Tax Provisions in the CARES Act Include Employee Retention Incentives and Retirement Plan Provisions
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed by President Trump. The CARES Act includes various tax provisions, and this update summarizes some of those key provisions related to employee and retirement benefit plan matters.
Employee Retention Credits (Section 2301 of the CARES Act)
Eligible employers are allowed a quarterly refundable credit against certain employment taxes in an amount equal to 50% of the qualified wages paid to an employee during the quarter. The maximum amount of wages paid to any employee that can be taken into account for purposes of the credit is limited to $10,000 for all calendar quarters. In addition, only wages paid after March 12, 2020, and before January 1, 2021 qualify for the credit.
To qualify as an eligible employer for a calendar quarter, either (1) the operation of the employer’s trade or business must be fully or partially suspended during the quarter due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 or (2) the quarter must occur during the period beginning with the first calendar quarter in 2020 for which gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019 and ending with the calendar quarter after the first calendar quarter for which gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year. Importantly, an employer receiving a covered loan under Section 1102 of the CARES Act (Paycheck Protection Program) is not eligible for this credit.
An eligible employer with an average number of full-time employees during 2019 in excess of 100 may receive the credit only with respect to wages paid to an employee who is not providing services (e.g., a furloughed employee). Smaller employers can seek the credit with respect to wages paid to any employee. There are employer aggregation rules that apply for purposes of determining the employer that could affect the calculation of the number of individuals employed.
Qualified wages do not include any wages taken into account for purposes of receiving credits against payroll taxes for required paid sick leave or required paid family leave under the Families First Coronavirus Response Act. However, qualified wages do include allocable expenses incurred by the employer to provide and maintain a group health plan, but only to the extent that such amounts are excluded from the gross income of employees. The Secretary of the Treasury is to provide guidance on how health plan expenses will be allocated to the employees whose wages are considered for purposes of the credit.
Delay of Payment of Employer Payroll Taxes (Section 2302 of the CARES Act)
The due date for depositing the employer’s 6.2% OASDI tax on employee wages (and corresponding amounts under the Railroad Retirement Tax Act and the self-employment tax rules) for the period beginning on March 27, 2020 and ending on December 31, 2020 is deferred. The deferred amount must be paid in two equal installments, the first of which is due on December 31, 2021, and the second of which is due on December 31, 2022.
If the employer has had debt forgiven under certain circumstances with respect to loans provided under the CARES Act (see Section 1106 and 1009 of the CARES Act), then it will not be eligible to also defer payment of the payroll taxes as described above.
Exclusion for Certain Employer Payments of Student Loans (Section 2206 of the CARES Act)
An employer may contribute up to $5,250 annually toward an employee’s qualified education loans, and such payments will be excluded from the employee’s income. The $5,250 limitation applies to both this new repayment benefit as well as other permissible educational assistance that may be provided on a tax-free basis under current law. This provision applies to payments made after March 27, 2020 and before January 1, 2021.
Retirement Plan Matters
The CARES Act includes several provisions intended to provide access by employees to their retirement savings and to provide funding relief to employers. Included among those provisions are the following:
Defined Benefit Plan Funding Relief (Section 3608 of the CARES Act)
Required contributions due during 2020 (including quarterly contributions) with respect to single-employer defined benefit pension plans are deferred until January 1, 2021. Each deferred payment must be increased by interest for the deferral period at the effective rate of interest for the plan for the applicable plan year.
Suspension of Required Minimum Distributions (Section 2203 of the CARES Act)
Required minimum distributions for 2020 from defined contribution plans (including certain plans covered by Sections 403(a) and (b) and Section 457(b) of the Code) and individual retirement accounts are waived. This includes such distributions that would have been required with respect to individuals who attained age 70½ in 2019 and who did not take their required minimum distribution last year.
Coronavirus-Related Distributions (Section 2202(a) of the CARES Act)
The CARES Act includes special provisions related to “coronavirus-related distributions,” which are distributions from certain retirement plans made on or after January 1, 2020 and before December 31, 2020 to the following individuals (“qualified individuals”): (a) an individual diagnosed with the virus SARS-CoV-2 or with COVID 19 by a test approved by the Centers for Disease Control and Prevention; (b) an individual whose spouse or dependent is diagnosed with such virus or disease by such a test; or (c) an individual who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having reduced working hours due to such virus or disease, or being unable to work due to lack of child care due to such virus or disease, or closing or reducing hours of a business owned or operated by the individual due to such virus or disease.
Up to $100,000 may be distributed to any qualified individual as a coronavirus-related distribution. The distribution is not subject to the 10% penalty tax on withdrawals made prior to age 59½, and it may be repaid to certain eligible retirement plans over a three-year period beginning on the day after the date of such distribution. Unless the taxpayer elects otherwise, any amount required to be included in income with respect to a coronavirus-related distribution can be included ratably over the three-taxable year period beginning with the year of distribution.
Loans from Qualified Plans (Section 2202(b) of the CARES Act)
Loans from a qualified plan to a qualified individual (defined as described above) made during the 180-day period beginning on March 27, 2020 are subject to higher loan limits than would otherwise apply (usually the lesser of $50,000 and 50% of the participant’s vested benefit). The limit in effect for this 180-day period will generally be the lesser of $100,000 and 100% of the individual’s vested benefit.
If a qualified individual has a plan loan (whether in existence on March 27, 2020 or taken out after such date), then any repayment due during the period beginning on March 29, 2020 and ending on December 31, 2020 must be delayed for one year. Interest continues to accrue during the delay. The one-year delay period does not count for purposes of the maximum five-year repayment period that is applicable to most plan loans.
Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.