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March 27, 2020

CARES Act includes new provisions on employee benefits, compensation, and wages

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted on March 27, 2020, in response to the COVID-19 emergency. The CARES Act provides $2 trillion of economic support and stimulus. This Alert is focused specifically on the CARES Act's provisions related to taxation of employee benefits, compensation, and wages as follows:

  • Payroll tax deferral
  • Employee retention tax credits
  • Amendments to mandated leave and credits under the Families First Coronavirus Response Act (Families First Act)
  • Retirement plan distributions and funding
  • Group health plan modifications
  • Executive compensation limitations related to the CARES Act's business loans
  • Employer-provided tuition payment programs
  • Extension of Department of Labor deadlines for employee benefit plans

Payroll taxes

Payroll tax deferral

CARES Act Section 2302 delays the timing of required federal tax deposits for certain employer payroll taxes and self-employment taxes incurred between March 27, 2020 (the date of enactment) and December 31, 2020. Amounts will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021, and the remainder by December 31, 2022.

Applicable employment taxes include:

  • The employer's share of Old-Age, Survivors, and Disability Insurance Tax (Social Security) under IRC Section 3111(a), which is 6.2% of wages up to the wage base ($137,700 in 2020)
  • The portion of the employer's and employee representative's share of Tier 1 Railroad Retirement Tax Act (RRTA) tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate due
  • For self-employed individuals, the equivalent amount of Self-Employment Contributions Act (SECA) tax due on net earnings from self-employment under IRC Section 1401(a) (i.e., 50% of the 12.4% tax), which would similarly be exempt from estimated tax payments

Deferral is available for employers remitting payroll taxes through an agent under IRC Section 3504 or a certified professional employer organization (CPEO). In these cases, the employer can direct the agent or CPEO to defer the applicable tax payments. Employers will be solely liable for making the deposits timely under the deferred deadlines, including with respect to worksite employees performing services for a CPEO customer.

There is no dollar cap on the wages that are counted in calculating the taxes that may be deferred. The payroll tax deferral does not apply to federal income tax withholding, the Hospital Insurance (Medicare) tax, or the employee's portion of Social Security tax. In addition, the payroll tax deferral is not available to a taxpayer that obtains a Small Business Act loan under the Paycheck Protection Program established by the CARES Act if the loan is later forgiven.

Employee retention credit

CARES Act Section 2301 creates a new employee retention credit (the Retention Credit) for wages paid from March 13, 2020 to December 31, 2020, by employers that are subject to closure or significant economic downturn due to COVID-19. The credit amount takes into account up to 50% of qualified wages, up to $10,000. Thus, the maximum Retention Credit amount is $5,000 per employee. The Retention Credit applies to:

  • The employer's share of Social Security tax under IRC Section 3111(a) (6.2% of wages)
  • The portion of the employer's and employee representative's share of RRTA tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate due

If the Retention Credit exceeds the employer's Social Security or RRTA tax liability for the quarter, the excess may be refunded to the employer. In the case of an employer for whom wages are paid by a CPEO, the Retention Credit belongs to the customer, not the CPEO.

To be eligible for the Retention Credit, an employer must carry on a trade or business in 2020 that experiences one of the two following COVID-19-related occurrences: (1) operations were fully or partially suspended on orders from a governmental authority due to COVID-19 (COVID-19 Shutdown), or (2) the business experienced a 50% reduction in gross receipts for a calendar quarter as compared to the same calendar quarter in the prior year (Gross Receipts Decline). The gross receipts test is governed by IRC Section 448(c), which evaluates gross receipts on an aggregated basis, combining parents and subsidiaries, brother and sister entities, combined groups, and affiliated service groups, under the rules of IRC Section 52(a) and (b), and IRC Section 414(m) and (o). Tax-exempt organizations may be eligible for the Retention Credit to the extent the organizations' operations experience a COVID-19 Shutdown. Governmental employers and any employer that receives a Paycheck Protection Program loan are not eligible for the Retention Credit.

For employers of more than 100 employees, qualified wages are wages (as defined under the Federal Insurance Contributions Act) paid for services an employee is not providing due to a COVID-19 Shutdown or Gross Receipts Decline. The wages taken into account for such employers are limited to the amount the employee would have been paid for an equivalent amount of work in the 30 days immediately preceding the period for which the employee is paid.

