The Act includes many forms of stimulus and support, such as extensions and changes to earlier COVID-related legislation and other measures of interest to employers.
On December 27, 2020, the Consolidated Appropriations Act (The Act) was signed into law in order to provide further stimulus and support to organizations and individuals affected by the COVID-19 pandemic. The Act includes many forms of stimulus and support, such as extensions and changes to earlier COVID-related legislation and other measures of interest to employers.
Paycheck Protection Program Reopened; Second Draw Loans Available
The Act reopens the Paycheck Protection Program ("PPP") to new loans, enabling borrowers to obtain a second PPP loan, even if an application for forgiveness of an original PPP loan has not been filed. Initial loans are available to new borrowers with 500 or fewer employees, and subsequent ("Second Draw") PPP loans of up to $2 million are available to organizations with 300 or fewer employees that can document revenue declines of 25 percent or more in any quarter of 2020 compared to the same quarter of 2019. A borrower must have used (or will use) the full amount of the first PPP loan on or before disbursement of the Second Draw loan.
The Act expands the types of organizations that are eligible for PPP loans and adds several new categories of non-payroll expenses that can be forgiven, which could enable previous borrowers to request increases in their original PPP loan amounts. However, payroll costs must still account for at least 60 percent of the loan amount.
Organizations that now qualify for PPP loans include 501(c)(6) organizations (generally non-profit trade associations); veterans' organizations, tribal businesses, farmers, ranchers, destination marketing organizations; and media organizations such as newspapers, television and radio stations previously ineligible due to their affiliation with other stations.
Certain organizations are not eligible, such as publicly traded businesses; new organizations not in operation on February 15, 2020; certain financial services industries and foreign organizations, and entities that receive grants under the live venues grant program. Borrowers cannot have more than 15 percent of activities or receipts devoted to lobbying. Eligibility and loan amounts may vary for different industries.
Maximum Loan Amount
Borrowers may receive a loan amount of up to 2.5 times the average monthly payroll costs in the one year prior to the loan or calendar year 2019, up to $10 million (up to $2 million for Second Draw loans). However, businesses in the Accommodation and Food Services industries (NAICS code 72) may qualify for PPP loans of 3.5 times average monthly payroll costs, up to the applicable cap. Borrowers are limited to two PPP loans in total.
'Seasonal employer' is redefined to mean an organization that operates for no more than seven months in a year; or that earned no more than 1/3 of its receipts in any six months of the prior year. Seasonal employers may calculate their maximum loan amount based on a 12-week period within their respective seasonal period, as defined.
New businesses may calculate the maximum loan amount by taking 2.5 times the average monthly payroll costs in months in which the employer was in operation.
Firms with multiple locations may qualify for a second draw loan if they have no more than 300 employees per location. Firms with multiple locations may not receive a loan greater than $2 million for all locations combined.
Generally, PPP forgiveness provisions and measures are the same as applied to the original PPP Loan program; i.e., Section 1106 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act (15 U.S.C. 9005), as amended. "Covered periods" (i.e., in which PPP loan proceeds must be spent) can range from eight to 24 weeks at the election of the borrower.
As a reminder, PPP loans are 100 percent forgivable if proceeds are spent in accordance with program rules. Repayment may be required if certain measures are not met, such as maintaining the number of employees, stable hours and wage levels. Proportionate repayment of PPP loans may be required if the employer does not maintain the average number of full-time-equivalent employees compared to the specified base period, or if compensation for any individual making less than $100,000 per year is reduced by more than 25 percent.
There are safe-harbor alternatives for these forgiveness reduction measures. Generally, if reductions in the number of employees or in compensation are restored by a specified "safe-harbor" date, reductions will not affect loan forgiveness. The safe-harbor restoration date was changed from December 31, 2020 to the last day of the borrower's covered period for all new loans (the deadline remains December 31, 2020 for loans issued on or before August 8, 2020). As a reminder, forgiveness is also not reduced if the employer can document written offers to rehire individuals; an inability to hire similarly qualified employees, or an inability to return to the same level of business activity due to compliance with COVID-related guidance. (See the SBA Form 3508 or 3508S for details.)
Allowable/Forgivable Expenses Expanded
Forgivable expenses now include supplier costs and investments in facility modifications and personal protective equipment to operate safely, including the following:
- Business software or cloud computing service that facilitates operations, including payroll and human resources systems to facilitate processing and tracking; and similar software and services for sales, billing, accounting and/or tracking of supplies, inventory, records and expenses.
