On Friday, March 27, 2020, the President signed into law the Bipartisan Proposal for Coronavirus Aid, Relief, and Economic Security Act (also known as the “CARES Act”). The Cares Act is a massive 2.2 trillion dollar package that contains a number of provisions to assist the United States economy combat the impact of COVID-19. This alert will summarize the significant tax and employee benefit provisions that are contained in the CARES Act.
Individual Tax Relief
Recovery Rebates for Individuals
Perhaps the signature piece of the CARES Act is the economic relief it provides for individuals in the form of a cash payment, expected in as little as three weeks, to qualifying individuals. Funds will be deposited into individual’s checking accounts if account information was included in a 2018 or 2019 personal income tax return. Pursuant to Section 6428 of the CARES Act, the payment will be up to $1,200 for each adult (therefore, $2,400 for individuals filing joint returns) who is not someone else’s dependent and $500 for each qualifying child. The payment phases out by 5% of adjusted gross income over $75,000 for individuals filing separate returns, $112,500 for those filing head of household, and $150,000 for those married filing jointly, but not below zero. The Treasury Department is permitted to rely on either 2018 or 2019 returns if filed. If no return information is available for 2018 or 2019, Social Security Administration records can be relied upon to compute the appropriate amount. As an example of how the phase out would work, a married couple filing jointly with a 2018 adjusted gross income of $170,000 should expect to receive a payment of $1,400, which is calculated by multiplying $1,200 by two (joint return) and then subtracting $1,000, which is 5% of the married couples adjusted gross income over $150,000 (5% x $20,000 = $1,000).
The CARES Act adopts two significant changes to the charitable contribution deduction.
First, for tax year 2020, Section 2204 of the CARES Act allows individuals who do not itemize their deductions to take an above-the-line deduction (i.e., a deduction made to calculate adjusted gross income) for up to $300 in charitable contributions.
Second, also for 2020, Section 2205 of the CARES Act suspends the current 60% adjusted gross income limit on deductions for cash charitable contributions for those individuals that do itemize deductions. So, for example, if an individual who itemizes deductions is so inclined, the individual can take a charitable deduction for up to 100% of such individual’s 2020 adjusted gross income, subject to certain limitations.
In both cases, contributions made to supporting organizations (i.e., organizations described in Internal Revenue Code Section 509(a)(3)) and donor-advised funds do not qualify.
Payroll Tax Relief
Deferral of Employer Portion of Social Security Tax
Section 2302 of the CARES Act allows employers to defer payments of the 6.2% employer portion of the Social Security tax due from the date of enactment through the end of 2020. Employers choosing to defer the payment are required to repay the deferred amount in two equal payments, one of which is due by December 31, 2021, and the second of which is due by December 31, 2022. Individuals paying self-employment tax are provided with equivalent relief.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
For businesses that are fully or partially suspended due to a government order limiting commerce, travel, or group meetings due to COVID-19, or that saw a 50% reduction in gross receipts for the first quarter beginning in calendar 2020 compared to the same quarter in the prior year, Section 2301 of the CARES Act creates a 50% credit for paying up to $10,000 in wages. Wages paid before the end of 2020 are potentially eligible for the credit, but are not available for any wages paid due to the new requirement for paid leave and sick pay. The credit is allowed against payroll taxes. The period for which wages are eligible for the credit ends when the business is no longer suspended or gross receipts for a quarter reach 80% of the prior year. Tax-exempt organizations may claim the credit based on a “full or partial suspension” of a trade or business.
For employers with more than 100 full-time equivalent employees, only wages paid when the employee was not providing services are eligible for the credit. Employers with 100 or fewer full-time equivalent employees are eligible to take the credit on any wages during the eligible period described above.
Corporate and General Business Tax Relief
Modification of the Net Operating Loss Provisions
Section 2303 of the CARES Act gives companies a 5-year carryback period for net operating losses (“NOLs”) arising in tax years beginning after Dec. 31, 2017, and ending before Jan. 1, 2021. The limitation in the Internal Revenue Code that allows NOLs arising in tax years beginning after 2017 to offset only 80% of taxable income is temporarily suspended for tax years beginning before 2021. When the suspension is lifted, the 80 percent limitation is amended such that it applies before taking into account certain deductions contained in the Internal Revenue Code and after taking into account the NOL deductions for NOL carryovers arising in taxable years beginning before January 1, 2018, and carried to such taxable year. The legislation includes special NOL carryback rules for real estate investment trusts (REITs). The NOL carrybacks are not allowed to offset the section 965 inclusion for the one-time repatriation tax.
