On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was enacted into law. The CARES Act is a $2 trillion stimulus package designed to help bolster the economy overall by providing aid to workers and businesses impacted by COVID-19 and to provide further support to the country’s health systems. This blog post is intended to give businesses a high level understanding of some of the key provisions of the CARES Act that may impact employers.
Among other provisions, as passed by the Senate, the CARES Act contains the following provisions related to compensation and benefits:
- Requirement to Maintain Employment Levels for Certain Companies Seeking Direct Government Assistance: Title IV of the CARES Act includes up to $500 billion in aid that can be provided to distressed companies in the form of government investment, loans and loan guaranties. Among other requirements, an eligible business that is an air carrier, a cargo air carrier or a business critical to national security (such businesses are eligible for a subset of such aid) that intends to receive aid must agree to maintain its current employment levels through September 30, 2020 to the extent practicable and, in any event, to not reduce its employment level by more than 10% of its employment level as of March 24, 2020. Such businesses must also agree to the compensation restrictions described below. For other eligible businesses that intend to receive aid, the Act does not appear to include a requirement to maintain a certain level of employment (although this point is not clear and it is possible that the Secretary would require an eligible business to maintain employment levels in any event as a condition of receiving direct aid), but it is clear in any event that such eligible businesses must agree to the compensation restrictions described below.
- Requirement to Maintain Employment Levels and Compensation and Benefits for Employees for Certain Companies Seeking Loans. Some of the government aid provided pursuant to Title IV of the CARES Act will be in the form of financing to banks and other lenders to make loans (with an interest cap of 2%) to eligible business (including nonprofit organizations) with between 500 and 10,000 employees. In order to apply for such a loan, the business must certify to meeting certain requirements, including that the funds that are received will be used to retain at least 90% of the workforce at full compensation and benefits until September 30, 2020 (plus an agreement to restore its workforce to certain levels after the threat of coronavirus ends and to not outsource or jobs or send jobs offshore for two years after repaying the loan). It does not appear that such eligible business must agree to the compensation restrictions for employees described below in order to apply for such a loan. Title I of the CARES Act contains provisions for loans to certain eligible businesses with up to 500 employees but such loans do not appear to require the same restrictions regarding employment levels and compensation and benefits as noted in this bullet for the eligible businesses with between 500 and 10,000 employees.
- Compensation Restrictions for Companies Seeking Government Assistance: An eligible business that receives direct government aid pursuant to Title IV of the CARES Act must agree to restrict compensation paid to certain highly compensation employees and executives during the period beginning on the date such agreement is executed through the date that is one year after the loan or loan guarantee is no longer outstanding (the “Restricted Period”) as follows:
- Employees or officers who received more than $425,000 in total compensation in calendar year 2019 cannot receive total compensation in any period of twelve consecutive months during the Restricted Period that exceeds the total compensation amount that was received during calendar year 2019. Such employees also cannot receive severance pay during the Restricted Period that is more than twice the compensation received during calendar year 2019.
- Employees or officers who received more than $3,000,000 in total compensation in calendar year 2019 cannot receive total compensation in any period of twelve consecutive months during the Restricted Period that exceeds the sum of (i) $3,000,000 and (ii) fifty percent of the excess over $3,000,000 that was received during calendar year 2019. For example, if an employee received $8,000,000 during 2019, such officer’s compensation would be limited to $5,500,000 (such amount calculated as ($3,000,000+(50% of $4,000,000))) during any period of twelve consecutive months during the Restricted Period.
- For purposes of these compensation restrictions, total compensation is defined as including salary, bonuses, awards of stock, and other financial benefits provide to such employees by the eligible business. The Act does not provide any further guidance on how such amounts will be valued for such purposes or when such amounts will be considered to be received for purposes of these rules.
- Distributions from Qualified Retirement Plans. The CARES Act permits participants in qualified retirement plans to receive distributions of up to $100,000 during 2020 without incurring the 10% additional tax under Section 72(t) of the Code normally imposed on early distributions. Such distributions, among other requirements, must be related to the financial needs of the participant related to the coronavirus. The taxation on such distribution may be incurred over a three year period rather than all in 2020. Additionally, loan amounts taken from a qualified plan during the 180-day period following the enactment of the Act may be increased to $100,000 rather than $50,000 and the repayment requirements may be delayed up to a year if certain requirements are met. Finally, the CARES Act also contains provisions that exempt distributions from certain defined contribution qualified plans from the minimum distribution rules for 2020 permitting such amounts to remain deferred in the plan subject to certain restrictions.
- Minimum Required Contributions to Single Employer Qualified Retirement Plans. The CARES Act permits minimum contributions to certain single employer qualified retirement plans that would otherwise be due in 2020 to be delayed until January 1, 2021, but any delayed contributions will require interest to be paid on the delay. Additionally, for defined benefit qualified retirement plans, plan sponsors may use the adjusted funding target attainment percentage for the last plan year ending prior to January 1, 2020 as the adjusted funding target attainment percentage for plan years that include calendar year 2020.
- Extension of Deadlines under ERISA. The CARES Act also expands the authority of the Department of Labor under the Employee Retirement Income Security Act (“ERISA”) to delay certain deadlines under ERISA in certain emergencies to include a public health emergency.
- Payroll Tax Credit for Certain Companies and Payroll Tax Deferral. Companies that are forced to fully or partially shut down as a result of the coronavirus or that have a significant decline in gross revenue as a result of the coronavirus (determined by comparing a quarter of revenue in 2020 against the revenue of the same quarter in 2019) may be eligible for a payroll tax credit equal to a percentage of applicable wages. Additionally, companies may be eligible to defer the employer portion of social security taxes otherwise due in 2020 until December 31, 2021 and 2022. For a more detailed description of the payroll tax credit and deferral, see our Legal Update US Tax Relief in CARES Act.
- Health Plan Changes. The Senate version of the CARES Act includes several changes that will affect employer-sponsored group health plans. Group health plans and health insurers will be required to cover additional COVID-related items and services, including preventive services (such as a vaccine or immunization). Telehealth services continue to be a priority, and the CARES Act includes language permitting (but not requiring) high deductible health plans to cover telehealth services for participants prior to the application of a deductible, without regard to whether those telehealth services are related to COVID-19, for plan years beginning on or before December 31, 2021. In addition, the CARES Act would revert changes made by the Affordable Care Act—it would permit individuals to again use their health savings accounts or flexible spending accounts for over-the-counter medications without a prescription. Expenses related to the purchase of menstrual care products would also be eligible for reimbursement under such accounts.
Although uncertainty remains unless and until the House passes the CARES Act, currently, eligibility for access to some of the government funds depends on companies maintaining a certain percentage of their workforce as of dates that predate the passage of the CARES Act. Companies considering furloughs or layoffs should consider these provisions in their decision-making. We will provide a more detailed analysis of the key provisions of the CARES Act that impact compensation and benefits in coming days and weeks after the final text of the CARES Act is signed into law.
The current draft of the CARES Act can be found at https://www.appropriations.senate.gov/imo/media/doc/FINAL%20FINAL%20CARES%20ACT.pdf
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