Tag: Employees

Employers Who Continue To Pay Employees Are Aided By CARES Act

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The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides two distinct and substantial employment tax benefits for certain employers under Sections 2301 and 2302 of the Act.  Section 2301 provides a refundable payroll tax credit for certain wages paid to employees from March 13 to December 31, 2020. Section 2302 allows employers to defer the deposit of certain employment taxes for as much as two years. Taken together, these provisions provide significant relief for employers and are designed to encourage employers to continue paying wages to employees during these unprecedented times.

Section 2301 Employer Retention Credit 

Insight:

This credit is not limited to small employers. However, any employer who receives a Small Business Administration Loan under the Paycheck Protection Program of the CARES Act is ineligible to receive this employee retention credit.

Section 2301 of the CARES Act provides a payroll tax credit of up to $5,000 per employee for eligible employers. The credit is equal to 50% of “qualified wages” paid to employees during a quarter, capped at $10,000 of “qualified wages.” The credit is available for wages paid from March 13 to December 31, 2020.

Eligible Employers
To be eligible, employers must meet the following criteria:

  1. They must be carrying on a trade or business during 2020, and
  2. During the calendar quarter, either:
    1. Their operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19, or
    2. Their gross receipts for the quarter were less than 50% of the gross receipts for the same calendar quarter in the prior year. The employer will remain eligible for the credit until such calendar quarter as their gross receipts equal 80% of the gross receipts for the same calendar quarter in 2019.

Qualifying Wages
The wages that can be used to calculate the tax credit differ based on whether the employer has over or under 100 employees. For employers with 100 or more full-time employees on average during 2019 (as determined by IRC Section 4980H as enacted by the Affordable Care Act), only wages paid to employees who are not providing services qualify for the credit. But for employers with less than 100 full-time employees, all wages paid to employees, regardless of whether the employees are providing services, qualify for the credit. For purposes of the employee count, organizations that are under common control (using IRC Section 52(a) and (b)) or that are a member of an affiliated service group (using IRC Section 414(m) and (o)) will be treated as a single employer.

Qualified wages are based on the definition of wages used for FICA taxes, plus the amount paid by the employer for health plan expenses. But the wages cannot exceed what the employee would have been paid for working an equivalent amount of time during the preceding 30 days. In other words, wage increases do not qualify for the employee retention credit. The CARES Act does not explain how this limitation should be calculated, so IRS guidance would be helpful.

Any federally mandated sick or child care leave paid under the Families First Coronavirus Response Act (FFCRA) is specifically excluded from “qualified wages” for the employee retention tax credit, since employers receive a dollar-for-dollar tax credit for such paid leave wages.

Insight:

The employee retention tax credit cannot be taken on the same wages as other tax credits, such as Work Opportunity Tax Credit under IRC Section 51 or Employer Credit for Paid Family and Medical Leave under IRC Section 45S.

How to claim the credit
Claiming the employee retention credit will track the same procedures for claiming the tax credits for providing federally mandated paid sick and child care leave under FFCRA. In IR 2020-57 (dated March 20, 2020), the IRS said that employers can immediately recoup their refundable tax credits for paid sick and child care leave by reducing their total federal tax deposit amount from all employees (not just from those who are receiving wages that qualify for the credit) by the amount of eligible credit. Specifically, employers can deduct the amount of tax credit for paid sick and child care leave from: (1) federal income taxes withheld from all employees’ pay; (2) the employees’ share of Social Security and Medicare taxes; and (3) the employer’s share of Social Security and Medicare taxes. Likewise, in IR 2020-62 (dated March 31, 2020), the IRS said that employers can follow that same process to immediately recoup their employee retention tax credit. These credits will ultimately be reconciled against the total tax liabilities when employers file their quarterly Form 941 or other employment tax returns.

