The ramifications of the COVID-19 pandemic continue to negatively impact businesses, and many companies may be forced to reduce their personnel expenses. Following is an overview of available employer options, including: furloughs, layoffs/reductions in force, pay and hour reductions.
Furlough: Many employers have considered the furlough option. The vast majority of these furloughs entail a one-time furlough including a restart or re-assessment date. However, rolling cycle furloughs are also being used. This entails each employee taking a one week or longer furlough on a rolling basis. For example, Joe will not work the first week of the month but will work the rest of the weeks. Sally will not work the second week of the month, but will work the rest of the weeks and so on.
Importantly, exempt employees must be paid for any week in which they perform work. Thus, if you are furloughing exempt employees, make sure to do it in full week increments. In addition, consider placing the furloughed employees on a “no-work” policy to ensure they are not performing any work while furloughed.
Layoffs/Reduction in Force: One of the most often used money-saving strategies we are seeing is layoffs. This decision should be balanced while considering the possible effects on the CARES SBA loan provision.
Pay Cuts: Many employers are cutting employee salaries in an effort to cut costs. Employers must do this prospectively with advanced written notice. In addition, employers should keep in mind that this could affect FLSA exempt status. The DOL explains that “[a]n employer is not prohibited from prospectively reducing the predetermined salary amount to be paid regularly to an exempt employee during a business or economic slowdown, provided the change is bona fide and not used as a device to evade the salary basis requirements. Such a predetermined regular salary reduction, not related to the quantity or quality of work performed, will not result in loss of the exemption, as long as the employee still receives on a salary basis at least $684 per week. On the other hand, deductions from predetermined pay occasioned by day-to-day or week- to-week determinations of the operating requirements of the business constitute impermissible deductions from the predetermined salary and would result in loss of the exemption. The difference is that the first instance involves a prospective reduction in the predetermined pay to reflect the long term business needs, rather than a short-term, day-to-day or week-to-week deduction from the fixed salary for absences from scheduled work occasioned by the employer or its business operations.” Keep this in mind when making your pay cut decisions.
Hour Cuts: Employers are also cutting hours. If you do so, do it prospectively and with advanced written notice. While this does not affect non-exempt employees significantly, employers should use caution to ensure the employees are still exempt after the hour cuts using the same method as explained above in the “pay cuts” section.
WARN Act: If you are ordering mass layoffs, furloughs, or hour cuts, don’t forget that the Workers Adjustment and Retraining Notification Act (WARN) could apply to you. The WARN Act requires covered employers (those with at least 100 employees excluding part-time employees, or 100 or more employees, including part-time time employees who in the aggregate work at least 4,000 hours per week) to provide at least 60 days’ advanced notice to covered employees of a mass layoff (employment loss of at least 33% of the employees and at least 50 employees or at least 500 employees within a 30 day period) or plant closing (employment loss of 50 or more employees within 30 days). An employment loss includes termination, a layoff exceeding 6 months, and a reduction of hours of work of individual employees of more than 50% during each month for any 6 month period.
There are arguments that the “unforeseeable business circumstance” exception may apply. It applies when a plant closing or mass layoff is caused by a business circumstance that was not reasonably foreseeable at the time notice would have been required, then the employer may be exempt from WARN requirements. While some government orders could arguably, fall within this exemption, seek counsel if you think you may fall into the WARN Act requirements and feel that you may be exempt. Lastly, if you are making decisions that could bring the WARN Act into play, ensure that you are also complying with your state’s WARN Act if applicable.
Discrimination Concerns: Lastly, in applying all of the above cost-cutting procedures, make sure that you do so in a uniform way. Clearly document your procedures and abide by them as strictly as possible. This will lower the exposure to a discrimination-based lawsuit.
Easing Tax Compliance Burdens and Economic Pain During COVID-19
IRS Actions via FFCRA and CARES Acts
The following is a summary of the IRS actions taken to ease tax compliance burdens and economic pain caused by COVID-19 via the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief and Economic Security (CARES) Act.
- Filing and payment deadlines are deferred
- Favorable treatment for COVID-19 payments from Health Savings Accounts (HSAs)
- Payroll tax credits (and one tax exemption)
- Waiving 10% additional tax for premature retirement plan distributions (related to COVID-19)
- Increased retirement plan loan amounts and extended repayment periods
- Some retirement plan required minimum distributions (RMDs) can be delayed
Details relative to these significant actions (and others) are outlined below.
