LawFlash

CARES Act Brings Compensation, Benefits, and Payroll Tax Changes

April 1, 2020 (Payroll Tax and Fringe Benefit Provisions section updated April 22, 2020; Executive Compensation Provisions section updated April 6, 2020)

With broad bipartisan support, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or Act), signed into law by the president on March 27, provides a $2 trillion economic stimulus and contains numerous and significant retirement plan, health plan, and payroll tax and fringe benefit changes to help businesses and individuals.

Among other things, the CARES Act provides a new coronavirus-related distribution option for retirement plans, the ability for high deductible health plans to cover telehealth and other remote services without deductibles or copays, an opportunity for businesses to delay the payment of their employment taxes in 2020, and significant limitations on executive compensation for borrowers under the $500 billion loan program established by the CARES Act. Some changes in the CARES Act are mandatory and others are optional. Businesses will need to digest the CARES Act quickly to determine how to comply with required provisions of the Act and to evaluate whether adopting the optional provisions may be desirable.

What follows is a summary of the retirement plan, health and welfare, payroll tax and fringe benefit, and executive compensation provisions of the CARES Act, along with our comments and considerations for businesses evaluating the changes brought about by the new law. A separate LawFlash will be issued addressing the payroll protection program in § 1102 of the Act, which provides the authority for the Small Business Administration (SBA) to make guaranteed loans to small businesses, nonprofit organizations, veterans organizations, or Tribal business concerns with no more than 500 employees (or more if the SBA applies a larger standard for the industry), and the loan forgiveness program in § 1106 of the Act, which makes certain payroll protection loans available for forgiveness.

Additional LawFlashes and analysis will be forthcoming on other provisions of the law.

Retirement Plan Provisions

Special Coronavirus Distribution Option for Eligible Retirement Plans (§ 2202(a))

Under the Act, an individual may take "coronavirus-related distributions" (as defined below) of up to $100,000 (in the aggregate) from their IRAs and from employer-sponsored retirement plans (tax-qualified plans, including 401(k) plans, 403(b) plans, or eligible 457(b) plans) from which coronavirus distributions are available. Coronavirus distributions must be taken between January 1, 2020, and December 31, 2020. Moreover, an individual can repay any coronavirus-related distribution during the three-year period beginning the day after the distribution date, and the repayment will be treated as a 60-day rollover in a direct trustee-to-trustee transfer. For these purposes, a "coronavirus-related distribution" is a distribution to an individual

  • who is diagnosed, or whose spouse or dependent is diagnosed, with SARS-CoV-2 or coronavirus (COVID-19) using a Centers for Disease Control and Prevention (CDC)-approved test; or
  • who experiences adverse financial consequences because of an inability to work due to quarantine, furlough, lay off, reduced hours, loss of child care, or the closing or reduction of hours of a business owned or operated by the individual because of SARS-CoV-2 or COVID-19.

Plan administrators can rely on the individual's certification that he or she meets the eligibility requirements for a coronavirus-related distribution.

Coronavirus distributions are eligible for favorable tax treatment. In particular, coronavirus distributions are exempt from any application of the 10% early-distribution penalty tax and are not treated as eligible rollover distributions for purposes of the mandatory 20% withholding, the requirement that the plan provide a 402(f) special tax notice and the requirement that the recipient must be offered an opportunity to make a direct rollover of the distribution. Further, unless a recipient elects otherwise, any income from the coronavirus distributions will be subject to federal income tax ratably over three years.

Any necessary retirement plan amendment to add a coronavirus distribution provision must be adopted by the end of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans) or, for governmental plans, after January 1, 2024 (December 31, 2024 for calendar year plans).

Considerations and Comments

Coronavirus-related distributions are not mandatory. As such, to the extent distribution or withdrawal features are not already available to active or terminated participants, retirement plan sponsors will need to consider whether to amend their retirement plans to make coronavirus-related distributions available. While some participants experiencing financial difficulties may be eligible to access their retirement plan accounts through existing plan features (e.g., hardship withdrawals; see our blog post describing hardship withdrawal opportunities), other participants may not or the available distribution/withdrawal features may not be sufficient to address participants’ financial needs and difficulties. In addition, the tax-favored treatment available to coronavirus-related distributions and participants' ability to repay them to the plan potentially makes them more attractive than existing plan features. Still, plan sponsors should consider the longer term effect that offering these coronavirus distributions may have on participants’ retirement savings and, as part of that consideration, could decide to set a maximum distribution limit for a plan of less than the full $100,000 permitted under the law. While participants will have the opportunity to repay coronavirus distributions to their retirement plans, it’s uncertain whether participants will take advantage of this repayment feature to restore their retirement plan accounts. In making these determinations, retirement plan sponsors also will want to consider the impact and interplay of offering (or not offering) expanded retirement plan loans as described in the section below.