In addition, the IRS has published Form 7200, Advance Payment of Employer Credits Due to COVID-19, which allows employers to request a rapid refund for both the employee retention credit and the FFCRA paid sick and child care leave tax credits. Form 7200 can be filed (by fax) to request an advance of payments at any time before the end of the month following the quarter in which the qualifying wages were paid. It can be filed multiple times during the quarter if necessary. Amounts use to offset federal tax deposits as described above should not be duplicated on a request for refund on Form 7200. Ultimately, any amounts refunded using Form 7200 will also be reconciled on the employer’s quarterly Form 941 or other employment tax returns.

Insight:

The timing of the rapid refunds is still somewhat unclear. They are supposed to be processed within two weeks after receipt of Form 7200, but the IRS’s system for processing Form 7200 does not yet appear to be fully operational and it is unclear when it will be up and running. To maximize cash on hand, employers should compare whether they might be better off offsetting their accumulated tax credits from their upcoming payroll deposits or requesting the refund on Form 7200. The result may differ for each employer, depending on their facts and circumstances.

Section 2302 Employer Payroll Tax Deferral

Insight:

This payroll tax deferral is available to all employers with no size restriction. However, any employer whose Paycheck Protection Program (PPP) SBA loan is forgiven under Section 1106 of the CARES Act is ineligible for this payroll tax delay.

Section 2302 of the CARES Act permits employers to forgo timely payment of the employer portions of Social Security and RRTA taxes that would otherwise be due from March 27 through December 31, 2020, without penalty or interest charges (as confirmed by IRS Notice 2020-22, dated March 31, 2020). Employers must pay 50% of the deferred amount by December 31, 2021, and the remainder by December 31, 2022.

Insight:

If the employer utilizes this benefit and later is approved for PPP SBA loan forgiveness, it is not clear if the payment date on accumulated deferrals is accelerated to the forgiveness date or if deferrals cease on a prospective basis.

Self-employed individuals can take an equivalent tax deferral on 50% of the OASDI tax imposed on self-employment income under IRC Section 1401 and will not be penalized for failing to make estimated tax deposits on that amount during the deferral period.

To protect third parties, such as payroll service providers and certified professional employer organizations, the CARES Act requires that the customer or client bear the ultimately responsibility for the payment of any deferred taxes if they instruct the third party to defer payment.

Insight:

It is not yet clear how these two provisions would work in tandem. At the moment, it appears that an employer could defer its deposit of payroll taxes that are otherwise due from March 13 to December 31, 2020 (using the payroll tax holiday under Section 2302 of the CARES Act) and offset against those un-remitted payroll taxes the employee retention credit (under Section 2301 of the CARES Act), and/or the tax credits for paying federally mandated FFCRA sick and child care leave, which would reduce the amount that the employer would eventually need to remit (i.e., 50% of the net amount would be owed on December 31, 2021, and the remainder would be owed on December 31, 2022).

CARES Act Improves Cash Flow For Employers and Employees As It Relaxes Qualified Plan And Employee Benefit Rules

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As the number of employers and employees impacted by the novel coronavirus (COVID-19) grows each day, employers with workplace retirement plans may find that employees may be looking to those plans now more than ever to help cover financial hardships they are experiencing. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (H.R. 748) includes several relief provisions for tax-qualified retirement plans, expands health care flexible spending accounts so funds can be used for over-the-counter items, clarifies some health insurance plan questions, and, through year-end, allows employers to reimburse employees for student loan payments tax-free. This alert explains those items. Further guidance will be needed from the IRS and DOL to answer many open questions about how these relief provisions are intended to work.
 

Defined Benefit (DB) Retirement Plans

Although it is not clear, based on past practices, the IRS may require employers to make an election to use the provisions described below. Plan amendments memorializing those elections would be needed by January 1, 2022.

Funding Relief. Many employers who sponsor defined benefit (DB) retirement plans (including cash balance plans) are facing large contribution requirements due to very low interest rates and a volatile stock market. The CARES Act provides short-term relief for single-employer DB plans. Specifically, employers have until January 1, 2021, to make any minimum required contributions that were originally due during 2020. The relief applies to quarterly contributions and any year-end contributions, regardless of plan year. When paid, contributions will need to include interest for the late payment.

