On Friday, March 27, 2020, Congress passed and the President signed the Coronavirus Aid, Relief and Economic Security Act (CARES). The law provides economic assistance to employers and workers in our nation given the economic impact of the pandemic.
I have counseled many clients the past three weeks given significant employment ramifications to businesses and nonprofit organizations in our State. CARES is, for the most part, a giant unemployment, business loan, and tax bill. As a result, for employers, most follow-up questions will require input from a tax advisor.
This article covers both individual/employee issues as well as loans and tax credits available for employers. It’s important that everyone understands the various options available.
Unemployment expansion for individuals
Many employers and employees have reached out to me wondering what happens with all the layoffs that have occurred in our State due to businesses being unable to operate or having to drastically downsize given Executive Order 2020-21 (“Stay in Place” Order). Any employee out of work due to layoff or closure can apply for unemployment.
The unemployment insurance program is funded by employers and employees through each paycheck (you can see the deduction on your pay-stub; many people don't realize that in addition to the employee contribution, employers are also making an equal contribution to the unemployment fund each pay period). CARES has made significant changes to the State's unemployment benefits (including adding an extra $600 per week in benefits for up to four months to the usual $362/week benefit offered in Michigan).
Usually, to qualify for unemployment, the employee must have:
(1) worked for a Michigan employer(s) during base period (4 of 5 last quarters),
(2) have made at least $3,589 in wages during one of the four quarters;
(3) earned wages in at least 2 quarters of the base period; and
(4) the employee’s total wages for the base period must have been at least 1.5 times the wages of the highest-earning quarter.
There is also an alternative calculation which requires the employee to have earned wages in at least two of the quarters and the total wages for all four quarters must equal at least 20 times the state average weekly wage (totaling $20,250 for 2019).
The Governor recently expanded unemployment benefits using her emergency powers via Executive Order (EO 2020-10 which was then replaced by EO 2020-24). The expansion made it clear that the following reasons will also qualify an individual for unemployment benefits: Employee (1) left work because of self-isolation or self-quarantine in response to an elevated risk from COVID-19 and being immunocompromised; (2) having symptoms of COVID-19; (3) having contact in the last 14 days with someone with a confirmed diagnosis of COVID-19; (4) having to care for someone with a confirmed diagnosis of COVID-19; or (5) having to care for children because of an ordered shutdown of school/childcare. The Governor's order expanded unemployment coverage from 20 to 26 weeks and expanded the time period to apply for benefits to 28 days. It also stated that an employer's unemployment account would not be charged due to layoffs or leaves of absence.
While this expansion was very helpful to some employees, individuals still would have had to qualify for benefits under the usual qualification rules, leaving many workers without coverage (including those without enough hours worked or wages earned the prior year and contractors). In order to offer expanded coverage, federal assistance was needed.
The federal CARES Act, in addition to adding $600/week in benefits for up to 4 months, expanded unemployment coverage to 39 weeks and expanded eligibility to the following (the first several of which are also covered by the Governor's EO 2020-24):
- An individual has been diagnosed with COVID-19 or is experiencing symptoms and is seeking a diagnosis;
- A member of the individual's household has been diagnosed with COVID-19;
- The individual is providing care for a family member or household member who has been diagnosed with COVID-19;
- A child or other person in the household for which the employee has primary caregiving responsibility is unable to attend school or another facility that is closed as a direct result of the COVID-19 emergency (and thus the employee cannot work);
- The individual is unable to reach the place of employment because they have been advised by a health care provider to self-quarantine;
- An individual was scheduled to start working but unable to do so as a direct result of the COVID-19 emergency;
- An individual has become the breadwinner because the head of household died as a result of COVID-19;
- An individual has quit his or her job as a direct result of COVID-19;
- The individual's place of employment closed as a direct result of the COVID-19 emergency; or
- An individual is self-employed, seeking part-time employment, does not have sufficient work history, or otherwise would not qualify for unemployment benefits AND meets one of the above reasons for needing to file for benefits.
People who are remote working or who are receiving other paid benefits (such as paid sick or medical leave) are not eligible for unemployment benefits. Once the new federal benefit is exhausted, workers will receive their usual state allotment of benefits. The Unemployment Agency now has parameters for when people should file by last name to help manage the overload the system is experiencing.
The CARES Act also includes $1,200 in one-time rebates to individuals ($2,400 for married couples; $500 per child) with the following phase-out range based upon adjusted gross income (individuals are no longer eligible for a rebate at the top of the range):
- Individuals: $75,000 - $99,000
- Joint Filing: $150,000 - $198,000 ($218,000 married with 2 children)
The rebate is based upon 2019 tax returns (or 2018 if there is not a filing yet for 2019).
Tax credits for employer payroll and benefits
CARES incentivizes employers (including nonprofit organizations) to maintain its payroll and benefits through a refundable tax credit for employers with operations partially or fully suspended due to the pandemic or whose gross receipts declined more than 50% (compared to the same quarter in the prior year). To qualify, the entity must have been operating in 2020.