While we understand that recordkeepers are gearing up to administer coronavirus distributions, there are a number of administrative issues and complexities that will need to be addressed by retirement plan sponsors and recordkeepers alike, including the substantiation requirements (if any) for individuals electing and certifying the existence of qualifying criteria, administration of the repayment provisions (including whether participants can make up the taxes that are paid), and Form 1099-R reporting of the distributions (including whether a single Form 1099-R will be used). Regulations or other guidance likely will be necessary to address these issues.

Retirement Plan Loan Limits Expansion (§ 2202(b))

The Act increases the tax-qualified retirement plan and 403(b) plan loan limit from the current limit of the lesser of $50,000 and 50% of the vested account balance to the lesser of $100,000 or 100% of the vested account balance for participants who meet the requirements to receive a “coronavirus-related distribution” (as described in the Coronavirus Distribution section above). This increase is effective for loans made within 180 days following the passage of the Act. 
In addition, the due date for any plan loan repayments that are otherwise due between the date of enactment and December 31, 2020, must be extended for qualified individuals (as described above) by one year (with interest), and subsequent loan repayments may be “appropriately adjusted” to reflect the delay. This extension applies even if the term of the loan is extended beyond five years (i.e., into a sixth year).

A plan amendment to add this provision must be adopted by the end of the first plan year beginning on or after January 1, 2022 (December 31, 2022, for calendar year plans) or, for governmental plans, after January 1, 2024 (December 31, 2024 for calendar year plans).

Considerations and Comments

As with the coronavirus distribution feature described in the section above, expanded plan loans are optional and not mandatory. As such, retirement plan sponsors will need to consider whether to offer these expanded plan loans to participants. In making this determination, plan sponsors may consider that plan loans (unlike coronavirus distributions) will be repaid to the plan and may result in less “leakage” of employees’ retirement savings.

The one-year delay of loan repayments for existing loans (and, seemingly, new loans taken during the 180-day period following passage of the Act) is mandatory, and retirement plan sponsors and recordkeepers will need to apply this feature immediately. Suspending the loan repayments in the near term may not be as straightforward as would seem, as it is not entirely clear how to determine whether a participant has met the requirements for the loan repayment suspension. That is, although the eligibility requirements are the same as those for a "coronavirus-related distribution," the Act provides no indication of how plan sponsors and recordkeepers are expected to determine who meets that criteria in connection with the loan repayment suspension (although the self-certification method that is used for coronavirus distributions would seem to be a reasonable method in the absence of other guidance). In addition, it is not entirely clear how loan repayments should be “appropriately adjusted” to reflect the delay and regulations, or other interpretative guidance likely will be necessary. Further, the Act does not directly address prohibited transaction issues or exemptions raised by existing US Department of Labor (DOL) rulings. Again, further guidance likely will be necessary to address these issues.

2020 Required Minimum Distribution Waiver for Defined Contribution Plans and IRAs (§ 2203)

Similar to a required minimum distribution (RMD) waiver that was available in 2009 during the Great Recession, the Act allows tax-qualified defined contribution retirement plans, 403(b) plans, IRAs or eligible 457(b) plans to postpone by one year (1) all required minimum distributions that must otherwise be made in 2020 and (2) all required beginning dates that would otherwise occur in 2020.
In the case of a defined contribution plan, an amendment to add this provision must be adopted by the end of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans), or, for governmental plans, after January 1, 2024 (December 31, 2024 for calendar year plans).

Considerations and Comments

Retirement plan sponsors that adopt this feature will provide participants and beneficiaries with an opportunity to leave amounts in their retirement accounts and avoid taking required minimum distributions in 2020 during a period of steep market declines. However, participants and beneficiaries who wish to receive a distribution will remain eligible to do so, and the distribution will be exempt from certain other requirements in the code. Specifically, the distribution is not subject to the mandatory 20% withholding; the plan does not need to provide a 402(f) special tax notice; and the recipient does not need to be provided the opportunity to make a direct rollover of the distribution.

DOL Ability to Postpone Deadlines for a Public Health Emergency 2020 (§ 3607)

The DOL may extend certain deadlines under the Employee Retirement Income Security Act of 1974, as amended (ERISA) (e.g., for providing required notices), by up to one year in certain circumstances (e.g., terroristic or military action). The Act expands this list of circumstances to include a public health emergency, as declared by the Secretary of Health and Human Services.

