On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. The CARES Act is a roughly $2 trillion package that includes significant expansions in small business lending, unemployment insurance, tax relief to individuals and employers, health care measures, $500 billion in economic stabilization funds and other measures aimed at combating the COVID-19 health care and economic crisis. Below is a general summary of select provisions of the CARES Act, followed by a brief summary of certain state-level measures that have been announced by the State of Maryland.
CARES Act Summary
EMERGENCY FINANCIAL AID (INCLUDING FOR CERTAIN NON-PROFITS)
The CARES Act provides $500 billion to Treasury’s Exchange Stabilization Fund to provide loans, loan guarantees, and other investments ($46 billion of this amount has been allocated to the airline industry and to businesses important to maintaining national security). All direct lending must meet the following criteria: (1) alternative financing is not reasonably available; (2) the loan is sufficiently secured or made at an interest rate that reflects the risk of the loan and, if possible, not less than an interest rate based on market conditions for comparable obligations before the coronavirus outbreak; (3) the duration of the loan shall be as short as possible and shall not exceed 5 years; (4) borrowers and their affiliates cannot engage in stock buybacks, unless contractually obligated, or pay dividends until the loan is no longer outstanding or one year after the date of the loan; (5) a borrower must, until September 30, 2020, maintain its employment levels as of March 24, 2020, to the extent practicable, and retain no less than 90 percent of its employees as of that date; (6) a borrower must certify that it is a U.S.-domiciled business and its employees are predominantly located in the U.S.; (7) the loan cannot be forgiven; and (8) in the case of borrowers critical to national security, their operations are jeopardized by losses related to the coronavirus pandemic.
Treasury will endeavor to implement a special facility through the Federal Reserve targeted specifically at nonprofit organizations and businesses between 500 and 10,000 employees, subject to additional loan criteria and obligations on the recipient, such as: (1) the funds received must be used to retain at least 90 percent of the recipient’s workforce, with full compensation and benefits, through September 30, 2020; (2) the recipient will not outsource or offshore jobs for the term of the loan plus an additional two years; (3) the recipient will not abrogate existing collective bargaining agreements for the term of the loan plus an additional two years; and (4) the recipient must remain neutral in any union organizing effort for the term of the loan.
Businesses in which the President, Vice President, Members of Congress, and heads of Executive Departments (and the immediate families of listed individuals) hold a 20 percent or greater interest (by vote or value) in any class of equity are not eligible for relief from the fund.
Paycheck Protection Program. The CARES Act establishes a new Paycheck Protection Program to let small businesses, nonprofits, and individuals seek loans through the Small Business Administration’s (“SBA”) 7(a) loan program. The CARES Act authorizes $349 billion in total 7(a) lending from Feb. 15 through June 30, instead of the current $30 billion authorization for fiscal 2020, and provides for the SBA to fully guarantee loans under the new program, compared with a 75% or 85% guarantee for standard 7(a) loans.
These loans would be available during the covered period for (i) any business, nonprofit, veterans group, or tribal business with 500 or fewer employees, or a number set by the SBA for the relevant industry, (ii) sole proprietors, independent contractors, and eligible self-employed workers, and (iii) hotel and food service chains with 500 or fewer employees per location. Rules requiring recipients to pay certain fees, provide collateral, or be unable to obtain credit elsewhere are waived. SBA rules on company affiliates used to determine small business size would be waived for franchises, food or lodging companies with 500 or fewer employees, and businesses that get financial assistance from a small business investment company.
Loans to an eligible borrower under the new program cannot exceed the lesser of $10 million or 250% of the eligible borrower’s average monthly payroll costs, and will have interest rate that does not exceed four percent. The loans can be used to cover eligible payroll costs — including salaries, commissions, regular paid leave, and health-care benefits — as well as mortgage interest, rent and utility payments, but they cannot be used to compensate individual employees at an annual rate above $100,000, or to pay for emergency sick or family leave under the second coronavirus response package (Public Law 116-127). Lenders under this program are required to provide deferral of any payment of principal, interest or fees for at least six months and as long as one year.
Subject to certain limitations, recipients of these loans are eligible to have a portion of the loan forgiven, with the forgiven amount being equal to the sum of certain costs (relating to payroll, mortgage interest, rent, and utilities) for the 8-week period beginning on the date the loan was originated. The loan forgiveness amount may be subject to certain reductions based on the borrower’s reduction in its workforce or in salary or wage payments made to certain employees. The canceled debt is excluded from the borrower’s gross income for federal income tax purposes.