AFTAP Relief. Also, when determining whether Internal Revenue Code (IRC) Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year, sponsors can (but are not required to) choose to use the plan’s adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019. This could help employers avoid freezing benefits and continue offering lump sums and other accelerated payment forms in 2020, even if the plan’s funded status significantly declined due to COVID-19.

RMDs Not Waived for DB Plans. DB plans are not eligible for 2020 RMD waivers (that relief is only available for defined contribution plans (see below)).
 

Defined Contribution (DC) Retirement Plans

Coronavirus-Related Distributions and Expanded Plan Loans. Employers who have DC plans — like a 401(k) plan or 403(b) plan — can let participants take up to $100,000 in “coronavirus-related distributions” by December 31, 2020. The distributions would be exempt from the 10% early withdrawal penalty and taxable over three years. Participants can take up to three years to repay all or any part of those distributions (and the repayment would be treated as a tax-free rollover when repaid to the plan).

From March 27 to September 23, 2020 (i.e., for 180 days after the CARES Act became law), “qualified individuals” can borrow up to the lesser of $100,000 (instead of just $50,000) or 100% of their entire vested account balance (instead of just 50%). For all new or existing plan loans to an affected participant, repayments due before December 31, 2020, may be delayed one year (but interest is charged during the delay). Also, the one-year delay would not count toward the maximum five-year repayment period for plan loans.

These special “coronavirus-related distributions” and expanded plan loan provisions are available to “qualified individuals,” which means any participant who self-certifies that he or she:

  • Has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention);
  • Has a spouse or dependent who has been diagnosed with SARS-CoV-2 or COVID-19 (with a test approved by the Centers for Disease Control and Prevention); or
  • Has experienced adverse financial consequences from being quarantined, furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; closing or reducing the hours of a business owned or operated by the individual; or from other factors, as determined by the Treasury Secretary.

Insight

​When former employees no longer have payments made via payroll deductions the loans frequently go into default, resulting in taxable income for the participant at the end of the calendar quarter following the default date and a Form 1099-R would be issued showing the loan balance as taxable income for the year. However, the CARES Act appears to provide a one-year grace period for any loans that were outstanding on or after March 27, 2020. It seems that this one-year extension could delay the income inclusion for one year if a participant with an outstanding loan would otherwise default on the loan due to nonpayment including loss of employment due to a COVID-19 related business closure. To prevent such loan defaults, employers may want to amend the loan documents and/or loan policy so that affected participants can take advantage of the one-year delay even if the participant’s employment is terminated or if the participant is laid off.



Participants that don’t qualify for “coronavirus-related distributions” may qualify for a regular “hardship” withdrawal due to an immediate and heavy financial need, if the plan allows. There are many situations that qualify a participant for regular hardship withdrawals, including expenses or loss of income incurred due to a disaster declared by the Federal Emergency Management Agency, also known as FEMA. Regular hardship withdrawals cannot be repaid to the plan, must be taken into income in the year distributed, and are subject to the 10% early withdrawal penalty (although they are not subject to 20% withholding). Generally, DC plans may also allow in-service distributions for participants who are over age 59½ and may allow vested employer contributions to be withdrawn under a “5 year” or “2 year” rule, so long as the plan document allows it (or is amended to allow it).

2020 Required Minimum Distributions (RMDs) Suspended. The CARES Act waives all 2020 RMDs from DC plans (and IRAs). That waiver includes initial payments to participants who turned age 70½ in 2019 and who did not take their initial RMD last year because they had a grace period until April 1, 2020. The RMD relief does not apply to DB plan participants.

Plan Amendments. Employers can immediately implement the provisions provided by the CARES Act but generally have until the end of the first plan year beginning on or after January 1, 2022, to amend their DC plans for this relief. Amendments to adopt provisions that are not included in the CARES Act require amendment by December 31, 2020.

Insight

This deadline appears to be the same for individually designed DC plans and for IRS preapproved DC plans

What Should Retirement Plan Sponsors Do Now?