Modification of Limitations on Losses for Taxpayers Other Than Corporations
Section 2304 of the CARES Act provides that the excess business losses limitation under Code Section 461(l) ($250,000 for individuals and $500,000 for joint) will be temporarily repealed back to 2018, and will not take effect until tax years beginning after December 31, 2020. Taxpayers who had losses that were limited in 2018 by this provision should consider filing amended returns. In addition, the CARES Act provides some technical corrections to the NOL provisions, including providing that NOLs are not considered excess business losses and that wage income is not includable in the business income calculation. The CARES Act also provides that capital losses from sales or exchanges of capital assets are not included in the excess business loss calculation. Furthermore, the amount of capital gains from the sale or exchange of capital assets are only included in the excess business loss calculation to the extent of the lesser of (1) the net capital gain attributable to a trade or business or (2) capital gain net income.
Modification of Credit for Prior Year Alternative Minimum Tax Liability of Corporations
The Tax Cuts and Jobs Act of 2017 (TJCA) repealed the corporate alternative minimum tax (AMT) effective for taxable years beginning after December 31, 2017. Section 2305 of the CARES Act allows corporations to immediately claim unused AMT credits. The CARES Act accelerates the refundable credit so that corporations can take the entire amount in 2018 and 2019. There is also a provision that allows corporations to make an election to take the entire amount in 2018.
Modification of Limitation on Business Interest
Section 2306 of the CARES Act allows taxpayers to make an election to limit their deduction for net business interest under Internal Revenue Code section 163(j) to 50% of adjusted taxable income instead of 30% for tax years beginning in 2019 and 2020. In addition, it allows taxpayers to elect to use their 2019 adjusted taxable income as their adjusted taxable income in 2020. There are also special rules that apply to partnerships.
Technical Correction Regarding Qualified Improvement Property
The TCJA inadvertently omitted “qualified improvement property” (“QIP”) from the 15-year property classification. As such, QIP did not qualify for bonus depreciation and had to be depreciated over 39 years. This error is now corrected by Section 2307 of the CARES Act. The CARES Act added QIP to the 15-year property list and such property is now eligible for 100% bonus depreciation. The change is retroactive to the effective date of the TCJA and applicable to property placed in service after December 31, 2017.
Increased Limitation for Charitable Contributions
The CARES Act also provides for an increased deduction for “qualified contributions” made by C corporations. Under prior law, a C corporation’s charitable contribution deduction generally was limited to 10% of its taxable income. Under the CARES Act, a C corporation is now entitled, for the 2020 calendar year, to deduct “qualified contributions” of up to 25% of its taxable income, reduced by the amount of any other charitable contributions for which a charitable deduction is allowed.
Retirement Plan Relief
Penalty-free Coronavirus-Related Plan Withdrawals Up to $100,000 (Permissive)
Section 2202(a) of the CARES Act permits sponsors and administrators of qualified retirement plans, section 403(b) plans, governmental section 457(b) plans, and IRAs to provide for eligible individuals to receive “coronavirus-related distributions” up to $100,000 (in aggregate, on a controlled-group basis) in the 2020 calendar year, without regard to current plan distribution requirements. Such distributions will not be subject to the 10% early withdrawal penalty that would otherwise be imposed by Code section 72(t). A coronavirus-related distribution is one made to an individual who:
- Is diagnosed with COVID-19 (or the underlying virus) by a CDC-approved test;
- Has a spouse or dependent that is so diagnosed; or
- Experiences adverse financial consequences as a result of a furlough, lay off, business closure, hours reduction or inability to work for lack of child care “due to” COVID-19 (or the underlying virus), or other conditions set forth in future guidance.
The plan administrator may rely on the employee’s certification that he or she satisfies one of these conditions for a coronavirus-related distribution. Such distribution may be repaid to the plan (or other eligible plan or IRA that accepts rollovers) within three years from the date distributed, and such repayment will be treated as a direct trustee-to-trustee transfer, so that it will not affect various Code limits on annual contributions, including the amount the participant can otherwise contribute under Code section 402(g) in the year(s) of repayment. Coronavirus-related distributions that normally would be included in taxable income in 2020 are instead included in income ratably over three years (unless the individual elects otherwise) with future guidance to provide for accelerated inclusion in certain cases, in a manner similar to the Roth IRA conversion rules.
