The legislation would significantly expand the existing credit to cover the wages and benefits—including 401(k) contributions—of employees of businesses affected by COVID-19 until the pandemic subsides, but the bill does come with some strings attached.
Introduced May 21 by Sen. Mark Warner (D-VA) along with eight original cosponsors, the Paycheck Security Act (S. 3793) would amend the CARES Act to create a national paycheck security program whereby the federal government would help cover the payroll expenses for workers who have been furloughed or laid off because of the coronavirus.
“Right now, nearly 39 million Americans are out of work due to the coronavirus. This is hitting working class folks particularly hard, with 40% of all workers making under $40,000 out of work right now,” Sen. Warner stated in introducing the legislation. “We need to be thinking big and helping people who have lost their jobs.”
S. 3793 would expand the existing employee retention tax credit (ERTC) with a refundable tax credit big enough ($90,000 annually per employee) to rehire and pay laid off and furloughed workers and restore their health care benefits. It also would provide small and mid-sized businesses with the funds they need to pay for rent, mortgages, utilities and other operating costs until they can reopen safely and sales begin to recover.
Employee Retention Credit
The ERTC, enacted under the CARES Act, is designed to encourage businesses to keep employees on their payroll and is viewed as an alternative relief mechanism for those businesses unable to take advantage of the Paycheck Protection Program (PPP). The amount of the credit is 50% of qualified wages paid up to an annual limit of $10,000, which equals a maximum credit amount of $5,000 for each employee for the year.
Wages paid between March 12, 2020, and Jan. 1, 2021 are eligible, and they are not limited to cash payments. Qualified wages also include contributions to 401(k) plans, as well as a portion of employer-provided health care costs.
Eligible employers are employers who operate a trade or business and has:
- fully or partially suspended operations because of a government order due to COVID-19; and/or
- experienced a significant decline in gross receipts in a calendar quarter compared to 2019.
An employer is considered to have a significant decline in gross receipts for the period beginning with the first calendar quarter in 2020 for which its gross receipts are less than 50% of gross receipts from the same calendar quarter in 2019. The decline is considered ended with the earlier of Jan. 1, 2021 or the first calendar quarter after the quarter for which gross receipts are greater than 80% of gross receipts for the same calendar quarter in 2019.
Qualified wages are based on the business’s average number of full-time employees in 2019. Specifically:
- Small employers with 100 or fewer employees may receive the credit for wages paid to employees whether or not they are providing services to the employer.
- Large employers with more than 100 employees may only receive the credit for wages paid to employees for time the employees are not providing services to the employer.
If an employer is eligible due to a full or partial suspension of operations, only wages paid while operations are suspended count as qualified wages.
Eligible employers may not receive both the ERTC and a PPP loan that is authorized under the CARES Act. Eligible employer can, however, receive both the tax credit for qualified leave wages under the Families First Coronavirus Response Act and the ERTC, but not for the same wages.
Additional information on the existing ERTC can be found here.
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Warner’s Paycheck Security Act
As noted above, the legislation substantially expands the ERTC established in the CARES Act to cover the wages, salaries and health care benefits up to $90,000 annualized for workers who have been laid off or furloughed.
Warner’s bill also would expand the definition of a “significant decline in gross receipts” such that all businesses that have experienced at least a 15% drop in revenues compared to the same quarter in 2019 would be eligible for a tax credit to cover payroll for laid off and furloughed employees.
Additionally, eligible businesses with less than $45 million in gross receipts in 2019 will also be eligible for a credit of 5% of 2019 gross receipts to pay fixed operating costs such as rent, mortgages, utilities and debt service. Sole proprietors with less than $1 million in gross receipts in 2019 will be eligible for an income credit of 30% of 2019 gross receipts, up to $75,000.
The bill would also include some conditions, however, including that companies receiving funds through this program must commit to not buying back stock; not paying out dividends; protecting collective bargaining agreements; staying neutral in union organizing efforts; and capping CEO compensation at 50 times the median wage of their workforce.
What’s Next?
While Warner’s bill only includes Democrats as cosponsors and does appear expansive, it come as there are growing discussions from members of both parties that additional steps are needed to help businesses weather the crisis.
After the $3 trillion House-passed HEROES Act was essentially declared dead-on-arrival in the Senate, the House plans to vote this week on stand-alone legislation that would ease the rules for businesses taking advantage of the PPP. In addition, Sen. Marco Rubio on May 21 introduced similar legislation (S. 3833) to extend the loan forgiveness period for the PPP. Sens. Angus King (I-ME) and Steve Daines (R-MT) also introduced legislation (S. 3805) to extend the time period businesses have to use funds from the PPP, as well as to ease the limit on using funds for non-payroll expenses.
What’s more, speaking last week at an event sponsored by The Hill, Treasury Secretary Steven Mnuchin reportedly indicated that there is a “strong likelihood” the country will need another bill providing more economic assistance.