Filing and payment deadlines deferred. The IRS provides the following to all taxpayers—meaning all individuals, trusts, estates, partnerships, associations, companies, or corporations, regardless of whether or how much they are affected by COVID-19:
- For a taxpayer with a federal income tax return or a federal income tax payment due on April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed.
- The taxpayer doesn’t have to file Form 4686 (automatic extensions for individuals) or Form 7004 (certain other automatic extensions) to get the extension.
- The relief is for (a) federal income tax payments (including tax payments on self-employment income) and federal income tax returns due on April 15, 2020 for the person’s 2019 tax year; and (b) federal estimated income tax payments (including tax payments on self-employment income) due on April 15, 2020 for the person’s 2020 tax year.
- No extension is provided for the payment or deposit of any other type of federal tax (e.g. estate or gift taxes) or the filing of any federal information return.
- As a result of the return filing and tax payment postponement from April 15, 2020, to July 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties, and additions to tax will begin to accrue again on July 16, 2020.
Favorable treatment for COVID-19 payments from Health Savings Accounts. Health Savings Accounts (HSAs) have both advantages and disadvantages relative to Flexible Spending Accounts when paying for health expenses with untaxed dollars. One disadvantage is that a qualifying HSA may not reimburse an account beneficiary for medical expenses until those expenses exceed the required deductible levels. However, the IRS has announced that payments from an HSA that are made to test for or treat COVID-19 don’t affect the status of the account as an HSA (and do not cause a tax for the account holder) even if the HSA deductible hasn’t been met. Vaccinations continue to be treated as preventative measures that can be paid for without regard to the deductible amount.
Tax credits and a tax exemption to lessen burden of COVID-19 business mandates. On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes the tax credits and a tax exemption discussed below.
(1) Payroll tax credit for required paid sick leave (the payroll sick leave credit). The Emergency Paid Sick Leave Act (EPSLA) division of the Act generally requires private employers with fewer than 500 employees to provide up to 80-hours of paid sick time to employees who are unable to work for virus-related reasons (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The pay is up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee that is a caregiver.
The tax credit corresponding with the EPSLA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit amount generally tracks the $511/$5,110 and $200/$2,000 per-employee limits described above. The credit can be increased by (1) the amount of certain expenses in connection with a qualified health plan if the expenses are excludible from employee income; and (2) the employer’s share of the payroll Medicare hospital tax imposed on any payments required under the EPSLA. Credit amounts earned in excess of the employer’s 6.2% Social Security (OASDI) tax (or in excess of the Railroad Retirement tax) are refundable. The credit is electable and includes provisions that prevent double tax benefits (for example, using the same wages to get the benefit of the credit and of the current law employer credit for paid family and medical leave). The credit applies to wages paid in a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020; and (2) ending on December 31, 2020.
(2) Payroll tax credit for required paid family leave (the payroll family leave credit). The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid and unpaid leave (with an administrative exemption for less-than-50-employee businesses that the leave mandate puts in jeopardy). The leave generally is available when an employee must take off to care for the employee’s child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either (1) closes a school or childcare place; or (2) makes a childcare provider unavailable. Generally, the first 10 days of leave can be unpaid and then paid leave is required, pegged to the employee’s pay rate and pay hours. However, the paid leave can’t exceed $200 per day and $10,000 in the aggregate per employee.
The tax credit corresponding with the EFMLEA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax). The credit generally tracks the $200/$10,000 per employee limits described above. The other important rules for the credit, including its effective period, are the same as those described above for the payroll sick leave credit.
(3) Exemption for employer’s portion of any Social Security (OASDI) payroll tax or railroad retirement tax arising from required payments. Wages paid as required sick leave payments because of EPSLA or as required family leave payments under EFMLEA are not considered wages for purposes of the employer’s 6.2% portion of the Social Security (OASDI) payroll tax or for purposes of the Railroad Retirement tax.
Although state and municipal governments are required to comply with the EPSLA and EFMLEA, the associated tax credits are not currently available to them. This may be changed with additional government guidance.