Employers who sponsor workplace retirement plans should review plan procedures to determine if any changes are needed to implement the CARES Act. For example:

  • For DC plans that will allow “coronavirus-related distributions” in 2020, a new distribution code would be needed, so that those distributions are not subject to the 10% early distribution penalty tax or the mandatory 20% withholding that would otherwise apply. If employers have more than one DC plan in their controlled group, procedures are needed so that the amount of such distributions made to any individual does not exceed a total of $100,000. These procedures would be similar to those for plans that made qualified disaster distributions over the past few years for certain hurricanes, floods or wildfires. If the DC plan will allow coronavirus-related distributions to be repaid to the plan, procedures are needed to treat those as rollover contributions and to limit the amount of such repayments to the amount of coronavirus-related distributions that the employee took from all DC plans in the controlled group.
  • If a DC plan sponsor wants to increase the maximum plan loan amounts available under the plans during 2020, existing plan loan procedures would need to be updated to allow for that increase. Plan sponsors who limit how many outstanding loans a participant can have at any time may want to increase that limit to allow participants to use the increased loan limits. Permissible one-year delays in loan repayments should be documented (such as updating amortization schedules), so that loans will not go into default. DC plans that do not currently allow participant plan loans could be amended to add them.
  • DC plan sponsors will need to update their plan operation immediately for the waived 2020 RMD distributions. Plans would use similar procedures as were used when 2009 RMD payments were waived after the 2008 economic crisis.
  • The plan’s definitions of covered compensation should be reviewed to ensure it is aligned with the sponsor’s intent, especially with regard to determining if employee assistance and paid leave will be subject to employees’ deferral elections and employer contributions.

Employers may also want to remind participants that they can change elective deferral amounts at any time in accordance with the plan document and to inform them how to take advantage of any changes in plan operations or procedures due to the CARES Act.
 

Health Plans

Tax-Free Over-the-Counter Products. The CARES Act allows employees to use funds in health care flexible savings accounts (FSAs) to purchase over-the-counter (OTC) medical products, including those needed in quarantine and social distancing, without a prescription. This change also applies to Health Savings Accounts (HSAs). Employers must generally have a “high deductible health plan” (HDHP) to have an HSA for their employees. Several years ago, the Affordable Care Act (ACA) eliminated the ability to use health care FSAs for OTC products, so the CARES Act rolls back that prohibition. The CARES Act also provides that menstrual products qualify as OTC products that can be purchased with health care FSA or HSA funds.

Insight

Employers may want to consult with their vendors to ensure that debit cards or other service delivery mechanisms are updated to accommodate this change in the law, so that employees may begin using health care FSAs or HSAs immediately to purchase COVID-19 related OTC items, such as pain relievers, hand sanitizers, cleaning products, etc.

Insight

Employers may want to remind employees of change in family circumstance requirements that might allow them to change their health care elections including pretax contributions to medical FSAs. Likewise, plan administrators should prepare for an increased number of requests for change.

Health Care Services

The CARES Act requires employer-sponsored group health plans (and health insurers) to address several health care services related to COVID-19, including the following.

COVID-19 Testing. Group health plans and insurers are required to cover approved diagnostic testing for COVID-19, including in vitro diagnostic testing, without any cost-sharing to participants, at their in-network negotiated rate (or if no negotiated in-network rate, an amount that equals the cash price for such tests as publicly listed by the provider).
 
COVID-19 Prevention. Group health plans and insurers are required to cover any qualifying preventative services related to COVID-19 without cost-sharing to participants. Plans are required to cover these services within 15 days after the date that a recommendation is made regarding the preventative service. Preventative services includes (1) any item, service, or immunization that is intended to prevent or mitigate COVID-19 and is evidence-based with an “A” or “B” rating in the U.S. Preventive Services Task Force’s recommendations or (2) an immunization with a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention.
 
Expanded Telehealth. Effective March 27, 2020, for plan years beginning on or before December 31, 2021, employers with a HDHP and an accompanying HSA can provide coverage for telehealth services before participants reach their deductible without disqualifying them from being eligible to contribute to their HSA. For calendar year plans, this provision would generally apply for 2020 and 2021. This is consistent with the IRS’s previous announcement that an HDHP will not fail to be an HDHP solely because it provides coverage for COVID-19 related diagnostic testing and services prior to participants satisfying their deductible.
 

