted) and remains in effect only while there is a declared public health emergency (as defined under federal law).
- Changes the use of health savings accounts (HSAs) paired with high-deductible health plans (HDHPs). Allows a high-deductible health plan (HDHP) with an HSA to cover telehealth services prior to a patient reaching the deductible. This means that telehealth and other remote care services could be covered pre-deductible without violating federal rules for HDHPs paired with an HSA. This provision is temporary and will sunset December 31, 2021 unless Congress takes future action to extend or make permanent.
- Inclusion of certain over-the-counter medical products as qualified expenses. Allows patients to use funds in HSAs, Flexible Spending Accounts, Archer medical savings accounts and health reimbursement arrangements for the purchase of over-the-counter medical products, including those needed in quarantine and social distancing, without a prescription from a physician. This change would apply for amounts paid or expenses incurred after December 31, 2019.
- Allows HSAs (and the similar arrangements noted above) to be used to pay for certain menstrual care products, such as tampons and pads. These products would be treated as qualified medical expenses for purposes of these arrangements. This change would apply for amounts paid or expenses incurred after December 31, 2019.
- Allows an employee who was laid off by an employer March 1, 2020, or later to have access to paid family and medical leave in certain instances if they are rehired by the employer. The employee would have had to work for the employer at least 30 days prior to being laid off.