Considerations and Comments

While it is not required to do so, the DOL could choose to exercise its authority under this provision to postpone deadlines in connection with the COVID-19 pandemic. This could include welcome relief from any manner of deadline, such as notice deadlines (e.g., annual fee disclosures, annual funding notices, etc.) or even deadlines for returns (e.g., Form 5500 filing deadlines).

Changes to Single-Employer Defined Benefit Pension Plan Funding Rules for 2020 (§ 3608(a))

If minimum required contributions (including quarterly contributions) to a single-employer defined benefit pension plan would otherwise be due during calendar year 2020, the Act extends the due date for such contributions to January 1, 2021. However, the delayed contributions must be increased by interest at the plan’s interest rate for the plan year in which the payment is made.

Considerations and Comments

This feature provides welcome temporary relief and flexibility to cash-strapped pension plan sponsors that otherwise would have owed minimum required contributions during 2020. However, the Act’s general directive to accrue interest on the delayed contribution at the “plan’s interest rate” is not entirely clear, as plans often use different interest rates for different purposes. Further guidance likely will be necessary to identify the applicable interest rate that should be used for these purposes.

Use of Pre-2020 AFTAP for Single-Employer Defined Benefit Pension Plans (§ 3608(b))

The Act gives sponsors of single-employer defined benefit pension plans the option of using the plan’s adjusted funding target attainment percentage (AFTAP) for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include calendar year 2020. This flexibility may allow employers to avoid the benefit accrual and payment restrictions under Section 436 of the Internal Revenue Code (Code) that otherwise would apply based on a plan’s AFTAP falling below 80% or 60%, as applicable. For example, plans with an AFTAP below 80% can only offer partial lump sum distributions, plans with an AFTAP below 80% may not adopt amendments improving benefits unless the improvements are immediately funded, plans with an AFTAP below 60% must freeze benefit accruals, plans may not pay unpredictable contingent event benefits such as plant shutdown benefits unless funded to an AFTAP of at least 60% after taking into account the payment of the benefit, etc.

Considerations and Comments

This feature provides welcome relief and flexibility to single employer pension plan sponsors with funding levels that dip below the applicable AFTAP percentage levels as a result of steep declines in investments and still historically low discount rates. There are some uncertainties and ambiguities about how this feature may apply to fiscal year plans and whether the discretion to apply (or not apply) the optional AFTAP adjustment in some instances may be prohibited by the Code’s anti-cut-back rules. Further guidance likely will be necessary to address these issues.

Morgan Lewis Resources for Retirement Plan Provisions

Matthew Hawes, Pittsburgh
Lisa Barton, Boston
Brian Dougherty, Philadelphia
Marla Kreindler, Chicago
R. Randall Tracht, Pittsburgh
Claire Bouffard, Pittsburgh

Health & Welfare Plan Provisions

Coverage of Diagnostic Testing for COVID 19; Pricing of Diagnostic Tests (§§ 3201 and 3202)

The Families First Coronavirus Response Act (FFCRA), which became effective March 18, 2020, requires a group health plan to cover in vitro diagnostic products for the detection of SARs-CoV-2 or the diagnosis of the virus that causes COVID-19 and to cover the cost of healthcare provider visits and services that are related to the testing or the evaluation of an individual's need for a test. Coverage must be provided at no cost-sharing to participants during the period of the COVID-19 emergency. The Act expands the FFCRA's coverage of in vitro diagnostic tests to include tests that are approved, cleared, or authorized by the US Food and Drug Administration (FDA), including tests that are in development under the auspices of the FDA, states, and the US Department of Health and Human Services (HHS).

With respect to the tests and services mandated by the FFCRA, the group health plan or insurer must reimburse the provider based on the negotiated rate in effect before the emergency or, if there is no negotiated rate, the cash price for the service listed by the provider on a public internet site (or a lower, negotiated rate). Providers that do not publish a cash price for their COVID-19 diagnostic test can be subject to monetary penalties by HHS.

Considerations and Comments

The expansion of FFCRA's requirement to cover in vitro diagnostic products is an important clarification to the law as more additional SARs-CoV-2 and COVID-19 diagnostic tests are developed. Sponsors of group health plans should reach out to their insurers and third-party administrators to ensure that their group health plan complies with these mandates. Although the Act expands the types of tests that are covered by the FFCRA, it does not address how employers can offer diagnostic tests at no cost-sharing to individuals who do not enroll in or are not eligible for group health plan coverage without triggering issues related to Affordable Care Act (ACA) mandates such as preventive care.

