Comp and Benefits Brief
The Consolidated Appropriations Act, 2021, H.R. 133 (the “CAA”) signed into law by the President on Dec. 27, 2020 and a variety of IRS guidance issued in the first week of 2021 mean that employers entering the new year have lots of COVID-19 relief to digest. This Alert is the second part of our three-part series focusing on COVID-related changes affecting employers and their employee benefit plans. Here we focus on employment-related provisions.
Paycheck Protection Program Loans
The CAA makes significant changes to Paycheck Protection Program (“PPP”) loans under the Coronavirus, Aid, Relief, and Economic Security CAA (the “CARES Act”):
- Borrowers may be eligible for a second PPP loan. If the borrower (1) will or has used the full amount of the first PPP loan only for authorized expenses, (2) has no more than 300 employees, and (3) can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020, a second PPP loan is available. Any second PPP loan is limited to $2 milion.
- More Entities Qualify for PPP Loans. The CAA expands PPP loan eligible entities to include:
- 501(c)(6) Non-Profit Organizations: An IRC §501(c)(6) entity is eligible for a PPP loan subject to the following: (1) the entity does not receive more than 15% of its receipts from lobbying activities, (2) the lobbing activities of the entity do not comprise more than 15% of the total activities of the entity, (3) the cost of lobbying activities of the entity did not exceed $1 million during the most recent tax year of the entity that ended prior to February 15, 2020, and (4) the entity employs not more than 300 employees.
- Housing Cooperatives (with not more than 300 employees)
- Destination Marketing Organizations (“DMO”): A DMO is eligible for a PPP loan subject to the following: (1) the DMO cannot employ more than 300 employees; (2) the DMO does not receive more than 15% of its receipts from lobbying activities, (3) the lobbying activities of the DMO do not comprise more than 15% of the total activities of the DMO, (4) the cost of lobbying activities of the DMO did not exceed $1 million during the most recent tax year of the DMO that ended prior to February 15, 2020, (5) the DMO is described in IRC §501(c) and is exempt from taxation under IRC §501(a) or is a quasi-governmental entity or is a political subdivision of a State or local government.
- Certain News Organizations: News organizations that are majority owned or controlled by a NAICS code 511110 or 5151 business or a non-profit public broadcasting entity with a trade or business under NAICS 511110 or 5151, that employs no more than 500 employees per location.
- Borrowers have more flexibility in selecting their “covered period.” Under the CARES Act and subsequent guidance, PPP loan proceeds were required to be used in either an eight-week or 24-week “covered period” at the election of the qualified borrower. The CAA removed the “or” requirement and allows all borrowers to define their ‘covered period’ as beginning on the date that the lender disburses the PPP loan and ending on any date selected by the borrower that occurs at least eight weeks and not more than 24 weeks after the date of disbursement.
- PPP loan proceeds may cover a broader list of expenses. Under the CARES Act, PPP loan proceeds generally could only be used for payroll costs (e.g., salary, wages, commissions, vacation, etc.) and certain non-payroll costs (e.g., mortgage interest payments, utility payments, etc.). PPP loan proceeds can now be used to cover:
- Covered Operations Expenditures (business software, cloud computing services, payroll services, account or tracking of supplies, and inventory, records, and expenses)
- Covered Property Damage (costs related to property damage and vandalism or looting due to public disturbances that occurred in 2020 that were not covered by insurance or other compensation)
- Covered Supplier Costs (payments made to a supplier of goods that are essential to the operations of the borrower and made pursuant to a contract or order in effect at any time before the PPP loan’s covered period or with respect to perishable goods)
- Covered Worker Protection Expenditures (operating or capital expenditures to adapt the borrower’s business to comply with requirements established by HHS, CDC, OSHA, or equivalent requirements issued by a state or local government between March 1, 2020 and the date the COVID-19 national emergency ends. Such expenditures include drive-through windows, ventilation, sneeze guards, etc.)
- Group Welfare Benefit Premiums (under original PPP loan guidance, payroll costs only included health care premiums this is now expanded to include dental, vision and disability insurance premiums.)
- Expenses Used to Qualify for PPP Forgiveness Are Now Deductible. IRS Notice 2020-32 and Revenue Ruling 2020-27 previously provided that taxpayers could not deduct expenses used to qualify for forgiveness of a PPP loan. The CAA reverses this position, removing the PPP loan prohibition so that employers who received a PPP loan may continue to deduct otherwise-eligible expenses, despite their use in qualifying for PPP loan forgiveness.
- EIDL Recipients Can Obtain Full Forgiveness of PPP Loan. If a borrower received both a PPP loan and an Economic Injury Disaster Loan (“EIDL”), the CAA removes the requirement that the amount of the EIDL be deducted from the borrower’s PPP loan forgiveness amount.
More Employers Can Qualify for Employee Retention Credits
- Employee Retention Credits (“ERCs”) are now available through June 30, 2021 (the ERC was originally scheduled to expire on Dec. 31, 2020). Under the CARES Act, the ERC is a fully refundable employee retention payroll tax credit equal to 50% of qualified wages (including qualified health expenses) that eligible employers pay their employees between March 13, 2020 and Dec. 31, 2020, up to a maximum tax credit of $5,000 per employee. Among other changes, the CAA increases the payroll tax credit to an amount equal to 70% of qualified wages per quarter. During each of the first and second quarters of 2021, a maximum of $10,000 in qualified wages paid in that quarter may be counted for purposes of determining the 70% credit. Therefore, the maximum credit for each employee for 2021 is $14,000. (70% of $10,000 + 70% of $10,000).