Disaster Loans. The CARES Act permanently expands the SBA’s disaster loan program to cover small entities affected by emergencies for which the president determines the federal government has primary responsibility, as President Trump did for the coronavirus outbreak. Further, the CARES Act provides $10 billion to expand the SBA’s disaster loan program through December 31, 2020, to cover businesses, cooperatives, employee stock ownership plans, and tribal businesses with 500 or fewer employees, as well as sole proprietors and independent contractors. The SBA is required to waive certain eligibility rules during the covered period for disaster loans made in response to COVID-19.
The CARES Act also authorizes the SBA to advance as much as $10,000 to disaster loan applicants within three days of receiving their applications. Recipients could use the advance funds to pay sick leave to employees affected by COVID-19, retain employees, address interrupted supply chains, make rent or mortgage payments, and repay debt. These advances do not have to be repaid (although if the applicant is approved for loan under section 7(a) of the Small Business Act, the advance amount reduces the loan forgiveness amount under the Payroll Protection Program).
SBA Express Loans. The CARES Act increases the maximum amount of an SBA 7(a) express loans, which have a 36-hour turnaround, to $1 million (up from $350,000) through the end of 2020.
Bankruptcy. The CARES Act allows businesses with as much as $7.5 million in debt to qualify for a streamlined Chapter 11 bankruptcy process, increasing the current debt limit of $2.73 million for eligible small businesses. For one year following the bill’s enactment, the CARES Act would temporarily exclude federal payments related to the coronavirus from income calculations under Chapter 11 bankruptcy proceedings. It also allows debtors experiencing hardship because of COVID-19 to modify existing bankruptcy reorganization plans.
The CARES Act creates a temporary Pandemic Unemployment Assistance program beginning January 27, 2020 through December 31, 2020, to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those seeking part-time employment, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency. A covered individual is one who is not eligible for regular compensation or extended benefits under state or federal law, and self-certifies that he or she is otherwise able to work but is unable to do so for reasons related to the impacts of COVID-19 on the individual, the individual’s family, the individual’s place of work, movement restrictions and more.
The CARES Act provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance through July 31, 2020. For states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive unemployment benefits, the federal government will provide funding to pay the cost of the first week of unemployment benefits through December 31, 2020. For the Pandemic Unemployment Assistance, assistance is available for up to 39 weeks and the total shall include any week for which the covered individual received regular compensation or extended benefits under any federal or state law.
The CARES Act also provides funding to support “short-time compensation” programs where employers reduce employees’ hours instead of laying them off and the employees with reduced hours receive a pro-rated unemployment benefit.
Mortgage Payments, Foreclosures & Evictions. The CARES Act permits borrowers with certain federally backed mortgages who attest to experiencing financial hardship due to COVID-19 to suspend their payments for 180 days, with a possible 180-day extension. Additional interest and fees cannot be charged during that period. The CARES Act also prohibits foreclosures on homes with federally backed mortgages for at least 60 days starting March 18, 2020.
Similarly, the CARES Act permits landlords with federally backed mortgages on multifamily properties to suspend their mortgage payments for as long as 30 days, with as many as two 30-day extensions. Multifamily landlords that take advantage of such forbearance provisions cannot evict tenants or charge fees solely for nonpayment of rent or other fees or charges during that period.
The CARES Act suspends evictions for 120 days following enactment on properties that have a federally backed mortgage or participate in a covered federal housing program.
Credit Reports. If a lender or debt collector gives a consumer a loan modification out of forbearance because they were impacted by the pandemic, the CARES Act requires the lender to report that person’s account as “current” in credit reports, as long as the consumer fulfills the obligations of the modification agreement. This credit protection expires 120 days after enactment or 120 days after the national emergency is terminated, whichever is later.
REBATES, PAYROLL TAX (CREDITS AND DEFERRAL), AND GENERAL TAX CHANGES
Recovery Rebate. The CARES Act provides a refundable tax credit (based on 2019 taxes, or for individuals who haven’t filed, against their 2018 taxes or 2019 Social Security statements) for eligible individuals. The credit can be as much as $1,200 per individual (or $2,400 for couples who file joint tax returns), plus $500 for each qualifying child. The credit is reduced by 5% of the amount by which the taxpayer’s adjusted income exceeds $150,000 for joint returns, $112,500 for heads of household, and $75,000 for other filers. No payments of the credit will be made after December 31, 2020.
Payroll Tax Deferral. The CARES Act defers employer payroll and railroad retirement tax payments (and 50% of self-employed Social Security tax payments) through the end of 2020. The deferred funds are paid over two years in 2021 and 2022. Deferral wouldn’t apply to employers with small business loan debt forgiven under the paycheck protection program (described above).