Group Health Plan and Health Insurance Issuers Coverage of Coronavirus Preventive Services and Vaccines (§ 3203)

Under the Act, group health plans and health insurance issuers offering group or individual health insurance are required to cover any “qualifying coronavirus preventive service” as a preventive health service under Section 2713 of the Public Health Services Act. A qualifying coronavirus preventive service is an item, service, or immunization that is intended to prevent or mitigate COVID-19 that has received an “A” or “B” rating under the recommendations of the United States Preventive Services Task Force (USPSTF) or has a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention (CDC). Coverage of the qualifying coronavirus prevention service must be offered by the 15th business day after the recommendation is made by appropriate authority.

Considerations and Comments

Although group health plans are required to offer this coverage, qualifying coronavirus preventive services have not yet been developed. Consequently this requirement will not become an issue until a qualifying coronavirus preventative service has been developed, and its use has been recommended by the USPSTF or the Advisory Committee on Immunization Practices of the CDC. Nevertheless, sponsors of group health plans will need to reach out to their insurers and third-party administrators to ensure that their group health plan is ready to provide this coverage when it becomes required.

Disclosure of Records Related to Substance Use Disorder (§ 3221)

The Act makes helpful changes to align the substance abuse disorder confidentiality rules in 42 CFR Part 2 regulations (Part 2) with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). In particular, this provision describes how covered entities, including group health plans, have to safeguard protected health information for participants undergoing substance use disorder treatment by requiring that authorization be obtained before protected health information can be used or disclosed.

Considerations and Comments

The Secretary of HHS has been ordered to provide updated regulations within one year of the enactment of the Act so that covered entities or other entities creating or maintaining these substance use disorder records can provide plain language notice to patients regarding privacy practice, such that compliance with the requirements of § 3221 is possible not later than 12 months after the date of enactment.

HIPAA Guidance Related to the COVID-19 Public Health National Emergency (§ 3224)

The Act instructs HHS to issue, within 180 days of the enactment of the Act (September 23, 2020), guidance regarding sharing of protected health information during the COVID-19 public health/national emergency, including compliance with HIPAA and policies that might come into effect during such emergencies.

Considerations and Comments

Many uncertainties exist with respect to the sharing of protected health information during a pandemic, even though sharing of information could be critical to preventing the spread of disease. The additional insight provided by HHS through the regulations will allow much-needed clarity into what information may be disclosed during the COVID-19 public health/national emergency.

No Deductible for Telehealth Services Offered Under HDHP (§ 3701)

The Act allows a High Deductible Health Plan (HDHP) to cover all telehealth and other remote care services prior to an individual reaching the deductible under the HDHP. This change is effective on the date of enactment and applies for plan years beginning before January 1, 2022.

Considerations and Comments

Under current law, a health plan cannot be an HDHP unless it has a minimum deductible of $1,400 for self only coverage and $2,800 for family coverage (in 2020). Thus, without the Act, health plan coverage of telehealth services, like all other medical services, generally must be subject to applicable deductibles before a HDHP can pay for any benefits. As discussed in our prior blogpost, the Internal Revenue Service (IRS) provided relief in Notice 2020-15 that allows health plans to provide first dollar coverage (i.e., no deductible) for COVID-19 testing and treatment. The Act expands upon Notice 2020-15 and permits a plan to provide all telehealth and other remote care services (e.g., telehealth services for physical therapy, behavioral health, dermatology, etc.), without a deductible, without causing an HDHP to fail to be an HDHP for plan years beginning before January 1, 2022. 

Encouraging the use of telehealth services may help protect individuals from exposure to COVID-19 by allowing access to medical advice in the home, in addition to potentially reducing the overall cost of care for individuals. Sponsors of group health plans should consult with their third-party administrators and insurers about the availability and implementation of telehealth and other remote care services and whether such services should be covered without a deductible. However, sponsors should keep in mind that the current relief applies only for plan years beginning before January 1, 2022, and it is unclear whether this provision will become permanent. 

Inclusion of Certain Over-the Counter Medical Products as Qualified Medical Expenses (§ 3702)

Under current law, as modified by the ACA, Flexible Spending Accounts (FSA), Healthcare Savings Accounts (HSA), Health Reimbursement Arrangements (HRA) and Archer MSAs may only pay or reimburse on a nontaxable basis for medicines or drugs that are prescribed, other than insulin. The Act eliminates the prescription requirement for medicines and drugs and also allows menstrual care products to be paid for or reimbursed from an FSA, HSA, HRA, or Archer MSA as an expense for medical care. This change is effective for payments after 2019 from an HSA or Archer MSA and for expenses incurred after 2019 with respect to an FSA or HRA.