The tax credit is a refundable payroll tax credit equal to 50% of qualified wages and is available up to $10,000 for compensation paid to an employee between March 13 and December 31, 2020 for employees on the employer’s payroll (assuming certain conditions are met). The credit applies as follows: (1) for employers who had an average of more than 100 full-time employees in 2019, the credit applies to those employees who have been retained but are not able to work and (2) for employers who had an average of 100 or fewer employees in 2019, the tax credit is available for all employees on payroll.
Employers and self-employed individuals can delay employer FICA/Social Security taxes over the following two years, interest free, with half due by December 31, 2021 and the remainder due by December 31, 2022.
Employers who obtain a Paycheck Protection Loan (see next point) are not eligible to participate in the tax credit program.
Paycheck Protection Program
Small businesses (including 501(c)(3) and (c)(19) organizations) with 500 or fewer employees can now access loans under the Paycheck Protection Program, which is part of CARES. The loan can be used for payroll costs (excluding costs of any annual salary which exceeds $100,000 and compensation for employees whose residence is outside the USA), health benefits, paid sick/medical/family leave, mortgage interest, rent, utilities, and any interest owed on debt obligations incurred before February 15, 2020. Loans cannot be used for wages already covered by the Families First Coronavirus Response Act (paid sick leave/paid family leave for childcare). Neither a personal guarantee nor pledged collateral is required to obtain the loan.
Loans are available up to $10,000,000 (but capped at 2.5 times average monthly payroll costs--looking back one year prior to the loan) and have a maximum term of 10 years. Rates are capped at 4%.
Loans can also be fully deferred for 6 months to one year. Significantly, loans can be forgiven for any amount used for the listed purposes for the first 8 weeks of the loan. The amount forgiven will be reduced proportionally by any reduction in employees or their compensation (if 25% change based upon prior compensation). If workers who were laid off between February 15 and April 1 are rehired, that reduction will not count against the loan forgiveness provision so long as they are rehired by June 30, 2020. Loan forgiveness will be obtained via submission of required documentation to the lender.
Businesses will obtain these loans from SBA-approved lenders (such as a bank or credit union).
CARES also will provide for loans to companies with 500-10,000 employees (which require at least 90 percent retention of the workforce with full compensation and benefits).
SBA Economic Injury Disaster Loans
Businesses and private non-profit organizations (which under CARES includes all 501(c) organizations), that have 500 or fewer employees operating as of January 31, 2020 with payroll or contractors can now access loans (up to $2 million based on need) via the SBA Economic Injury Disaster Loan (EIDL) program.The existing program has been expanded to cover those impacted by the pandemic. Interest rates are 3.75% for small businesses and 2.75% for private nonprofit organizations with up to a 30-year term. Sole proprietors, independent contractors, and self-employed workers are also eligible for this program. Applicants will apply at www.sba.gov/disaster.
Loans of less than $200,000 will not require a personal guarantee. The usual requirements of not being able to access credit elsewhere and having been in business for one year have been waived for this program. Applications are based upon credit scores. Additionally, borrowers can access a $10,000 emergency grant that will be forgiven if used for payroll, paid leave, mortgage, or other debts. The program period is January 31 to December 31, 2020.
Significantly, a $10,000 advance is also available within three days of applying prior to formal approval for purposes that include maintaining payroll to retain employees, meeting increased costs, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses. Repayment of the advance will not be required (even if the application is denied).
Employers may qualify for both participation in the Paycheck Protection Program and the SBA EIDL program under some circumstances. The EIDL loan will not be available for duplicative purposes.
Other parts of the law
Employers can make tax-free payments for student loans (a benefit program many employers have been pushing for that is now in place until December 31, 2020). Employers must have a written program in place communicated to eligible employees. Employees also will be able to borrow money from retirement account without penalties for a limited time period.
The bill has MANY other non-employment provisions that I have not addressed, including increasing the charitable deduction to $300 for those who take the standard deduction.
As with all updates, this is not legal advice as the laws are complicated and require analysis on a case-by-case basis. These are difficult times but hopefully some of the programs outlined are helpful to you.
Elizabeth Welch practices employment law in Grand Rapids and is currently a candidate for the Michigan Supreme Court. Her work includes assisting small businesses and nonprofit organizations as well as individuals on employment matters. Elizabeth is very involved in Grand Rapids’ non-profit community, serving on numerous boards, including the Steelcase Foundation and the Grand Valley University Foundation. She is a prior Vice President of the East Grand Rapids Board of Education and prior President of the Michigan League of Conservation Voters. She is a 2004 graduate of Leadership Grand Rapids and was recognized as a “40 Under 40” leader (way back when she was under 40). Elizabeth and her husband Brian are busy with their four kids (ages 19-22), three of whom are home completing their studies online.