- ERCs can now be claimed by employers who obtained a PPP loan. Under the modifications provided by the CAA, employers are permitted to claim the ERC on any eligible wages not used to support PPP loan forgiveness. In addition, any wages that are eligible for both PPP loan forgiveness and the ERC are now permitted to be applied to either, but not both, per an employer election. These changes apply as if they were included in the CARES Act and are effective retroactively.
- A 20% Reduction in Gross Receipts May Qualify for ERCs. The reduction in gross receipts (compared to the same calendar quarter in 2019) that must be met to qualify for the ERC is reduced from 50% to 20%. Under the CARES Act, an employer qualified for the ERC beginning with the first calendar quarter for which gross receipts were less than 50% of gross receipts for the same calendar quarter of 2019. Beginning Jan. 1, 2021, an employer qualifies for the ERC beginning in the calendar quarter in which the employer’s gross receipts are less than 80% (instead of 50%) of gross receipts for the same calendar quarter of 2019.
- Employers May Use Prior Calendar Quarter to Measure Reductions. Employers may now elect to satisfy the gross receipts test by using gross receipts from the prior calendar quarter (rather than looking back to 2019).
- New Employers May Qualify for ERCs. ERCs are now available to employers that were not in existence in 2019. Such new employers may apply the gross receipts test based on 2020 gross receipts.
- Larger Employers May Qualify for Full ERCs. Employers with up to 500 employees can now claim ERCs for all full-time employees (whether working or not). The CARES Act had imposed a limit that restricted employers with more than100 full-time employees from claiming ERCs on employees who were still working (limiting them to only claiming ERCs for those not working). This limit is now increased to 500 employees.
Employers Can Choose to Offer More Time to Take FFCRA Leave
Employers may opt to extend FFCRA leave entitlement. The FFCRA previously required eligible employers to provide COVID-19 related emergency paid sick leave and paid family leave. The FFCRA provided employers with a refundable payroll tax credit to cover wages paid in connection with such leave taken between April 1, 2020 and Dec. 31, 2020. Under the CAA, employers are no longer required, but may voluntarily choose to continue, to allow employees who have not yet used up their FFCRA leave entitlement to still take leave.
Employers that allow their employees to use FFCRA leave between Jan. 1, 2021 and March 31, 2021 can still claim the associated payroll tax credit.
Employers should take note that the CAA does not extend the amount of leave and credits that may be claimed. Under the FFCRA, employers may claim a credit on 80 hours of emergency paid sick leave and 10 hours of paid family leave per employee. These caps apply cumulatively to any required 2020 leave and voluntary 2021 leave taken. If employees have already used the maximum amount of leave in 2020, no additional FFCRA tax credits are available.
Unemployment Benefits Are Extended
- Additional federal unemployment benefits are now available. The Federal Pandemic Unemployment Compensation (the “FPUC”) benefit provided a $600 per week federal unemployment benefit until its expiration on July 31, 2020. The CAA renews the FPUC benefit to provide an additional FPUC benefit lasting up to 10 weeks during the period from Dec. 26, 2020 to March 14, 2021. However, the CAA reduces the benefit from $600 per week to $300 per week. The CAA does not provide any retroactive benefits for unemployment between Aug. 1, 2020, and Dec. 25, 2020.
- Increased unemployment benefit for self-employed. The CAA also adds the Mixed Earners Unemployment Compensation (the “MEUC”) program which provides an additional $100/week payment to supplement the FPUC for individuals who: (1) received at least $5,000 of self-employment income in the most recent taxable year; (2) are receiving a FPUC benefit; and (3) submit documentation substantiating the self-employment income. Payments of the MEUC are available for weeks of unemployment between Dec. 27, 2020 and March 14, 2021.
Employers Can Further Defer Employee Payroll Tax Withholding & Payments until Dec. 31, 2021
The due date for employers to withhold, deposit and pay the employee portion of certain payroll taxes due on wages paid from Sept. 1, 2020 through Dec. 31, 2020 is now further delayed until Dec. 31, 2021. The IRS previously issued guidance (IRS Notice 2020-65) implementing the President’s Aug. 8, 2020 Executive Order directing that employers be allowed to defer the withholding, deposit and payment of the 6.2% Social Security portion (not the 1.45% Medicare tax portion) of payroll taxes otherwise due during the Sept. 1, 2020 through Dec. 31, 2020 time period. The due date for the withholding and payment of the deferred amount was deferred under that prior IRS guidance until the period beginning Jan. 1, 2021 and ending April 30, 2021.
Employers Can Assist Employees with Student Loan Payments on a Tax-Free Basis
Employers may choose to provide employees with a tax-free student loan repayment benefit. This relief only applies to payments made between Jan. 1, 2021 and Dec. 31, 2026. Employers may pay up to $5,250 annually for each employee on a tax-free basis.