COVID-19 Stimulus Legislation: the CARES Act and Other Relief Measures

In response to the COVID-19 pandemic, the U.S. government has taken unprecedented steps to boost the economy in an attempt to thwart the risk of economic collapse and provide a safety net to families impacted. This alert summarizes pertinent provisions of the stimulus legislation passed to date.

In addition to the approved bipartisan legislation described below, on March 13, 2020, the President declared COVID-19 a National Emergency and invoked emergency relief under the Robert T. Stafford Disaster Relief Emergency Assistance Act. In response, the Treasury extended the deadline for all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax, to both file income tax returns and pay taxes due to July 15, 2020, assuring no assessment of interest and penalties during that time.

Coronavirus Preparedness and Response Supplemental Appropriations Act

The first stimulus legislation passed on March 6, 2020 provides $8.3 billion in funding to federal agencies for the purchase and development of medicines, therapies and vaccines for those suffering or at risk of suffering from COVID-19. These stimulus dollars were shared among the Department of Health and Human Services, Centers for Disease Control, National Institute of Health, the Food and Drug Administration and others.

Families First Coronavirus Response Act

Enacted on March 18, 2020, the Families First Coronavirus Response Act (the “FFCRA”) was the first stimulus legislation passed to help American families suffering from the financial impacts of COVID-19. This legislation provides additional funds for programs providing nutrition for the poor and elderly, such as the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), Supplemental Nutrition Assistance Program (SNAP) and the Emergency Food Assistance Program. It also provides waivers to certain qualification requirements under these programs, such as work training programs under SNAP and the requirement that free or low-cost meals be provided to low-income students in-person and on school grounds.

The FFCRA also expands the Family Medical Leave Act (the “FMLA”) to include as a trigger a person’s inability to work because of school closures or lack of childcare.

As before, the FMLA protects a person’s job for 12 weeks. The first 10 days (two workweeks) of such leave can be unpaid, but the employee can use vacation or other paid time off (PTO) during that time. After that, the employee is to receive two-thirds of their regular salary up to $200 per day and $10,000 during the entire period of absence.

The FFCRA also provides Emergency Paid Sick Leave to employees unable to work or telework because they are subject to quarantine or isolation orders or have COVID-19 symptoms. Full-time employees are entitled to 80 hours of sick time at two-thirds of their regular pay up to $200 per day or $2,000 over the entire benefit period.

Beginning on April 1, 2020, smaller employers (those with 500 or fewer employees) providing Emergency Paid Sick Leave or payments under the expanded FMLA can take the amounts paid as a credit against their full payroll tax liabilities through December 31, 2020.

Coronavirus Aid, Relief & Economic Security Act

The Coronavirus Aid, Relief & Economic Security Act (the “CARES Act”), a bipartisan measure passed on March 25, 2020, provides $2 trillion of stimulus to American families and businesses intended to stabilize the economy.

Stimulus for Small Business

The law provides $10 billion for Emergency Economic Injury Disaster Loans (“EIDLs”). Available through December 31, 2020, small businesses (as defined below), Employee Stock Ownership Plans, sole proprietorships and independent contractors, and tribal organizations can receive loans through a simplified and streamlined EIDL loan approval process. Loan decisions are to be made solely on credit score and tax returns are not required. Personal guarantees are waived on loan requests up to $200,000, the one-year in operation rule is waived, and the rule that requires no available credit elsewhere is waived.

Most notably, the CARES Act implements the Paycheck Protection Program (PPP)

 and provides $349 billion in stimulus loans, deemed “paycheck protection loans,” to small businesses, nonprofits and certain tribal organizations. Unsecured loans are provided under the law equal to the lesser of $10 million or 2.5 times the average monthly payroll costs (capped at $100,000 per individual) for the one-year period prior to the loan date, plus outstanding EIDLs incurred after January 20, 2020. A small business is defined as either a business with 500 or fewer employees in the aggregate among affiliates (unless an exception applies) or based on Small Business Administration (SBA) industry-size standards. Loans issued under the CARES Act must be used for certain specified expenses, including payroll costs, healthcare benefits, mortgage interest, rent, utilities and interest on other loans incurred prior to the pandemic period, and the SBA clarified in its interim final rule implementing provisions of the CARES Act (Interim Final Rule) that at least 75% of the expended amounts must be for payroll costs since maintaining jobs is the principal policy of the law.

The SBA also clarifies in its Interim Final Rule that payroll costs are costs paid to employees only (not independent contractors). Independent contractors are eligible to receive loans under the PPP, but since they are essentially owners of their own businesses, they must file for their own loan under the program and submit 1099s to prove payroll and associated costs. The loans are 100% guaranteed by the SBA and when determining whether to lend money, lenders can only consider whether an employer was in operation on February 15, 2020 and whether the employer had employees to whom they paid compensation. All personal guarantee and collateral requirements are waived and lenders have no recourse against the owners of the business provided the proceeds are used for authorized purposes.

Paycheck protection loans are eligible for deferment for 6 months, with a term not to exceed 10 years. The deadline to apply for a loan is June 30, 2020, and loans under the program are on a first-come, first-served basis until the appropriated funds are depleted.

Paycheck protection loans made under the CARES Act are also entitled to forgiveness (up to the principal of the loan) in an amount equal to payroll costs, rent, utilities, and interest payments on other loans, provided those loans were incurred prior to February 15, 2020; provided, however, that at least 75% of the loan was used for payroll costs. The amount of loan principal forgiven is reduced by certain reductions to employee wages and reductions in employee headcount over the 8-week period following the loan origination. The SBA will reimburse lenders for forgiven amounts and borrowers will not recognize income tax on cancellation of indebtedness income attributable to the loan forgiveness.