Considerations and Comments

It is unclear how soon debit cards (and the internal controls for eligible expenses) can be updated to reflect the expansion of permissible expenses and permit point of sale debit card use. Employers should consult with their third-party administrators to discuss the timeline for implementing these changes. In the interim, participants may have to submit claims for reimbursement after their purchase. It should be noted that the expansion of permissible expenses will not trigger a change in status under Section 125 of the Internal Revenue Code (Code), and individuals cannot start or increase Health FSA contributions as a result of the expansion in eligible expenses. An HSA is not subject to Section 125 of the Code, however, and individuals can increase HSA contributions or begin contributing to an HSA to receive tax-favored reimbursements for these expenses as long as they are participating in a High Deductible Health Plan. 

Morgan Lewis Resources for Health & Welfare Plan Provisions

Andy Anderson, Chicago
Michelle McCarthy, Los Angeles
Sage Fattahian, Chicago
Lindsay Goodman, Chicago

Payroll Tax and Fringe Benefit Provisions

Exclusion for Certain Employer Payments of Student Loans (§ 2206)

The Act expands the Code Section 127 "educational assistance" income and wage exclusion to cover certain pre-existing student loan debt (principal and interest), whether paid directly to employees or to lenders, to the extent the payments are made between March 27, 2020, and December 31, 2020. Qualifying student loans are limited to higher education expenses that an employee incurred within a reasonable period of time of taking classes, and provided that the employee carried at least a half-time course load. The repayments do not extend to loans from any qualified employer plan (such a 401(k) loan). Prior to enactment, employers could only make nontaxable "educational assistance" payments to defray educational expenses that employees incurred while employed by (or on leave from) the reimbursing employer. The Act does not otherwise change the Code Section 127 "educational assistance" exclusion. As a reminder, this means that the following rules continue to apply:

  • The maximum exclusion remains capped at $5,250 per employee (including any debt forgiveness in 2020 allowable under the Act).
  • In order for payments to qualify for exclusion, an employer must memorialize the terms of any "educational assistance" offerings in a separate written plan (although the IRS has never issued any “model plans” or explained how detailed any plan must be).
  • An employer must give reasonable notice to employees of the program's existence and as to the program's terms.
  • Qualifying "education" broadly includes "any form of instruction or training that improves or develops the capabilities of an individual" and is "not limited to courses that are job-related or part of a degree program."
  • Qualifying educational assistance can be provided to current employees (whether actively employed or on leave), as well as any former employees who retired, became disabled, were laid off, or who terminated voluntarily to pursue certain post-termination education, such as vocational instruction and training. Spouses and dependents may not participate in a qualifying educational assistance program (nor can their loans be forgiven under this new provision if the employee is in such a program).
  • Educational assistance programs that discriminate in favor of highly compensated employees are not covered by the exclusion.
  • Educational assistance programs may not give employees the choice between educational assistance or other taxable income items (cash, for example).

Considerations and Comments

Many companies have been looking for ways to assist employees with servicing pre-existing student loan debt under tax-favorable terms for employees. The Act now permits an employer to repay up to $5,250 of an employee's pre-existing student loan debt (principal and interest) on a tax-free basis. Relief under § 2206 of the Act is available to all employees, regardless of whether an employee's ability to repay student loans has been impacted by COVID-19. However, please note that care should be taken to implement new or update existing employer-provided educational assistance program materials in writing, and not to offer loan forgiveness through a wage reduction arrangement. Moreover the change applies only to payments made between March 27, 2020 (the date of enactment) and December 31, 2020. It is not clear whether any special information reporting will apply to this education debt forgiveness, since under existing law, section 127 benefits are not reportable on employee Forms W‑2).

Employee Retention Credit for Employers Subject to Closure Due to COVID-19 (§ 2301)

The Act provides up to $5,000 in refundable tax credits per eligible employee for certain “eligible employers” (1) whose trade or business operations fully or partially shut down due to COVID-19-related government orders, or (2) who experience +50% decline in gross receipts (or operations, for tax-exempt employers) as compared to the corresponding calendar quarter in 2019. The credit applies to 50% of the “qualified wages” (defined below) paid to employees between March 13, 2020 and December 31, 2020. Qualifying employers may claim a refundable credit against the employer share of Old-Age, Survivors, and Disability Insurance (i.e., Social Security) taxes imposed on FICA wages and RRTA compensation (at the 6.2% tax rate) paid to employees as a result of COVID-19-related shutdowns and slowdowns. Any credit must first be reduced by any credits received for qualified sick or family medical leave paid under the FFCRA.