Employee Retention Credit. The CARES Act establishes a refundable credit against employer payroll and railroad retirement taxes for certain employers affected by the coronavirus that retain their employees. The credit is 50% of eligible employee wages paid after March 12, 2020 and before January 1, 2021 (with eligible wages for each employee being limited to $10,000, including certain health benefits). In order for an employer to receive the credit, a government order related to the pandemic must require them to partially or fully suspend operations, or their gross receipts must have declined by certain thresholds. Alternate rules would apply for tax-exempt organizations.
Employers cannot receive the credit if they receive a loan under the paycheck protection program (described above). Employers cannot use the credit for wages paid to an employee for which they also receive a credit under the work opportunity tax credit or with respect to wages taken into account for purposes of determining the paid leave credit established by the 2017 tax overhaul (Public Law 115-97). Furthermore, wages taken into account for the paid leave credits established under the second coronavirus response law (Public Law 116-127) cannot also be used for the employee retention credit.
Retirement Plans. The CARES Act waives early withdrawal penalties on coronavirus-related distributions from qualified retirement accounts up to $100,000. It allows tax payments on distributions to be spread out over three years and allows individuals to return distributions to the retirement account over three years, with such redeposits not subject to annual contribution limits. The bill also provides flexibility for loans from certain retirement plans and waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
Charitable Contributions. The CARES Act permits individuals to deduct up to $300 of cash contributions, regardless of whether they itemize their deductions. The limitations on deductions for charitable contributions are also increased for individuals who itemize, as well as corporations. For individuals, the 50% of adjusted gross income limitation will be suspended for 2020. For corporations, the 10% limitation will be increased to 25% of taxable income. The limitation on deductions for contributions of food inventory also will be increased from 15% to 25%.
Net Operating Losses. The CARES Act expands the use of net operating losses (“NOLs”) for corporate and non-corporate businesses. Taxpayers will be able to use NOLs to offset income without the 80% taxable income limitation enacted as part of the 2017 tax reform and to carry back NOLs to offset prior year income for five years. These are temporary provisions that apply to NOLs incurred in the 2018, 2019, or 2020 tax years. For tax years after 2020, the 80% taxable income limitation is reinstated with certain modifications.
Interest Deductions. The CARES Act temporarily increases the limitation under section 163(j) of the Internal Revenue Code on deductibility of interest. Enacted as part of the 2017 tax reform, section 163(j) generally limits a taxpayer’s interest deduction based on 30% of adjusted taxable income (ATI). For 2019 and 2020, this limitation is raised to 50% of a taxpayer’s ATI.
AMT Credit Recovery for Corporations. The 2017 tax reform eliminated the corporate AMT but made remaining AMT credits refundable over several years, ending in 2021.The CARES Act allows corporate taxpayers with AMT credits to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years.
Alcohol Excise Tax. Under the Act, taxpayers subject to the excise tax on distilled spirits will be excepted for distilled spirits removed in 2020 and used in or contained in hand sanitizer produced and distributed in response to SARS-CoV2 or COVID-19.
Sequestration. The CARES Act suspends mandatory 2% Medicare sequestration cuts to hospitals and doctors until 2021.
Medicare Payments. The CARES Act (i) increases Medicare reimbursements by 20% for treating a patient with COVID-19 during the coronavirus emergency, (ii) postpones scheduled reductions in Medicare payments for durable medical equipment during the emergency period, (iii) postpones scheduled reductions in Medicare payments for clinical diagnostic laboratory tests from 2021 to 2022 (and delays an associated payment rate reporting requirement by one year), and (iv) expands the existing Medicare accelerated payment program, allowing qualified facilities to request up to a six-month advanced lump sum or periodic payment, for the emergency period.
Telehealth. The CARES Act lifts the requirement that telehealth providers have prior relationships with patients, enhances telehealth payment for federally qualified health and rural health centers, and allows hospice recertification to be conducted via telehealth during the emergency period.
Medicare Coverage. The CARES Act requires Medicare Part B to fully cover a COVID-19 vaccine without any cost-sharing. Furthermore, drug plans would have to allow Part D prescription drug beneficiaries to receive a 90-day supply of medication during the public health emergency.
Post-Acute Care. The CARES Act waives the Inpatient Rehabilitation Facility (IRF) 3-hour rule, which requires that a beneficiary be expected to participate in at least 3 hours of intensive rehabilitation at least 5 days per week to be admitted to an IRF. This waiver gives acute care hospitals flexibility, during the COVID-19 emergency period, to transfer patients out of their facilities and into alternative care settings in order to prioritize resources needed to treat COVID-19 cases.
