A $900 billion COVID-19 relief bill passed by Congress late last night is expected to be signed into law by President Trump later today. In addition to an assortment of aid for individuals and businesses, the bill extends several provisions of the CARES Act passed in March, including the tax credit for employers providing paid leave under the Families First Coronavirus Response Act (FFCRA). However, the bill does not extend the mandate for employers to provide paid leave, set to expire December 31, 2020.
What Does This Mean?
Employers are not required to provide paid sick leave or paid family leave for coronavirus-related reasons under the FFCRA after December 31, 2020. But the COVID-relief bill allows employers with less than 500 employees to voluntarily provide this leave and take the tax credit associated with the leave through March 31, 2021. Tax credits are available for qualifying wages (up to a cap) paid while an employee is on leave if (1) the leave would have been required under the FFCRA had the FFCRA been extended through March 31, 2021, and (2) all requirements related to leave under the FFCRA are met.
The bill does not change the maximum amount of paid leave subject to the tax credit for an individual employee. This means that if an employee took 80 hours of paid sick leave to quarantine in 2020, and the employer claimed the tax credit on wages paid during that leave, the employer cannot claim an additional tax credit on wages paid to that same employee for additional paid sick leave in 2021.
Employers should decide as soon as possible if they will provide voluntary paid FFCRA leave during the first quarter of 2021 – and commit to that decision. Additionally, employers should administer the leave on a consistent basis and maintain all documentation required to substantiate the leave.
Of course, local and state leave mandates (paid and unpaid), as well as disability-related accommodation and traditional FMLA leave are all still in play. Employers need to continue to carefully navigate the waters of COVID-19 related leaves regardless of the FFCRA.
Your company was not approved for a Paycheck Protection Program (PPP) loan but the bills are still due. There may still be some opportunities available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help keep your company on its feet.
The Small Business Administration stopped accepting applications for loans under the Payroll Protection Program (PPP) late last week after quickly reaching the program’s $349 billion limit. Congress is debating appropriating additional funds for the program and businesses shut out last week may get another chance. But in the meantime, employers should consider the other options under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as discussed below.
Employee Retention Tax Credit
An Employee Retention Tax Credit of up to $5,000 per employee is available to an eligible employer whose business has been financially impacted by COVID-19. The refundable payroll tax credit is equal to 50% of up to $10,000 in “qualified wages” paid per employee. The credit is available for wages paid from March 13 to December 31, 2020.
An employer may be eligible for the tax credit for a calendar quarter if the employer has not taken an SBA loan under the CARES Act (i.e., a PPP loan, Economic Injury Disaster loan or other SBA loan) and:
the employer’s business is fully or partially suspended by government limiting commerce, travel or group meetings order due to COVID-19 during the quarter, or
the employer’s gross receipts are below 50 percent of the comparable quarter in 2019.
The “qualified wages” used to calculate the tax credit differ based on whether the employer has 100 or more full-time employees. If the eligible employer averaged more than 100 full-time employees in 2019, only wages paid to an employee for time that the employee is not providing services due to a full or partial suspension of operations by order of a governmental authority, or a significant decline in gross receipts qualify for the credit. But for employers with less than 100 full-time employees, wages paid to anyemployees during the period of economic hardship qualify for the credit. “Qualified wages” include cash payments plus the employer portion of health insurance premiums.
Any paid sick leave or paid FMLA under the Families First Coronavirus Response Act (FFCRA) is specifically excluded from “qualified wages” for the Employee Retention Tax Credit, as employers receive a separate tax credit for such paid leave wages.
Employers can be immediately reimbursed for the Employee Retention Tax Credit by reducing their required deposits of payroll taxes by the amount of the credit for the quarter. Eligible employers may also request an advance of the Employee Retention Credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Payroll Tax Deferral
All employers are eligible to defer the payment of the employer’s portion of social security taxes that otherwise would be due between March 27, 2020 and Dec. 31, 2020, with no penalties or interest. Fifty percent (50%) of the deferred amount must be paid by December 31, 2021 and the remainder paid by December 31, 2022. There is no dollar cap on the wages that are counted in calculating the taxes that may be deferred.
