The Coronavirus Aid, Relief and Economic Security Act (CARES Act) contains a number of tax- and employee benefit-related provisions, which fall into three general categories. Some enact rules or procedures that had already been administratively developed by the Internal Revenue Service or the Department of Labor; some modify or correct provisions of the previous COVID-19 assistance legislation; and some enact new laws, or change existing laws, to provide financial and other assistance to people and businesses having to deal with the effects of the pandemic, many of which are temporary measures (e.g., waiving taxes for the remainder of this year). Many of these provisions are discussed below, in no particular order.
TAX PROVISIONS
Waiver of Retirement Account Early Distribution Penalties
Distributions from retirement plans prior to age 59-1/2, up to 100,000 total during 2020, are exempt from the 10% additional income tax on early distributions if the recipient is either
- diagnosed (or has a spouse or dependent who is diagnosed) with COVID-19 (or with the virus SARS-CoV-2) using a CDC-approved test; or
- experiencing adverse financial consequences as a result of: being quarantined; being furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; or the closing or reduction of operating hours of a business owned or operated by the participant, in each case due to COVID-19-related reasons.
(The distributing plan's Plan Administrator is permitted to rely on an employee's certification that he or she satisfies the indicated conditions.)
The distributions remain taxable, but the taxable amount can be included in income over three years (2020-2022), unless including it all in 2020 is preferred, or unless it is rolled over within three years following receipt of the distribution. (If it were to be rolled over three years later, as is permitted, then at least part of the tax will already have been paid; it appears that an amended return would be needed in order to recover that tax, but the IRS will have to decide that.).
Allowance of Additional Deduction for Charitable Contributions
The Act amends the deduction for charitable contributions in such a way that up to $300 of cash contributions to most charitable organizations can be deducted "above the line," rather than as an itemized deduction. This enables an individual to claim some charitable deduction while using the standard deduction (i.e, without having to itemize deductions generally). The Act also increases the overall limitation on cash contributions, both for individuals and corporations. These increases are effective for years after 2019.
Tax Free Payment of Student Loans by Employers
From March 27 through the end of 2020, employers' qualified "educational assistance programs," under which employers may provide up to $5,250 of nontaxable educational assistance in a year, may include payment of, or reimbursement for, student loan payments as a permissible benefit.
Employee Retention Credit
An employer who is engaged in a trade or business in 2020 will be entitled to a credit against its employer Social Security tax, equal to 50% of the wages paid to employees if the employer's business is fully or partially shut down or suspended by orders of a governmental authority limiting commercial or other activity due to COVID-19. The credit may also be claimed by employers whose quarterly gross receipts suffer a greater-than-50% decline from the corresponding quarter last year, and who continue thereafter to incur more than a 20% decline compared to last year. The employees whose wages are taken into account are all employees in the case of employers having not more than 100 full-time employees, or only employees who are receiving wages but not working for reasons related to a decline in gross receipts in the case of employers having more than 100 full-time employees. In either case, an employee's wages include the employer's costs of health coverage allocable to those wages.
The credit is also limited by limiting any employee's wages taken into account to $10,000 for the year, and by excluding from wages any paid leave that is itself creditable against the employment tax.
This credit is integrated with the credits for paid sick leave and enhanced FMLA leave, and applies after those credits have been applied against the employer's Social Security tax. So, for example, if the employer's payroll taxes for a quarter were totally offset to collect its paid sick leave credit for that quarter, then the employer could not be advanced its available employee retention credit. However, any excess that is not collected by retaining payroll taxes is refundable, and that refund can be claimed.
Like the other COVID-19-related tax credits, this is not available to governmental employers. It is technically available to tax-exempt organizations, provided that they are carrying on a trade or business.
Advance Refunding of Tax Credits
The Act codifies the procedure previously issued by the IRS under which employers are able to collect their anticipated employment tax credit attributable to paid sick leave and enhanced FMLA leave during a quarter by retaining payroll taxes that they would otherwise be required to deposit during the quarter. But it does make one significant addition. The statutory provision now states that the credits may be advanced in this manner, "as calculated through the end of the most recent payroll period in the quarter." So the amount that can be refunded in advance is the credit calculated to date, up to the amount of the employer's OASDI tax liability to date, and that amount may be retained out of the employer's aggregate payroll taxes that are awaiting deposit.
EMPLOYEE BENEFIT PROVISIONS
Plan Funding
Minimum required contributions to single-employer plans that are otherwise due during 2020 – both annual contributions and quarterly contributions – are deferred until January 1, 2021 (with interest). As a related matter, at the option of the plan sponsor, a plan's adjusted funding target attainment percentage may be carried forward from the last plan year ended before 2020.
Plan Loans
Defined contribution plans may change their loan provisions (or add new loan provisions) to allow loans to COVID-19-affected participants in increased amounts. The participants to whom this applies are the same ones for whom the early withdrawal penalty is waived (as discussed above); that is, a participant:
- Who is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 (or with SARS-CoV-2) using a CDC-approved test; or
- Who experiences adverse financial consequences as a result of: being quarantined; being furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; or the closing or reduction of operating hours of a business owned or operated by the participant, in each case due to COVID-19-related reasons.
Here, too, the plan administrator may rely on an employee's certification that he or she satisfies the indicated conditions.
The loan limits for an affected participant are the lesser of 100% of the vested account balance (up from 50%) or $100,000 (up from $50,000). In addition, loan payments due (including on existing loans) at any time between March 27, 2020 and December 31, 2020 are deferred for one year, but the loan has to be re-amortized to reflect the delayed payment date(s) and additional interest accruals. A new loan being made in 2020 also need not take into account that one-year deferral in determining its five-year maximum term.
The enhanced loan rules are effective until September 23, 2020, i.e. for the 180 days following enactment of the Act.
Required Minimum Distributions Waived
The required minimum distribution (RMD) rules are waived for 2020 with respect to qualified plans, 403(b) plans, governmental 457(b) plans and IRAs. So, any individual required to receive an RMD this year no longer has to do so. That includes individuals whose required beginning date is April 1, 2020 and did not receive their first RMD in 2019.
Ignoring 2020 will also affect the five-year period that applies in some cases to a non-spouse beneficiary of a deceased participant, and may effectively convert that to six years.
A distribution that would have been an RMD but for this waiver (such as an initial RMD taken prior to the required beginning date, in, e.g., January, 2020) is no longer an RMD, and therefor is eligible to be rolled over (subject to the 60-day requirement, etc.). However, the Act provides that it is not treated as an "eligible rollover distribution" for purposes of tax withholding, or for purposes of plan requirements relating to direct rollovers.
Coronavirus-related Distributions
In addition to waiving the early-withdrawal penalty and other special tax treatment (discussed above), the Act includes certain other special treatment for distributions made for coronavirus-related reasons (as described under "Waiver of Retirement Account Early Distribution Penalties" and under "Plan Loans"). Those distributions are exempt from statutory distribution requirements (such as 401(k) deferrals not being able to be distributed prior to age 59-1/2), and from the direct-rollover and mandatory withholding requirements applicable to "eligible rollover distributions." They can, however, be repaid to another plan or IRA, within three years (rather than 60 days) and still be treated as having been rolled over.
Extensions of Deadlines
The Secretary of Labor has the authority to extend various deadlines under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") in the event of "terroristic or military actions." The Act expanded that authority so that it applies in the event of public health emergencies as well.
Effective and Sunset Dates
These provisions generally take effect on March 27, 2020 – the day the Act was signed, and many of them expire at the end of the year. Different effective dates for some provisions are contained in the text, above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