The CARES Act
Retirement Provisions
The CARES Act waives the 10% additional tax for premature distributions related to the coronavirus for amounts not to exceed $100,000 from all plans of the controlled group, subject to the following rules:
- The penalty free distribution provision covers retirement plans and IRAs;
- Amounts distributed may be repaid at any time over the three-year period commencing on the date the distribution was received (and there is no requirement that the repayment occur in one tranche);
- Amounts distributed can be paid (repaid) to a qualified plan or an IRA so long as the account is one to which a rollover contribution could be made under the Code;
- The distribution provision applies to individuals who have been diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control (CDC), their spouse or dependent who has been diagnosed by such a test, or a person who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours, or who is unable to work due to lack of child care. The CARES Act allows a plan to rely on a certification provided by the participant;
- To the extent that the amounts are not repaid, the income inclusion with respect to any coronavirus distribution can be included ratably over the three taxable years beginning with the taxable year in which the distribution was received; and
- Distributions will be deemed to meet the permissible distribution requirements of section 401(k), which essentially means that they will satisfy the hardship distribution provisions of the code. They will be treated as exempt from tax withholding and exempt from the trustee to trustee transfer rules (that require a plan to offer a trustee to trustee transfer to participants taking distributions).
In addition, the CARES Act increases the dollar amount available for loans from qualified plans from $50,000 to $100,000 and increases the percentage limit for loans from half the present value of the participant’s benefit to the present value of his entire benefit under the plan. Furthermore, if a loan repayment is due on a loan outstanding between the date of the CARES Act’s enactment and before the end of the year, the CARES Act allows the repayment to be delayed for one year from the original due date. Subsequent loan repayments must be adjusted to reflect the delay in the 2020 repayment and any interest accruing during that delay. The five‑year limit on loan repayments in section 72(p) disregards the one-year delay for 2020. The individuals to whom this provision applies are the same as those covered by the provision permitting penalty-free distributions.
The amendments made by the retirement provisions apply for calendar years beginning after December 31, 2019, allowing participants who have already taken plan distributions the benefit of these provisions.
The CARES Act adds a provision permitting a one-year delay in required minimum distributions (RMDs) for defined contribution plans described in Code section 401(a), as well as for defined contribution plans described in section 403(a) and (b), IRAs, and section 457 plans. Thus, the change does not appear to apply to defined benefit plans. The delay applies to both 2019 RMDs that needed to be taken by April 1, 2020 and 2020 RMDs. The CARES Act also adds the special rollover rule similar to the one enacted in 2009, allowing amounts subject to the RMD rules in 2020 to be rolled over.
The CARES Act delays the due date for amendments to plans, so long as the plan is operated as if the amendment is in effect and any subsequent writing is retroactive, as follows:
- Amendments required because of the Act need only be made by the last day of the plan year beginning on or after January 1, 2022; and
- In the case of governmental plans, that date is the last day of the plan year beginning on or after January 1, 2024.
- The Secretary of the Treasury can delay these dates. The Act makes clear that the retroactive amendment will not violate the cutback provisions of Employee Retirement Income Security Act of 1974 (ERISA) or the Code.
The CARES Act also delays minimum funding contributions for qualified defined benefit pension plans, including quarterly contributions until January 1, 2021. The amount of each such minimum required contribution shall be increased by interest accruing for the period between the original due date and the payment date, at the effective rate of interest for the plan year in which the payment is made.
When determining whether Section 436 benefit restrictions apply to any plan year that includes the 2020 calendar year, sponsors can choose — but are not required — to use the plan’s adjusted funding target attainment percentage (AFTAP) for the plan year ending in 2019. This relief could help sponsors avoid freezing benefits and continue to offer lump sums and other accelerated payment forms in 2020, even if the plan’s funded status has significantly declined in the wake of the pandemic.
Finally, the amended CARES Act expands the circumstances under which the Secretary of Labor can postpone certain filing deadlines. Currently, ERISA allows the Labor Secretary to delay filing deadlines up to one year if the President has declared a “disaster” under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) or if there has been a terroristic or military action. As of March 25, 2020, President Trump has only declared the COVID-19 pandemic a “national emergency” (which is different than a “disaster”). The CARES Act amends section 518 of ERISA to permit the Labor Secretary to postpone certain filing deadlines by up to one year if the Secretary of the Department of Health and Human Services (HHS) declares a “public health emergency” pursuant to section 319 of the Public Health Service Act. HHS Secretary Alex Azar did just that on January 31, 2020.
Employee Retention Credit
The CARES Act provides eligible employers – including tax-exempt organizations but not governmental entities – a refundable credit against payroll tax (Social Security and Railroad Retirement) liability equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits). Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:
- Have business operations fully or partially suspended operations due to orders from a governmental entity limiting commerce, travel, or group meetings; or
- Experience a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.
For employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit. The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021.
Delay of Employer Payroll Taxes
The CARES Act postpones the due date for depositing employer payroll taxes and 50% of self-employment taxes related to Social Security and Railroad Retirement and attributable to wages paid during 2020. The deferred amounts would be payable over the next two years – half due December 31, 2021, and half due December 31, 2022.
Coverage of Testing and Preventive Services
The CARES Act expands the types of testing that would be covered with no cost sharing beyond the scope of the types of testing contemplated by the Families First Act. In addition to the in vitro diagnostic testing approved, authorized, or cleared by the FDA, it also covers in vitro diagnostic testing for which the developer has requested, or intends to request, emergency use authorization from the FDA or that a state (which has told HHS it is reviewing such test) has authorized. It leaves open for coverage other types of testing by covering any “other test that the Secretary determines appropriate in guidance.”
The CARES Act also requires that the group health plan or insurer reimburse the provider for either the negotiated cost of the testing or if there is no negotiated price between the group health plan (or insurer) and the provider, for the cash price of the diagnostic testing as reflected on its website. The provider is required to publicize that price on a publicly available website. If a provider fails to publicize the price of the testing, it is subject to a fine not to exceed $300 per day.
The CARES Act provides that if preventive measures, defined as an “item, service, or immunization that is intended to prevent or mitigate coronavirus disease 2019” become available, then group health plans/insurers must also cover such preventive measures with no cost-sharing obligation. The item or service must meet certain criteria of the United States Preventive Services Task Force or must have a recommendation from the CDC “with respect to the individual involved.” It is unclear how an individual-by-individual approval is intended to work in practice.
Changes to Paid Sick Leave and Family Leave Provisions from Families First Act
The CARES Act provides a few clarifications and makes modest changes to the Family Medical Leave Act provisions in the previous Families First relief package. Those changes include:
- Authority for the Office of Management and Budget (OMB) to exclude certain US government employers and executive branch employees for good cause from the expanded COVID-19 FMLA requirements; and
- A new rule for rehired employees under which “eligible employee” (defined as employed for at least the last 30 calendar days) includes someone who:
- Was laid off by the employer March 1, 2020 or later;
- Had worked for the employer for at least 30 days in the last 60 calendar days prior to the lay-off; and
- Has been rehired by the employer; and
- Allows for advances on anticipated tax credits for employers’ paid family leave costs (the details/process for which will be worked out in instructions provided by the Department of Labor (DOL)), and provides penalty relief for failure to deposit tax amounts in anticipation of credits allowed under this section.
In terms of clarifications, the new package clarifies that the $200 per day/$10,000 total cap on paid leave is per employee, which was omitted from the Families First Act.
Similarly, there are parallel changes made to the paid sick leave provisions from the Families First Act, which include:
- Authority for OMB to exclude certain US government employers and executive branch employees for good cause from the expanded COVID-19 paid sick leave requirements; and
- Includes provisions intended to improve the ability of taxpayers to monetize the benefit of the recently-enacted sick and family leave credits. Specifically, the CARES Act allows employers to receive an advance tax credit from Treasury instead of having to be reimbursed on the back end. Also, it provides penalty relief for failure to deposit tax amounts in anticipation of credits allowed under this section.
The CARES Act also makes a clarification that the paid leave dollar limits under these provisions are per employee.
DOL regulations are expected in April to address additional questions and details under these Families First Act provisions.
Health Savings Accounts
The CARES Act clarifies that for plan years beginning on or before December 31, 2021, a plan will not fail to be a high deductible health plan by failing to have a deductible for telehealth and other remote care services.
In addition, the CARES Act repeals the rule enacted in the Affordable Care Act that prohibited over-the-counter medicines (i.e., non-prescribed) other than insulin from being “qualified medical expenses.” Thus, users of health savings accounts or flexible spending accounts would be able to use funds in those accounts to cover over-the-counter medical products, including those needed in quarantine and social distancing, without a prescription. The provision also adds menstrual products to the definition of qualified medical expenses.
Employer Payments of Student Loans
The CARES Act permits employers to provide a student loan repayment benefit to employees on a tax-free basis, up to $5,250. This amount would be excluded from the employee’s income and can also include payments under employers’ existing tuition assistance programs. The tax-free cap applies to any payments made by an employer for these purposes before January 1, 2021.