This payroll tax deferral is available to all employers, regardless of size, and there is no requirement to show any specific COVID-19-related impact. However, employers that receive a PPP loan may not defer taxes due after a PPP loan is forgiven.
Tax Credits for Paid Sick Leave and Expanded FMLA
Don’t forget that a tax credit is available to employers with less than 500 employees that provide paid leave to employees as required by the Families First Coronavirus Response Act (FFCRA). These refundable payroll tax credits are available to fully reimburse employers for the costs related to providing qualifying paid leave for reasons related to COVID-19 under the FFCRA.
An employer may claim a tax credit against the employer portion of Social Security taxes equal to 100% of the amount of paid leave provided under the FFCRA. If the amount of the tax credit exceeds the employer portion of the Social Security taxes, then the excess is treated as an overpayment and refunded to the employer. Employers claiming the tax credit will be able to retain an amount of federal employment taxes equal to the amount of the qualified leave wages paid, rather than depositing them with the IRS. An employer may claim the tax credits when filing its quarterly federal employment tax return or request an advance of the tax credits using Form 7200, Advance Payment of Employer Credits Due to COVID-19. Employers must retain records supporting each employee’s leave to substantiate the tax credit.
Recent legislation providing COVID-19 relief to individuals and businesses includes provisions allowing more flexibility under retirement plans for individuals impacted by COVID-19. The CARES Act permits special hardship distributions of up to $100,000 from most tax-qualified retirement plans without early-withdrawal penalty taxes, increases the maximum 401(k) loan available for participants impacted by the pandemic and allows a delay in existing loan repayments. Required minimum distributions from defined contribution plans are waived for 2020.
Coronavirus-Related Hardship Distributions and Loans
The CARES Act allows plan sponsors to adopt special provisions expanding distributions and loans for “qualified participants.” A “qualified participant” is a plan participant who: (1) is diagnosed with COVID-19, (2) has a spouse or dependent diagnosed with COVID-19, or (3) experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to COVID-19.
Coronavirus-Related Distributions – A “qualified participant” may take a coronavirus-related distribution of up to $100,000 from an eligible retirement plan between January 1, 2020 and December 31, 2020. Eligible retirement plans include 401(k) and other profit sharing plans, 403(b) plans, government 457(b) plans and IRAs.
The 10% early withdrawal penalty does not apply to a coronavirus-related distribution. The distribution is taxable to the participant ratably over a three-year period, instead of all in the year of distribution. A participant can elect to repay the funds to the plan within three years and the taxable amount of the distribution will be reduced.
Increased 401(k) Loan Maximum – The maximum amount available for 401(k) plan loans taken between March 27, 2020 and September 23, 2020 by a “qualified participant” is doubled to the lesser of $100,000 or 100% of the participant’s vested account balance. The amount available is reduced by any other loans outstanding in the last twelve months.
Plan sponsors can choose to impose a lower loan maximum and may impose other limits that currently apply under a plan (minimum loan amounts, loans from only certain contribution sources, number of loans outstanding, etc.).
Delay in Loan Repayments – Loan repayment due dates between March 27, 2020 and December 31, 2020 may be delayed for up to one year for a “qualified participant.” Any subsequent repayment due dates may be adjusted to reflect the delay. The period of delay shall not be taken into account in determining the five-year term or repayment period of the loan.
Plans may begin taking advantage of these provisions immediately and do not need to be amended until the last day of the plan year beginning on or after January 1, 2022.
Required Minimum Distributions NOT Required in 2020
Required Minimum Distributions (RMDs) from defined contribution plans (including 401(k), 403(b) and government 457(b) plans) and IRAs are waived for 2020 under the CARES Act. RMDs that would otherwise been required to be made for those participants reaching age 72 during 2020 may be delayed until 2021. The delay does not apply to RMDs under defined benefit plans. Plans must be amended to reflect the waiver by the last day of the plan year beginning on or after January 1, 2022.
We are diligently reviewing the CARES Act for the sections that will most affect small and mid-sized businesses across the country. As we dive ever deeper into the Act, we will post individual section summaries to our web page. We know you are craving information on changes to small business loans and tax policy which could bring some relief to your business so we started with those.
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