Temporary Coronavirus-Related Plan Loans (Permissive)
Section 2202(b) of the CARES Act provides a 180-day window from March 27, 2020 (the date of enactment) for sponsors and administrators of qualified retirement plans, section 403(b) plans, or any retirement plan (qualified or not) sponsored by a governmental entity, to permit plan loans up to $100,000 (capped at 100% of the present value of the participant’s vested accrued benefit under the plan or $10,000, if less), to individuals who satisfy one of the eligibility conditions for a “coronavirus-related distribution” described in the preceding section of this Alert.
- Note: This provision gives plans the option to allow larger plan loans for the next six months. The normal maximum loan under section 72(p) is $50,000 (capped at 50% of the present value of the participant’s vested accrued benefit or $10,000, if less).
- Note: In addition, payments on new or existing loans that would be due on or after March 27, 2020 and before December 31, 2020 are delayed for one year.
- Plan Amendments – Sponsors and administrators that choose to provide coronavirus-related distributions or loans have until the last day of the plan year beginning on or after January 1, 2022 (2024 for governmental plans) to adopt a written plan amendment, provided the plan is in operational compliance throughout the applicable period, and the amendment is retroactive.
Waiver of 2020 Required Minimum Distributions (RMDs) for Certain Retirement Plans and IRAs (Required)
Section 2203 of the CARES Act provides a temporary waiver of the required minimum distribution (RMD) rules for the 2020 calendar year. This elimination of the RMD for 2020 applies to all defined contribution section 401(a) plans such as 401(k) plans, as well as 403(b) plans, IRAs and 457(b) plans sponsored by governmental entities (but not 457(b) plans sponsored by non-governmental tax-exempt entities).
This RMD waiver for 2020 applies to all persons who would otherwise be required to receive an RMD in 2020, even if a person is neither ill with COVID-19 nor experiencing coronavirus-related adverse financial consequences. The 2020 RMD waiver, in much the same way as the 2009 RMD waiver enacted by Congress for the 2009 calendar year after the 2008 financial crisis, eliminates the financially harsh effect of having to calculate a 2020 RMD based on a participant’s account balance on December 31, 2019, which was in all likelihood significantly higher than its current balance, given the pandemic-related stock market losses. Without this 2020 RMD waiver, persons would experience a disproportionate shrinkage of their retirement plan and IRAs, and a disproportionate amount of taxable income for 2020.
Section 2203 of the CARES Act amends Code section 401(a)(9) to add a new subparagraph 401(a)(9)(I), which contains the 2020 RMD waiver rules. In particular:
- In addition to persons who have already been receiving RMDs prior to 2020, the RMD waiver also applies to persons for whom 2019 would be their first RMD distribution year, in the event those persons were waiting until their required beginning date of April 1, 2020, to receive their first RMD.
- The 2020 RMD has no effect on the resumption of the RMD rules for 2021, or how the RMD is calculated for years after 2020. In other words, a person will not have to “catch up” later to make up for no RMD for 2020.
- In cases where a person dies before starting RMDs, in applying the general rule that requires that the account balance be fully distributed within the 5-year period after death, the 2020 calendar year does not count for determining the 5-year period.
- Should a person choose to receive a distribution during 2020, then the portion of the distribution that would have been the RMD amount but for the 2020 waiver shall not be eligible for direct rollover into another retirement plan account or IRA (an indirect 60-day rollover of that amount is still permitted), nor shall that amount be subject to the mandatory 20% withholding that would otherwise apply for non-RMD distributions from retirement plans other than IRAs. (This is the same type of rule that Congress added in 2009 for the 2009 RMD waiver.)
- Plan Amendments – The 2020 RMD waiver is a required change that applies to plan years after December 31, 2019. Provided the plan complies with the change in operation from the date of enactment, the written conforming plan amendment need not be adopted until the end of the first plan year beginning on or after January 1, 2022 (2024 for governmental plans).
Temporary Defined Benefit Plan Funding Relief
The CARES Act contains several pension plan provisions aimed to help plan sponsors concerned about their own cash flow and the funded status of their plans given the market volatility associated with the coronavirus crisis. Some of the Act’s provisions are only applicable to very specific circumstances or plan situations, but the ones of the broadest applicability to single-employer defined benefit pension plans are covered in Section 3608.
The Act delays the due date for minimum required contributions (as defined in Code section 430(a)) that are otherwise due in 2020 to January 1, 2021, at which time the contributions plus interest (accrued at the plan’s effective rate of interest for the plan year when payment is made) will be due. Contributions other than minimum required contributions, such as those required under the terms of an agreement with the PBGC, are not extended by this change.