Summary Highlights – Paycheck Protection Program

• Loans are available under the PPP with relaxed underwriting requirements through June 30, 2020.
• Loans under the PPP are on a first-come, first-served basis and applications will be accepted until the earlier of June 30, 2020 or until appropriated funds are depleted.

• Eligible borrowers only need to make the following good-faith attestations: (1) that the business was in operation on February 15, 2020; (2) it had employees to whom it paid compensation; (3) loan proceeds are needed for the ongoing operations of the business; (4) at least 75% of the funds will be used for payroll costs and the remainder on payroll, rent or mortgage payments, utilities, and interest payments on existing debt; and (5) the applicant will receive no other loan under the program.
• The CARES Act automatically delegates existing SBA lenders to approve and make loans under the PPP, as well as federally insured depository institutions and credit unions, any farm credit union, and certain other lenders who have originated at least $50 million in loans during the last 12 months. Lenders may make loans to any eligible borrower that was in business as of February 15, 2020 and had employees for which it paid payroll taxes.
• The interest rate on paycheck protection loans is 1% as established in the Interim Final Rule.
• No fees, collateral, or personal guarantees are required, and the loans are nonrecourse to the borrowers (except if there is a later finding of misuse or abuse).
• The loans will be guaranteed by the SBA.
• Lenders will be required to defer payments on paycheck protection loans for 6 months, although the modest interest rate of 1% will accrue during the deferment period.

Stimulus for Corporations

The CARES Act also provides $500 billion in the form of equity investments and loans to severely distressed sectors of the economy, such as the passenger and cargo airline industries, national security/aerospace and other businesses of any size impacted by the pandemic. Unlike paycheck protection loans, loans made under this program are not subject to forgiveness and are subject to oversight by a Special Inspector General for Pandemic Recovery and a new Congressional Oversight Commission. Companies receiving these loans must agree to retain employees through September 30, 2020, not conduct share buy-backs or pay dividends while the loan is outstanding and until one year after it is repaid, and maintain domestic operations with a majority of their employees in the U.S. No company that is 20% or more owned by the President, Vice President, any member of Congress or head of an executive office (or their immediate family members) can participate in this program.

To reduce the payroll tax burden on employers, employee retention credits are provided to employers whose businesses are fully or partially suspended due to government orders that results in a 20% or more decline in gross receipts. A refundable credit can be taken against employment taxes up to 50% of qualified wages (up to $10,000). Also, businesses can defer payment of payroll taxes accrued before December 31, 2020 and pay 50% of taxes due on December 31, 2021 and the remaining 50% on December 31, 2022.

Net operating losses recognized by businesses can now be used to offset 100% of income (up from 80%) in 2019 and 2020, and net operating losses experienced in 2018, 2019 and 2020 can be carried back for up to five years.

Stimulus for Individuals

In addition to a stimulus for businesses, the CARES Act also aids individuals in the form of one-time stimulus checks, enhanced unemployment benefits, deferral of student loan interest payments, above-the-line charitable deductions and penalty-free access to funds in retirement accounts. The CARES Act authorizes the FDIC to temporarily remove coverage limits for noninterest-bearing transactional bank accounts through December 31, 2020 to help people rest assured that their bank deposits are safe. Some experts believe the FDIC will act to waive the $250,000 limit to the extent it did during the financial crisis from 2008-2012.

Stimulus checks: Individuals who earn less than $75,000 per year are entitled to a one-time payment of $1,200 ($2,400 for joint filers earning less than $150,000 per year). Payments are phased out as earnings exceed the numbers above and are fully phased out at $99,000 in earnings for an individual ($198,000 for joint filers). Individuals with children are entitled to receive $500 per child regardless of income.

Unemployment benefits: The CARES Act extends unemployment benefits to 39 weeks and increases amounts paid by states under their programs by $600 per week per individual.

Student loans: Federal student loan borrowers can defer loan payments through September 30, 2020, without incurring interest or penalties for doing so.

Charitable deductions: Prior to the CARES Act, charitable contributions were not deductible for individual tax filers who elected the standard deduction and did not itemize deductions, and for itemizers, deductions for charitable gifts were limited to 60% of the contributor’s adjusted gross income (AGI). The CARES Act now allows non-itemizers to deduct charitable contributions up to $300 and the AGI limitation for itemizers is increased to 100%.

IRA withdrawals: Individuals under age 59-½ are now permitted to take penalty-free withdrawals of up to $100,000 from their retirement plans if they (or a spouse or child) are diagnosed with COVID-19, or if they suffer adverse financial consequences due to quarantine, furlough or reduced hours. Also, required minimum distributions from retirement plans are suspended for 2020.

Key Takeaways:

• The CARES Act is unprecedented in both its size and the speed with which it was passed by Congress.
• Expenditures from the bill will be front-loaded in 2020.
• The logistics of how to efficiently fund the fiscal stimulus will be complicated.
• It’s critically important to review your wealth plan with your team of trusted advisors to ensure you have an appropriate strategy in place to achieve your goals.

Charity Babington Falls, Director, Senior Wealth Strategist
The Private Bank

If you have additional questions regarding these new rules and how they might impact you or your business, please contact your relationship manager or Wealth Strategist to discuss in further detail.