For employers with more than 100 full-time employees (determined using the Affordable Care Act's measure of 30 hours per week) during 2019, "qualified wages" available for tax credit are capped at $10,000 (thus limiting the potential 50% credit to $5,000), and include wages paid (including health benefits) to employees who are not providing services due to the shutdown or slowdown circumstances described above, provided that the wage payments during the leave period do not exceed the amount of wages that an employee would have received for an equivalent period of active work, measured by wages received during the 30-day period prior to the shutdown or slowdown. For eligible employers with 100 or fewer full-time employees, 50% of all employee wages up to $10,000 per employee, including health benefits, qualify for up to a $5,000-per employee tax credit, whether or not the wages were paid during a shutdown or slowdown. The Act also prohibits any double benefit for wages that an employer previously claimed a tax credit for under the section 7001 and 7003 relief provisions of the FFCRA.

Considerations and Comments

This tax credit provides some relief from the employment tax burden for employers affected by COVID-19 crisis, providing a tax incentive to retain their employees through the crisis (§§ 1102 and 1106 of the Act also provide incentive to continue to pay wages and furlough benefits through the Paycheck Protection Program and the associated loan forgiveness program ). However, there are a number of items that are still unclear, including (1) how full and partial suspensions will be determined; (2) how the credit applies to large employers that provide reduced hours for employees; and (3) whether the credit applies to any new employees added after enactment. In addition, the FFCRA provided a similar refundable tax credit against OASDI taxes, but then the IRS in IR 2020-57 greatly expanded the credit to cover other federal employment taxes (i.e., federal income tax withholding, employer portion of Medicare tax, and employee portion of Social Security and Medicare tax). It is unclear whether the IRS will likewise expand the CARES Act § 2301 tax credit to include additional employment taxes, in light of the fact that § 3606 of the ACT (discussed below) authorized the IRS to adopt such an expansion, but only for the OASDI advanced tax credit provided under the FFCRA for certain sick and family medical leave pay. If Congress had intended for the IRS to provide a similar expansion of the § 2301 of the CARES Act employee retention credit to cover more than just employer-share OASDI taxes, presumably Congress would have instructed so in § 3606 of the CARES Act.

Delay of Payment of Employer Payroll Taxes (§ 2302)

The Act provides that FICA employers, RRTA employers, and RRTA employee representatives may delay payment of 100% of the Old-Age, Survivors, and Disability Insurance (i.e., Social Security) taxes imposed on FICA wages and RRTA compensation (at the 6.2% tax rate) where such taxes are due between enactment of the Act on March 27, 2020, and December 31, 2020. Similarly, self-employed individuals may delay payment of 100% of Social Security taxes on self-employment income (at the 6.2% tax rate) paid between enactment of the Act and December 31, 2020. The deadline for paying the first half of the deferred taxes is December 31, 2021, and the deadline for paying the remaining 50% of taxes is delayed until December 31, 2022. These delay relief provisions are available regardless of workforce size, unlike similar relief provided under the FFCRA.

In the event that an IRC 3504 agent or an IRC 3511 certified professional employer organization is directed to defer payment of deferrable Social Security taxes under the Act by a common law employer (a/k/a "customer"), the Act places sole liability for any deferred taxes on the customer. The Act is silent as to tax liability in situations involving an IRC 3401(d)(1) statutory employer arrangement.

Considerations and Comments

Delayed payment of 50% of qualifying Social Security taxes for twenty-one months (until December 31, 2021) and the other 50% for 33 months (until December 31, 2022) should free up cash as needs arise during and following the COVID-19 crisis through the end of 2022. It is not clear whether the delay can apply to taxes that are ultimately determined to be “due” for employment tax audits relating to years prior to 2020 that conclude during the remainder of 2020. It is also unclear how employers will differentiate on quarterly Forms 941 between the employer-share OASDI taxes that have been deferred under this provision, and the employer-share OASDI taxes that will never be paid as a result of applicable FFCRA and CARES Act tax credit provisions. The ambiguity will not arise for the FFCRA credit until the second quarter of 2020, because that credit cannot be claimed for wages paid before April 1 (according to an IRS Notice released March 27). However, this question could arise for the CARES Act credit, and thus this ambiguity over whether to characterize an unpaid 6.2% tax as “OASDI deferral” or “OASDI Credit” is an open question that will be confronted by many employers when filing Form 941 for the first quarter of 2020 (currently due on April 30, 2020).

Temporary Relief for Federal Student Loan Borrowers (§ 3513)

The Act directs the Secretary of Education to suspend, through September 30, 2020, all payments due for federal student loans that are held by the US Department of Education. The relief is limited to certain federally owned loans. During the suspension, no interest will accrue, and the Secretary is directed to suspend all involuntary collection activity on federal student loans, including wage garnishments and reductions of tax refunds and Social Security payments. The student loan payment relief provided in § 3513 of the Act is separate and distinct from the IRC 127 employer-provided student loan assistance relief provided in § 2206 of the Act (discussed above).

