Publish Date

Apr 30, 2020

Human Capital Focused Legislation: Key Payroll Provisions of the CARES and FFCRA Acts

A&M Tax Advisor Weekly

Over the past two months, the federal government has enacted several measures to provide support and relief to individuals and companies impacted by the unprecedented COVID-19 pandemic. Two of the most impactful pieces of legislation to date are the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Families First Coronavirus Response Act (the “FFCRA”) (together, the “Acts”). The Acts cover a range of emergency relief items ranging from coverage of COVID-19 testing to paid sick leave and tax credits for retaining employees to small business loans. The purpose of this article is to summarize key payroll-related provisions of the Acts that are impacting employers today and provide readers with A&M’s additional insight.

Paycheck Protection Program

The Paycheck Protection Program (the “Program” or “PPP”) provides an unprecedented forgivable loan program for certain “small businesses and organizations.”  The purpose of the PPP is to provide liquidity to small businesses (generally those with no more than 500 employees) in order to cover the costs of payroll and various other overhead costs during this economic downturn. The PPP turned out to be so popular that the initial $349 billion funding was depleted within the first week, and $310 billion of additional funding was subsequently added to the Program.

During the “covered period” between February 15, 2020, and June 30, 2020, an eligible recipient may apply for a covered loan equal to the lesser of:

  • 2.5 x average monthly payroll costs, or
  • $10 million.

For this purpose, average monthly payroll costs are determined based on the 12-month period prior to the loan issuance, as opposed to the 2019 calendar year. Certain adjustments and elections may be made for seasonal employers that were not in operation between February 15, 2019 and June 30, 2019, and for new businesses (provided they were in business by February 15, 2020 at the latest).

While a narrow reading of “payroll costs” might lead employers to look specifically to Internal Revenue Code (“IRC”) Section 3121 Wages (what we all know as “W-2 wages”), the CARES Act definition includes the following amounts:

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
  • Employee benefits costs, including:
    • Leave costs;
    • Separation pay;
    • Payments required for the provision of group health care benefits, including insurance premiums; and
    • Payment of any retirement benefits.
  • Employer share of state and local taxes assessed on compensation; and

However, expressly excluded from the payroll cost base are the following:

  • Independent contractor payments,
  • Wages to employees or self-employed payees in excess of $100,000 annualized for each employee,
  • Any form of compensation paid to non-resident taxpayers,
  • Payroll tax withholding, and
  • Paid leave benefits and compensation under other COVID-19 relief programs.

Provided payroll and employment levels are maintained through the covered period and the covered loan proceeds are used for allowable uses (payroll costs, mortgage interest, rent, and utilities), the amounts spent on those categories may be forgiven (with the amount forgiven for non-payroll costs is limited to 25% of the total amount forgiven).

If an employer reduces their employee headcount or payroll during the covered period (as compared to prior periods), then the amount eligible for forgiveness may be reduced in certain circumstances.  However, employers can avoid any reduction in the amount eligible for forgiveness by re-hiring employees that have been recently fired at their previous pay rate…