Employer Suspension of Federal Department of Education Loans
Automatic suspension of Federal Department of Education student loans is effective from March 13, 2020 through September 30, 2020. Employers will receive an order soon from the Department of Education to immediately stop wage garnishments relating to Federal Student Loans. This guidance is found at studentaid.gov/announcements-events/coronavirus under the “Questions about Defaulted Loans” section. The employee will also receive a letter from the Department of Education explaining the suspension and how they can continue to pay on their loans if they wish by contacting the Department of Education. Amounts erroneously deducted for loan repayment after March 13, 2020 will be refunded to borrowers by the Department of Education by request.
Updates on the Leave Provisions Under the Families First Coronavirus Response Act
On April 1, 2020, the leave provisions under the Emergency Family and Medical Expansion Act (EFMLEA) and the Emergency Paid Sick Leave Act (EPSLA) of the comprehensive Families First Coronavirus Response Act (the Act) took effect. We reported on this development a few weeks ago (click here for the March 19 legal alert). However, since first being signed into law on March 18, 2020, we have received more guidance on how the laws should be implemented. Since our last update, the DOL and IRS have clarified how employers may reimburse themselves much more quickly than originally thought (see article above). We have also received guidance on the tests that will apply in determining how to count whether 500. Finally, the DOL has published posters that covered employers must post.
Summary of the Law
Under both the EFMLEA and EPSLA, employers with fewer than 500 employees must provide certain leave to their employees. For small employers with fewer than 50 employees, there is a possible exemption if the business can show that the leave requirements would jeopardize the viability of the business as a going concern.
Generally speaking, the EPSLA requires that employers provide all employees with two weeks or up to 80 hours of paid sick leave for any of the following reasons: (i) the employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19; (ii) the employee has been advised by a health care provider to self-quarantine related to COVID-19; (iii) the employee is experiencing COVID-19 symptoms and is seeking a medical diagnosis; (iv) the employee is caring for an individual subject to (i) or (ii); (v) the employee is caring for a child whose school or place of care is closed (or child care provider is unavailable) for reasons related to COVID-19; or (vi) the employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury. If the employee is taking leave for reasons (i) through (iii), the employee is entitled to his or her full rate of pay up to a cap of $511 per day. If the reason is (iv) through (vi) then the employee is entitled to two-thirds their regular rate of pay with a cap of $200 per day.
Additionally, under the EFMLEA, an employee that has been employed for at least 30 days is entitled to an additional 10 weeks of paid leave (and two weeks of unpaid leave) if the employee is unable to work due to a bona fide need to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID- 19. The employee is entitled to two-thirds of his or her regular rate of pay, again capped at $200 per day and $12,000 aggregate over the twelve week period.
Recent guidance has clarified that the EFMLEA leave is not in addition to normal FMLA leave. In other words, if an employee has exhausted their 12 weeks of normal FMLA leave, they are not eligible for additional EFMLEA leave. Guidance has also clarified that leave does not apply to employees who are absent due to lack of work, even if that lack of work is COVID related.
On the other hand, sick leave under EPSLA is in addition to leave granted under other employer policies or prior to April 1. Thus, employers may not require employees to first use other paid leave, and such leave will not run concurrently with EPSLA.
Tax Reimbursement
Covered employers qualify for a dollar to dollar reimbursement through tax credits paid under the Act. For more information about this tax reimbursement, please see article above.
Notice and Posting Requirements
Additionally, covered employers must post in a conspicuous place the new poster for the Act, available at:
https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf.
The posting requirement may also be satisfied by emailing or direct mailing the notice to employees or by placing this information on a website for its employees.
Enforcement
Employers should immediately begin making efforts to comply with the Act, as it takes effect on April 1, 2020. However, the Department of Labor has agreed that it will not bring enforcement actions against any public or private employer within 30 days of the Act’s enactment (until April 17, 2020) so long as the employer has made reasonable, good faith efforts to comply with the Act. An employer will be considered to be acting “reasonably” and “in good faith” when the employer remedies any violations as soon as practicable, the violations of the Act were not willful, and the Department receives written commitment from the employer to comply with the Act in the future. After April 17, 2020, the Department of Labor intends to fully enforce the Act and its provisions.
Additional Regulations and Guidance
In the next few weeks, we expect there to be significant developments as additional regulations are implemented and additional guidance is provide. We will do our best to continue to update you as new information is released. Please also feel free to reach out with your questions and concerns.