The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. Here’s a list of the tax-related provisions regarding employee benefits.
Waiver of 10% early distribution penalty.
The additional 10% tax on early distributions from IRAs and defined contribution plans, such as 401(k) plans, is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is diagnosed with the coronavirus or who is economically harmed by the coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the option to spread out the distributions. Employers may amend defined contribution plans to provide for these distributions.
Waiver of required distribution rules.
Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner's having turned age 70½ in 2019.
Defined contribution plans, like a 401(k )plan, are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.
- The dollar limit on plan loans may be increased from $50,000 to $100,000 and the percentage limit from 50% to 100% of the present value of the participant’s account, for loans made during the 180-day period following enactment of the CARES Act, i.e., until September 23, 2020.
- Any plan loan repayment that comes due during the period beginning on enactment of the CARES Act and ending on December 31, 2020 may be delayed for an additional year. There is an exclusion for employer payments of student loans. An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.
Break for remote care services provided by high deductible health plans.
For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for telehealth and other remote services without regard to the deductible amount for the plan.
Break for nonprescription medical products.
For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren't paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Accounts and Health Reimbursement Arrangements.
Pension funding delay.
The CARES Act gives single-employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.
Accelerated payment of credits for required paid sick leave and family leave.
The CARES Act authorizes the IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.
Recent COVID-19 Legislation Provides Payroll Tax Relief to Employers.
Employee retention credit for employers.
Eligible employers can qualify for a refundable credit against, generally, the employer's 6.2% portion of the Social Security (OASDI) payroll tax, or against the Railroad Retirement tax, for 50% of certain wages (below) paid to employees during the COVID-19 crisis. See our
Recent COVID-19 Legislation Provides Payroll Tax Relief to Employers, which discusses the Employee retention credit for employers in greater detail.
Charitable deduction liberalizations.
The CARES Act makes four significant liberalizations to the rules governing charitable deductions:
- Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
- The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn't apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual's qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
- Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn't apply to qualifying contributions made in 2020. Instead, a corporation's qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
- For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.
Delayed payment of employer payroll taxes.
Taxpayers, including self-employed individuals, will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). The relief isn't available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For self-employed individuals, the deferral applies to 50% of the Self-Employment Contributions Act tax liability, including any related estimated tax liability.
Certain SBA loan debt forgiveness isn't taxable.
Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren't taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020. See our
for a discussion of the new SBA Payment Protection Program Loan For Small Businesses.
We are pleased to hear from you at any time with questions about the above information or any other matters, related to COVID-19 or not.