Within 15 days of the Act's enactment (April 11), the Secretary is required to notify affected borrowers of (A) any applicable suspension of payments and interest, (B) actions taken to suspend garnishments or other collection actions, (C) the option to continue making payments towards principal, and (D) that this relief is temporary. In addition, the Act generally keeps borrowers in the same position they otherwise would be in for purposes of qualification for any loan forgiveness program or loan rehabilitation program, and indicates that taking advance of the relief will not be negatively reflected on a credit report. Beginning on August 1, 2020, as the end of the repayment and interest holiday, the Act also directs the Secretary to provide notice to borrowers (by mail, telephone or electronic communication), no less than six times, that the normal student loan repayments will resume, and that the borrower has the option to enroll in income-driven repayment.

Considerations and Comments

The Act's temporary loan repayment and interest holiday codifies and extends the US Department of Education's previously announced 60-day suspension of federal loan repayments and the President's March 13 announcement of a temporary waiver of interest on federal student loans. However, additional guidance is needed to inform eligible borrowers subject to involuntary collection efforts and effected third parties holding borrower funds (e.g., employers processing employee-borrower garnishment orders) when and how to trigger payment suspension relief provided for by the Act or otherwise elect to continue making student loan repayments. The suspension of garnishment collections on federal student loans is likely to present challenges to employers that are unlikely to know which of their existing garnishment orders is eligible for suspension, particularly in light of the numerous private collection agencies servicing federal student loan collections and the fact that private student loans are not covered by the Act. Although the Department of Education is required to provide borrowers with notice of the actions it has taken to suspend garnishments and other involuntary collections, there is no indication of how or when employers will be directed to temporarily cease complying with those orders. Pending formal notice from the Department of Education or the collection agency, employers might consider requesting a copy of the notice that the Act directs the Secretary of Education to provide to affected borrowers by April 11.

Advanced Refunding of Credits (§ 3606)

The FFCRA provides a tax credit for employer share of OASDI or RRTA tax for each calendar quarter equal to 100% of certain qualified sick and family medical leave wages paid by any qualifying employer for such calendar quarter. The Act amends the FFCRA to authorize the IRS to advance qualifying refundable credits on a quarterly basis according to rules and procedures proscribed by the IRS, whereas before amendment, the IRS could only refund tax credits after the close of each calendar quarters upon an employer's Form 941 filing.

Considerations and Comments

Permitting advanced refunds of FFCRA tax credits qualified sick and family medical leave wages should accelerate reimbursement to employers who pay qualified sick and family medical leave wages. However, because Congress provided statutory authority enabling the IRS to pay an “advanced credit refund” only for the FFCRA credits, this may make it less likely for the IRS to apply a similar “advanced credit refund” for the CARES credits provided under §2301, discussed above.

Morgan Lewis resources

Executive Compensation Provisions

Limitation on Certain Officer and Employee Compensation Tied to Certain Loans (§§  4003 and 4004)

Under the Act, a passenger air carrier (or certain related business such as businesses approved by the Federal Aviation Administration (FAA) to perform aircraft maintenance and ticket agents), cargo air carriers, or other business critical to national security (eligible business) that receives a loan or loan guarantee under the $500 billion loan fund established under § 4003, Emergency Relief and Taxpayer Protections, of the CARES Act must agree to limit the total compensation and any severance pay of certain officers and employees during a restriction period as described below.

In addition, a company that takes a loan or loan guarantee as a “direct loan” (i.e., a bilateral loan agreement that is entered into directly with an eligible business as a borrower that is not part of a syndicated loan, loan originated by a financial institution in the ordinary course of business or a securities or capital markets transaction) under the $454 billion expanded loan provisions of § 4003(b)(4) must agree to limit the total compensation and any severance pay of certain officers and employees during a restriction period as described below.  For this purpose, an eligible business is one that has not otherwise received economic relief in the form of loans or loan guarantees provided under the CARES Act.

Under these provisions, if a business takes a loan or loan guarantee under §4003 of the Act, the business must agree to limit the total compensation and any severance pay of certain officers and employees during the period beginning on the date the loan or loan guarantee agreement is executed and continuing until the end of the one-year period after the loan or loan guarantee is no longer outstanding (restriction period). Under this limitation, officers and employees of an eligible business who earned more than $425,000 in "total compensation" in calendar year 2019 would be prohibited from receiving during the restriction period:

  • total compensation during any 12 consecutive month period that exceeds the total compensation the officer or employee received during the 2019 calendar year; and/or
  • severance pay or other benefits upon termination of employment that exceed two times the maximum total compensation the officer or employee received during the 2019 calendar year.

