The Coronavirus Aid, Relief and Economic Security Act (CARES Act) passed into law on March 27, 2020. It is intended to alleviate the financial hardship of workers through a number of measures. The following are features of the new law important to employers and employees.
Enhanced Unemployment Benefits
The law allows states to tap into federal funding to provide additional weekly unemployment benefits to employees who have been laid off or furloughed without pay during the COVID-19 emergency. The Federal weekly benefit added to the state unemployment benefit is $600. Self-employed individuals would also be eligible for special unemployment benefits up to 26 weeks. The federal government would either advance or reimburse the state for the added cost of unemployment benefits. The unemployment benefits enhancement for the COVID-19 emergency covers the period through July 31, 2020.
Financial Relief and Retirement Plans
Special Distributions. The new law allows a retirement plan participant to take distributions of up to $100,000 from their benefits in the plan without penalty, if the amount is needed for COVID-19 related hardship and occurs before December 31, 2020. If the amount is repaid to the plan, IRA or other eligible retirement plan within 3 years, it is treated as a nontaxable rollover. If the participant does not repay the distribution it is taxed ratably over the three year period.
Increased Loan Amounts. The bill allows retirement plan loans up to $100,000 (instead of $50,000) if the proceeds are used for COVID-19 related expenses. Any loans now outstanding and through December 31, 2020 need not be repaid for a year. The year reprieve is disregarded in determining the 5 year loan term. Plans must be amended to allow for these special features, although the amendment may be retroactively effective.
Required Minimum Distributions. Persons who are otherwise required to take a minimum distribution from a tax qualified retirement plan, IRA, 403(a) or (b) or certain 457(b) plans may skip this year.
Defined Benefit Plan Funding Deferred. A single employer may defer minimum required contributions to defined benefit plans in 2020, until January 1, 2021. When they are paid, interest is due.
Special Paid Leave Benefits for Employees
A. Emergency Family and Medical Leave Expansion Act. The CARES Act amends new federal law already in effect through December 31, 2020 that provides some paid leave to working parents caring for their children. All employers with under 500 employees generally must provide the leave to part- or full-time employees who have been employed at least 30 days, cannot work or telework and need to take care of children whose daycare centers, other paid childcare or schools have closed because of the COVID-19 emergency.
Except for Emergency Paid Sick Leave (see below), the employer is not required to pay wages during the first 2 work weeks of the leave, but must allow employees to use PTO during that period.
After the first 2 weeks for the remainder of the FMLA limit of 12 weeks, the employer must pay at least 2/3 of the employee’s regular wages (capped at $200 a day or $10,000 in the aggregate). If an hourly worker’s schedule varies, the employer uses the employee’s average hours over the 6 months prior to leave to determine pay during the leave.
A refundable tax credit will be available to the employer to recoup the cost of this leave from payroll taxes.
B. Emergency Paid Sick Leave. During the COVID-19 emergency, private employers with under 500 employees must generally allow up to 80 hours paid medical leave for employees who must address COVID-19 to care for themselves or family. This is in addition to other leave and applies to all part- and full-time employees of the employer without a waiting period. Employers of healthcare providers and emergency responders can elect not to allow those employees to take this leave.
Caps on Pay Depend on Reason for Leave Under the new federal law, an employee caring for a child is entitled to 80 hours of leave paid at 2/3 of regular pay up to $200 per day and $2,000 in the aggregate. The remaining 10 weeks of Emergency FMLA for childcare are paid at 2/3 regular pay up to $200 a day and $10,000 in the aggregate.
An employee taking leave for his or her own COVID-19 condition (i.e. employee is subject to quarantine or isolation orders or is experiencing symptoms and is seeking diagnosis for COVID-19) has different dollar limits of $511 per week and $5110 in the aggregate for the 80 hour period.
For the remaining FMLA period there is a cap equal to 2/3 pay up to $200/day and $10,000 in the aggregate for the remaining 10 weeks of emergency paid FMLA.
Part-time employees are entitled to their average pay for two weeks.
Recouping the Cost of Leave. Even though it must comply with the emergency leave law, employers can recoup the full cost of that leave from refundable tax credits. Withholding for Social Security and Medicare from all employees is used to meet the sick leave and paid family leave payments. Rather than remitting 100% of those withholdings to IRS, the employer deducts what it has paid out to the employee on leave and remit what is left to the IRS. If an employer is paying out more in sick leave and paid family leave than it is withholding from wages, it may claim a refund payment from the IRS under an expedited refund process. The IRS has promised to issue further guidance on the mechanics of the tax credits.
C. Notice Requirement. Employers must post a notice laying out the various triggers for paid sick and leave time, the amount of time workers can take off, and the amount they of paid leave. The US Department of Labor requires employers to post the notice in a conspicuous place in the workplace or directly mail or email the notice to workers. Employers are not obligated to share the notice with laid-off workers or new applicants, but must notify new hires.
If the employer’s workplace spans multiple buildings, it must post the notice in each building.
Nontaxable COVID-19 Related Reimbursements
Under section 139 of the federal tax code, employers may make nontaxable reimbursements to employees for reasonable and necessary expenses resulting from the coronavirus pandemic. The protection of Section 139 was triggered on March 13, 2020, when President Donald Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act due to the spread of the coronavirus. Employers may now provide tax-favored financial assistance to employees who are affected by the coronavirus.
Reimbursable expenses associated with the coronavirus may include:
- Unreimbursed medical expenses including co-pays, deductibles, vitamins, and supplements;
- Increased expenses associated with being quarantined at home (e.g., increased utilities and home office expenses, as discussed below);
- Expenses associated with setting up or maintaining a home office such as enhanced internet connections, computer monitors, laptops, printers, office supplies, etc. (even if such expenses would not otherwise satisfy the home office deduction requirements);
- Housing for additional family members, (e.g., transportation and living expenses for college students returning home including duplicative meal expenses);
- Increased childcare expenses.
Three broad categories of non-reimbursable expenses are:
- Payments for expenses that are not reasonable and necessary;
- Payments that constitute an income replacement program (i.e., a payment for lost wages, lost business income, or unemployment benefits);
- Payments that are reimbursed or reimbursable by insurance or otherwise.
Employees are not required to account for or substantiate actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.
Section 139 does not impose a dollar limit nor is there any discrimination testing required. Qualified disaster relief payments are excluded from gross income and wages for payroll tax purposes. In addition to being exempt from payroll taxes, such payments are not subject to information reporting on either Forms W-2 or Forms 1099-MISC.
Qualified disaster relief payments should be fully deductible. Even though the payments are neither taxable wages nor gross income, employers may reasonably take the position that the payments remain fully deductible to the same extent that they would have been if they were otherwise included in gross income or taxable wages.
About the Author: Evelyn Haralampu
Evelyn Haralampu is a partner at Burns & Levinson. She specializes in assisting businesses, executives, and non-profit and governmental organizations in designing employee benefits programs and executive compensation to help clients meet their objectives, while saving and deferring costs through tax efficiencies. Evelyn has served on the ABA’s Subcommittee on Government Submissions, recommending regulatory policies to the IRS, and is a member of the Tax Council of the Massachusetts Bar Association, which influences the development of tax legislation in the Commonwealth. She can be reached at firstname.lastname@example.org or 617.345.3351.