- Certain property damage costs related to public disturbances that occurred during 2020 that was not covered by insurance or other compensation;
- Certain supplier costs pursuant to a contract or order that was in effect before the date of disbursement of the covered loan for the supply of goods that are essential to the operations of the entity at the time at which the expenditure is made; and
- Worker protection expenditures that were required to facilitate the adaptation of the business activities of an entity to comply with government restrictions related to COVID–19, such as drive-through window facilities, ventilation or filtration systems, physical barriers and health screening facilities to comply with government guidance.
- The Act clarifies that "other employer-provided group insurance benefits," such as life insurance, are included in payroll costs.
- Loan proceeds cannot be used for lobbying activities, including any lobbying expenditures related to state or local campaigns.
Borrowers that received a PPP loan previously may be able to seek an increase in the original loan amount to pay for these new allowable expenses, and this would not be considered a second-draw loan. Borrowers still need to spend at least 60 percent of any PPP loan on payroll costs to qualify for forgiveness.
For loans under $150,000, borrowers are not required to submit documentation, but must sign and submit a one-page form to be issued by the Small Business Administration ("SBA"), attest to a good faith effort to comply with PPP loan requirements, and report the number of employees retained as well as the loan proceeds spent on payroll and non-payroll costs. Borrowers must retain relevant records related to employment for four years.
For loans between $150,000 and $2 million, borrowers are not required to submit documentation, but must complete related certifications, retain relevant employment records for four years, and retain other records and worksheets for three years. As a reminder, lenders and/or the SBA may review and audit all PPP loans.
Deductibility of Business Expenses Paid with PPP Proceeds Clarified
The Act clarifies the tax treatment of expenses paid for with PPP loan proceeds. It provides that no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, on the basis that such expenses qualify for PPP loan forgiveness.
Lastly, the Act permits PPP borrowers to also qualify for the Employee Retention Tax Credit ("ERTC"). However, as explained below, PPP loan proceeds cannot be used to pay eligible wages for an ERTC claim.
Loan Applications Must Be Filed by March 31, 2021
Businesses are advised to apply for PPP loans as soon as possible since appropriated funds are limited. However, the Small Business Administration and/or lenders may delay the opening of the program for a number of weeks to develop new forms and instructions.
Employee Retention Tax Credit Extended and Revised
In March 2020, the CARES Act provided that private sector employers are allowed a refundable tax credit against employer Social Security tax equal to 50 percent of wages paid by employers to employees during the COVID-19 crisis, up to $10,000 in wages per employee (i.e., a $5,000 credit per employee). Employers qualified if their operation was fully or partially suspended due to orders from a governmental authority related to COVID-19, or who experienced a 50 percent decline in gross receipts compared to the prior year. The credit is increased by the proportionate share of employer's health costs related to such wages.
The Act extended and modified the Employee Retention Tax Credit. From January 1, 2021 through June 30, 2021, the credit is expanded to 70 percent (from 50 percent) of qualified wages. The wage limitation is increased from $10,000 per year to $10,000 per quarter; i.e., the maximum credit per employee in 2021 is $14,000.
Employers are also eligible if they can demonstrate revenue declines of 20 percent (formerly 50 percent), and employers may also use prior quarter gross receipts to determine eligibility.
Importantly, the Act provides that employers who receive PPP loans may qualify for the ERTC for wages that are not paid with forgiven PPP loan proceeds. Prior to enactment, PPP borrowers were not eligible for this credit unless they had repaid the loan in full by May 18, 2020.
Eligibility is also expanded to certain public instrumentalities, such as public universities, hospitals and medical care providers, and new rules permit new employers not in existence in 2019 to claim the credit. Originally the CARES Act provided that for employers with more than 100 employees the credit was only available for wages paid to employees for which no services were provided (i.e., for paid time off). Employers with 100 or fewer employees were eligible for the credit for all wages paid; i.e., for time worked, in addition to paid time off. This 100-employee threshold for determining qualified wages is now changed to 500 for 2021.
Employee Retention Tax Credit is Retroactively Available to PPP Borrowers
The Act provides that the Employee Retention Tax Credit is retroactively available to PPP borrowers. For 2020, the maximum credit remains $5,000 per employee (i.e., 50% of wages up to $10,000), for employers that were affected by government shutdown orders or had revenue declines of 50 percent or more. The IRS and Treasury Department must issue guidance on this provision before it can be put into effect.