Collectively bargained employees would not be subject to limitations if their compensation is determined under an existing collective bargaining agreement that was in place before March 1, 2020.

In addition, no officer or employee of the eligible business who received more than $3 million in total compensation in calendar year 2019 may receive total compensation in any 12 consecutive month period during the restriction period that exceeds the sum of $3 million plus 50% of the excess over $3 million that he or she received in total compensation during calendar year 2019. For example, an officer who received $6 million of compensation in calendar year 2019 could not receive more than $4.5 million in any 12 consecutive month period during the restriction period.

For purposes of these limitations, “total compensation” includes “salary, bonuses, awards of stock and other financial benefits.”

Considerations and Comments

Eligible businesses  that are considering borrowing or obtaining loan guarantees under § 4003, Emergency Relief and Taxpayer Protections, of the CARES Act should consider the impact of these limitations as part of any decision to take advantage of the loans and loan guarantees. As part of any decision, the eligible business will want to consider its authority to unilaterally reduce salary, equity awards, and bonuses and whether there are legally permissible methods of deferring payments, subject to the requirements of Code Section 409A. Reductions in compensation to comply with the Act could have contractual implications (such as "good reason" clauses in employment agreements) and retention and recruitment implications.

Many important questions are left unanswered by the Act, which will require additional guidance. For example, the Act contains no guidance on how an employer will reduce the total compensation in order to satisfy the requirements of § 4004, how and when "stock awards (e.g., restricted stock units, performance units, stock options, etc.) would be valued, what constitutes "other financial benefits," or whether "total compensation" is determined before or after deductions, deferrals and other adjustments. Moreover, it is not clear whether deferral opportunities may be available to avoid possible forfeiture of total compensation and/or severance pay during the restriction period or how these restrictions apply to officers and employees who were hired during or after the 2019 calendar year. Again, further guidance is necessary to address these issues.

Limitation on Certain Officer and Employee Compensation Tied to Federal Aid for Air Carriers and Related Contractors (§ 4116)

Eligible air carriers and related contractors receiving financial assistance under the “Air Carrier Worker Support” portion of the CARES Act must agree to limit the total compensation and any severance pay of certain officers and employees. These limitations are generally the same as those described above with respect to § 4004 (i.e., the limitations apply to officers and employees who had total compensation in calendar year 2019 of more than $425,000 and the Act restricts the total compensation and severance pay that can be paid during any 12-month period the limitations are in effect). However, the limitations under § 4116 apply only during the two year period from March 24, 2020, through March 24, 2022 (and the exception for collectively bargained employees applies with respect to existing collective bargaining agreements entered into before the enactment of the CARES Act). 

Considerations and Comments

The discussion above concerning § 4004 and our considerations and comments on those restrictions are equally applicable to the limitations under § 4116. And, once again, additional guidance is necessary to address the uncertainties associated with the limitations under this section of the Act.

Morgan Lewis Resources

Mims Maynard Zabriskie, Philadelphia
David Zelikoff, Philadelphia

What Can be Expected Next?

The changes and relief rendered by the CARES Act are unprecedented. Plan sponsors, third-party providers, and governmental regulators alike will be scrambling in the upcoming weeks to digest and implement the CARES Act. Still, some lawmakers have indicated a desire to pass additional stimulus legislation. Democratic lawmakers previously unveiled legislation, on March 23, reflecting the party’s priorities in addressing the COVID-19 pandemic and associated health and economic impacts. Republican lawmakers have encouraged Congress to delay further action and first allow for the implementation of the CARES Act.

Regardless of further Congressional action, as demonstrated by the discussions above, the changes brought by the CARES Act will require extensive work by all involved. In particular, plan sponsors and third-party providers anxiously await interpretative guidance from the affected regulatory agencies, which can be expected to be both formal and informal, to bring further understanding and speed the implementation of the Act.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Lisa Barton

Chicago
Andy Anderson
Marla Kreindler
Sage Fattahian
Lindsay Goodman

Los Angeles
Michelle McCarthy

New York
Craig Bitman
Mary (Handy) Hevener

Philadelphia
Brian Dougherty
Amy Pocino Kelly
Mims Maynard Zabriskie
David Zelikoff

Pittsburgh
Claire Bouffard
Matthew Hawes
R. Randall Tracht

San Francisco
Heather Brookfield

Washington, DC
Steve Johnson
Jonathan Zimmerman