Tax-Free Student Loan Repayments

From March 27 until December 31, 2020, employers can contribute up to $5,250 towards an employee’s student loans and such amount will be excluded from the employee’s taxable income. The employer could either pay the amount to the lender or to the employee. The amount could be applied to principal or interest for “qualified education loans” defined in IRC Section 221(d)(1). The $5,250 limit applies in the aggregate to both the new student loan repayment benefit and other employer-provided, tax-free educational assistance (e.g., tuition, fees, books).

Insight

This appears to be the first time an employer’s payment of an employee’s student loan debt can be made tax-free to employees.

Employees In Connection With COVID-19 Can Immediately Receive Tax-Free Qualified Disaster Payments From Employers

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Employers are scrambling to find ways to help their employees who are impacted by the novel coronavirus (COVID-19). Help is available. Now that the COVID-19 has been declared a national emergency,[1] Internal Revenue Code Section 139 can be used to allow employers to make tax-free payments or reimbursements to employees as “qualified disaster payments.” Below are some frequently asked questions about how employers can use Section 139 immediately to help employees cope with COVID-19.

Q1: What is a “qualified disaster payment”?
A1: Qualified disaster payments are payments that are not otherwise reimbursed by insurance made by an employer to an employee that are reasonably expected by the employer to:

  • Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and
  • Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

The payments should not include non-essential, luxury, or decorative items or services.

Insight

Wage replacement (such as paid sick or other leave) would not be covered by Section 139, so such payments would still be taxable wages and would remain subject to income and payroll tax withholding and reporting.

 
Q2: What expenses might be considered to be eligible as a qualified disaster payment with respect to COVID-19?
A2: With respect to COVID-19 circumstances, it appears that employers can pay for, reimburse, or provide in-kind benefits reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance. For example, it appears that employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (like setting up a home office, increased utilities expense, higher internet costs, printer, cell phone, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit).
 
Q3: What is the federal tax treatment of qualified disaster payments?
A3: Qualified disaster payments are federal tax-free to employees and are fully deductible to the employer. Such payments are not considered “gifts.” There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.
 
Q4: What is the state tax treatment of qualified disaster payments?
A4: Generally, state treatment for income tax withholding purposes will mirror the federal treatment of qualified disaster relief payments. That is, states generally exclude qualified disaster relief payments from the definition of wages for state income tax withholding purposes, either expressly or by applying the federal definition of “wages” for state income tax withholding purposes. However, qualified disaster relief payments may still be considered “wages” for purposes of state unemployment insurance tax. Employers should determine on a state-by-state basis whether certain income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with such payments.
 
Q5: Is there a cap on how much an employer can provide to an employee as a qualified disaster payment?
A5: No. Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees in the aggregate.
 
Q6: Must employers have a written plan to make qualified disaster payments to employees?
A6: No. Employers are not required to have a written program for qualified disaster payments. But having such a program is recommended, so employers can inform employees about the parameters of the employer’s program in the COVID-19 context. Such a program might include a description of who is eligible, what expenses will be reimbursed (perhaps up to a “per employee” maximum), how and when payments will be made, etc.
 
Q7: Are employees required to substantiate their expenses to prove that they are eligible for qualified disaster payment treatment?
A7: No. Employees are not required to provide receipts or other proof supporting their expenses. However, employers could require such proof as part of its written program, perhaps using rules similar to the long-standing IRS “accountable plan” rules.

[1] COVID-19, was designated as an emergency under the Stafford Act on March 13, 2020. Although there is some debate over the legal technicalities of that declaration, it appears that Section 139 relief has been triggered. Specifically, Rev. Rul. 2003-29 says that for Section 165(i) (which is cross-referenced in Section 139), an “emergency” is treated as a “disaster.” In addition, an IRS Chief Counsel Memorandum dated June 28, 2019, states “A Federally declared disaster includes a major disaster declaration under section 401 of the Stafford Act and an emergency declaration under section 501 of the Stafford Act.”