The CARES Act also allows a Long Term Care Hospital (LTCH) to maintain its designation even if more than 50 percent of its cases are less intensive and temporarily pauses the current LTCH site-neutral payment methodology.
Disproportionate Share Hospital Cuts. The CARES Act delays until December 1, 2020 a scheduled reduction in Medicaid funding for disproportionate share hospitals, which have large numbers of low-income and uninsured patients.
Other Medicare and Medicaid Provisions. The CARES Act (i) allows physician assistants, nurse practitioners and other professionals to order home health services for Medicare beneficiaries, reducing delays and increasing beneficiary access to care in the safety of their home, (ii) allows state Medicaid programs to pay for direct support professionals to assist disabled individuals in the hospital to reduce length of stay and free up beds, and (iii) amends a section of the Families First Coronavirus Response CARES Act of 2020 (Public Law 116-127) to ensure that states are able to receive the Medicaid 6.2 percent FMAP increase.
Medical Supplies. The CARES Act makes permanent a provision in the second coronavirus response package extending liability immunity to manufacturers of respiratory protective devices, such as masks and ventilators, to incentivize production and distribution.
Drug and Device Shortages. The CARES Act requires manufacturers of drugs that are critical to public health during an emergency to notify the FDA of supply chain interruptions for active pharmaceutical ingredients. Device manufacturers would have to make similar disclosures.
Private Health Insurance Coverage for Testing and Vaccines. The CARES Act requires health insurers to reimburse providers for all coronavirus testing and related visits based on the cash price that the provider lists online, unless they have a previously negotiated rate or negotiate a new rate that’s less than the cash price. Testing providers that don’t list their prices online during the emergency are subject to a penalty of $300 per day. The CARES Act also expands the types of coronavirus lab tests that would have to be fully covered by insurance, including tests that haven’t yet received an emergency use authorization from the FDA. Private health insurers are required to cover vaccines and other services intended to prevent COVID-19 without any cost-sharing.
Liability Protection. The CARES Act provides liability protections to health-care professionals providing volunteer services during the coronavirus emergency.
Waivers. The CARES Act allows the Education Department to waive certain requirements related to institutions’ eligibility for and allotment of federal financial aid, as well as certain reporting requirements. The Education Department also has broad authority during the coronavirus emergency to waive obligations at the request of state or local governments, school systems, or the Bureau of Indian Education. These waivers would generally be limited to the current academic year. Civil rights laws cannot be waived.
Campus-Based Aid Waivers. The institutional matching requirement for campus-based aid programs is waived, and institutions are allowed to transfer unused work-study funds to be used for supplemental grants.
Supplemental Educational Opportunity Grants. The CARES Act allows institutions to award additional Supplemental Educational Opportunity Grant funds to students impacted by COVID-19.
Federal Work-Study. Institutions may issue work-study payments to students who are unable to work due to work-place closures as a lump sum or in payments similar to paychecks.
Institutional Refund and Federal Student Loan Flexibility. For students who dropped out of school as a result of COVID-19, the student is not required to return Pell grants or federal student loans. The CARES Act also waives the requirement that institutions calculate the amount of grant or loan assistance that the institution must return to the government in the case of students who dropped out of school as a result of COVID-19.
Student Loans. The CARES Act provides for deferral of student loan payments, principal, and interest for six months, through September 30, 2020, without penalty to the borrower for all federally owned loans.
Authorized Uses and Other Modifications for Grants. The CARES Act authorizes the Secretary of Education to waive or modify current allowable uses of funds for institutional grant programs so colleges can re-deploy resources and services to COVID-19 efforts. It also permits institutions to request waivers from the Secretary of Education for financial matching requirements in competitive grant and other MSI grant programs in the Higher Education CARES Act so colleges can devote institutional resources to COVID-19 efforts.
To see the Maryland State-Level Measures, click here.
This client alert is for informational purposes and is not legal advice. The COVID-19 crisis has created a very fluid situation, in which changes to the law or related guidance can occur on a daily basis. Please contact your legal advisor for assistance before acting in relation to the subject of this client alert.
Peter E. KeithPartner
Peter has been a member of Gallagher Evelius & Jones LLP since 1989. He joined the firm following several years of public service, first as a white collar criminal prosecutor at the Attorney General's Office and then as trial counsel for the U.S. House of Representatives in an impeachment of a federal judge.