Additionally, the Act permits plan sponsors to use their plan’s adjusted funding target attainment percentage (“AFTAP”) for the last plan year ending before January 1, 2020 for purposes of determining the funding-based benefit limitations under Code section 436 for 2020. As a result, if a plan’s AFTAP has fallen because of the recent market downturn, the plan sponsor may elect to use the higher AFTAP that the plan had in the last plan year to avoid the required restrictions on future benefit accruals and distributions in optional forms that would otherwise be imposed by Code section 436.
Health & Welfare Plan Relief
Safe Harbor for Pre-Deductible Telehealth Services Under HDHPs
Section 3701 of the CARES Act expands on the theme of IRS Notice 2020-15 (which provided that a plan’s coverage of COVID-19 testing before the HDHP deductible is met does not jeopardize its status as an HDHP for purposes of pairing with participant health savings accounts (HSAs)) by amending Code section 223 to provide that a plan’s provision of telehealth services pre-deductible does not cause it to fail to be an HDHP. This temporary safe harbor applies to plan years beginning on or before December 31, 2021, and takes effect upon enactment.
- Note: This provision ensures that HDHP participants using telehealth services in the safe harbor period will be able to continue to make tax-favored HSA contributions even if those services are offered before the applicable HDHP deductible is met.
Purchases of OTC Medicine With Tax-Favored Savings Accounts
Provisions in the Affordable Care Act effective January 1, 2011 made over-the-counter (OTC) medicines (excepting insulin) only available for reimbursement from tax-favored accounts (health flexible spending arrangements (health FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs)) with a prescription. Section 3702 of the CARES Act eliminates this rule and makes OTC drugs reimbursable from these accounts without a prescription, for purchases after December 31, 2019. It also makes expenses for menstrual care products reimbursable from these accounts.
Clarification of FFCRA Group Health Plan Cost Sharing Waiver for Coronavirus-Related Testing and Treatment
Section 6001 of the Families First Coronavirus Response Act (FFCRA) requires group health plans to cover, without cost sharing, (i) all laboratory testing approved by the FDA to detect the virus that causes COVID-19 and (ii) all expenses for provider office visits (including in-person, telehealth, urgent care and emergency room visits) that produce a COVID-19 testing order, for the duration of the national emergency declared under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Section 3201 of the CARES Act expands the scope of testing required to be covered without cost sharing to “emergency use” diagnostic methods, and Section 3202 of the CARES Act requires certain disclosures regarding the cost of testing and sets the rate of reimbursement for testing payable by plans to providers. Section 3203 of the CARES Act separately requires that group health plans (and health insurance issuers) cover, without cost sharing, any “qualified coronavirus preventive service”, which in general means an evidence-based item or service designed to prevent or mitigate COVID-19 that is currently recommended by the U.S. Preventive Services Task Force, or is an immunization recommended by the CDC, within 15 days after the date such recommendation is made.
Temporary Expansion of Code Section 127 Plan Rules to Cover Employer Payments of Employee Student Loan Debt Up To $5,250
Code section 127 provides a $5,250 per calendar year exclusion from employees’ gross income for “educational assistance” payments from employers, providing the educational assistance program meets certain requirements. Until the CARES Act, “educational assistance” has meant payments for the cost of tuition, books, supplies, fees and the cost of classroom instruction—i.e. expenses currently being incurred by employees, as opposed to expenses previously incurred and paid for through student loans.
Effective upon enactment, Section 2206 of the CARES Act expands the scope of “educational assistance” under Code section 127 to payments by an employer to the employee (or directly to the lender servicing the employees’ loans), of principal and interest on any “qualified education loan” (generally a loan incurred to pay expenses incurred by an employee, or the employee’s spouse or dependents in pursuit of a degree or certificate of higher education) made before January 1, 2021. Interest on the student loan is not deductible to the employee to the extent it is paid by an employer in this manner.
Charitable Giving Incentives
Charitable organizations other than supporting organizations and donor-advised funds may benefit from the individual charitable giving incentives applicable to individuals described above under the heading “Individual Tax Relief” In addition, for corporations, Section 2205 of the CARES Act raises the annual corporate charitable contribution limit from 10% to 25% and also raises the cap on food donations from corporations from 10% to 25%.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19
Tax-exempt organizations described in Code section 501(c) (this includes all 501(c) organizations, not just 501(c)(3) charitable organizations) can apply for employee retention credits arising from certain COVID-19 related business closures as described above in the section on Payroll Tax Relief.