Changes to the Families First Coronavirus Response Act ("FFCRA") Paid Leave Program
As background, in March 2020, the FFCRA required employers with fewer than 500 employees to provide specified paid sick and family leave to employees affected by COVID-19 and provided affected employers with a corresponding employment tax credit. These provisions were originally in effect through 2020. The Act did not extend the employer mandate beyond 2020, but for those employers with 500 or fewer employees that choose to provide such qualified FFCRA leave wage payments, the Act extends the 100 percent tax credit for such payments through March 31, 2021.
The FFCRA limited the amount of sick leave wages eligible for the tax credit to $5,110 in the aggregate for care required for the employee; $2,000 for care that the employee provided to others, and $10,000 in family leave, if the employee is unable to work or telework because they are caring for family members whose school or child-care facility is closed. The Act does not reset these amounts for 2021; i.e., if such amounts were exhausted for an employee in 2020, any leave payments to that employee in 2021 would not qualify for the tax credit.
Employee Social Security Tax Deferral Repayment Deadline Extended to December 2021
On August 8, 2020, the President issued a memorandum to allow employers to defer withholding employees' share of social security taxes from September through December of 2020; and required employers that chose to participate to withhold and pay the deferred amounts "ratably" from wages paid from January through April 2021. The Act extends the repayment period for any amounts deferred through December 31, 2021. However, the Act does not authorize further deferrals after 2020.
As a result, participating employers should generally offer employees who elected the deferral a one-year repayment schedule, which would reduce per-paycheck deduction amounts. However, employees may prefer to retain the four-month repayment schedule, which would result in roughly corresponding amounts withheld from 2021 paychecks compared to amounts deferred from 2020 paychecks.
Tax Exclusion for Employer Student Loan Repayment Benefits Extended to 2025
The CARES Act provided that employers may contribute up to $5,250 annually toward an employee's student loans, and such payment would be excluded from the employee's income as well as employment taxes. The $5,250 cap applies to both the student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under Section 127 of the Internal Revenue Code (IRC). The provision originally applied to student loan payments made by an employer through 2020. The Act extends the tax treatment of such payments through 2025.
Carryover and Related Changes to Health Care and Dependent Care Flexible Spending Accounts
Existing rules governing health care and dependent care flexible spending account (FSA) plans limit the ability to carryover unused benefits and prohibit changes to elections during the plan year except under specific limitations. As a result of the pandemic, many participants were unable to use their FSA contributions. In order to eliminate the potential loss of money contributed to an FSA plan, the Act authorizes employers to amend FSA plans to permit the carryover of unused benefits for plan years ending in 2020 and 2021, and to extend the grace period applicable to health care FSA plans for plan years ending in 2020 or 2021 to a period of up to 12 months. The Act also provides special relief when a dependent ages out of dependent care FSA eligibility during the pandemic, and permits changes to contribution elections by participants to FSA plans at any time during the plan year. The Act further provides that an FSA plan may be retroactively amended to adopt one or more of these provisions so long as the plan is operated in compliance with the adopted change.
The Act also includes an extension of several tax provisions which were set to expire at the end of 2020, including the Work Opportunity Tax Credit, Empowerment Zone Employment Credit, and the Employer Credit for Paid Family and Medical Leave, each of which received a five-year extension through 2025. The Indian Employment Credit was extended through 2021.
For More Information
ADP's Paycheck Protection Program site: https://www.adp.com/PPP
Treasury PPP Frequently Asked Questions:
Small Business Administration PPP site:
Prior Eye on Washington publications covering the Paycheck Protection Program:
ADP Compliance Resources
ADP maintains a staff of dedicated professionals who carefully monitor federal and state legislative and regulatory measures affecting employment-related human resource, payroll, tax and benefits administration, and help ensure that ADP systems are updated as relevant laws evolve. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at www.adp.com/regulatorynews.
ADP is committed to assisting businesses with increased compliance requirements resulting from rapidly evolving legislation. Our goal is to help minimize your administrative burden across the entire spectrum of employment-related payroll, tax, HR and benefits, so that you can focus on running your business. This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages readers to consult with appropriate legal and/or tax advisors. Please be advised that calls to and from ADP may be monitored or recorded.
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Updated on December 28, 2020
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