For employers of 100 or fewer employees, qualified wages are wages paid to any employee during a COVID-19 Shutdown or during a calendar quarter of Gross Receipts Decline, without regard to whether the employee is providing services. In determining how many employees are employed, the average number of full-time employees during 2019, as determined under IRC Section 4980H, applies.

In either case, qualified wages include qualified health plan expenses paid or incurred by the employer for health coverage excludable under IRC Section 106(a). These expenses are allocated to qualified wages as prescribed by the Treasury Secretary, but absent a contrary provision by the Secretary, a pro rata allocation among employees is permitted.

The Retention Credit is subject to a number of rules to prevent double-dipping. An employer's deduction for wages must be reduced by the amount of the Retention Credit. In addition, an employer may not take into account the following:

  • Wages taken into account under sections 7001 and 7003 of the Families First Act, which provides payroll tax credits for paid leave required to be provided by small employers (see Tax Alert 2020-0586)
  • Wages taken into account under IRC Section 45S (income tax credit for paid family and medical leave)
  • Wages paid to certain related individuals specified in IRC Section 51(i)(1)
  • Wages of an employee for whom a work opportunity tax credit is claimed

Modifications to Families First Act paid leave requirements and payroll tax credits

As discussed in Tax Alert 2020-0586, the Families First Act, enacted on March 18, 2020, imposed paid leave requirements and established corresponding payroll tax credits for employers of fewer than 500 employees. The CARES Act makes certain minor changes to these provisions:

  • Employees laid off on or after March 1, 2020, who are later rehired, are eligible employees if they worked for the employer for at least 30 of the 60 calendar days prior to the layoff.
  • Employers subject to the mandated leave are not required to pay employees more for the leave than the specified limits:
    • $200 per day and $10,000 in the aggregate, for paid leave required by the Emergency Family and Medical Leave Expansion Act
    • $511 per day and $5,110 in the aggregate, or $200 per day, and $2,000 in the aggregate, depending on the type of leave, for leave required by the Emergency Paid Sick Leave Act
  • The credit may be advanced to employers in accordance with forms and instructions provided by the Treasury Secretary, who has authority to prescribe the necessary rules.
  • The Treasury Secretary shall waive penalties for failure to deposit if the failure was in anticipation of the payroll credits for paid leave.
  • The Director of the Office of Management and Budget is permitted to exclude certain categories of Executive Branch employees from the paid leave requirements.


All employers and self-employed individuals may avail themselves of the payroll tax deposit deferral. There is no need-based eligibility and this provision alone should provide positive cashflow to businesses on an interest-free basis, as there is no interest charge for the deferral.

The Retention Credit requires an analysis of how a business has been affected by COVID-19 and whether either the COVID-19 Shutdown or the Gross Receipts Decline tests have been met. The COVID-19 Shutdown test refers to a trade or business that has been fully or partially suspended due to government action. A government order requiring a retail establishment to close all its stores is a straightforward example. But, other situations may require further analysis and regulatory guidance. For example, some businesses may be subject to mandatory closure of their worksites but continue to have a portion of the workforce who can telework. If the business does not meet the Gross Receipts Decline test, it may be unclear whether the business has been partially suspended. The Gross Receipts Decline test also presents unique challenges, as employers must analyze gross receipts across all aggregated entities rather than by location (a departure from rules associated with prior employee retention credits related to natural disasters).

The combination of the retention credit with the payroll tax deferral will allow employers to reduce this year's Social Security tax and defer any remaining liability to 2021 and 2022. With respect to the payroll tax deferral, if an employer uses an agent or CPEO, the employer is solely liable for the deposit of deferred payroll taxes. With respect to the Retention Credits, the CARES Act directs the IRS to provide further guidance on administering the credits.

Employers will need to consider whether they intend to avail themselves of the Small Business Act loans made available through the Paycheck Protection Program under the CARES Act; these loan programs will affect the employer's ability to use the deferral and the Retention Credits.

Retirement provisions

The CARES Act provides for a one-year waiver of required minimum distributions (RMDs) from IRAs (individual retirement accounts or individual retirement annuities) and tax-qualified plans (including 403(b) plans and governmental 457(b) plans) for calendar year 2020.

In addition, the CARES Act creates a new category of "coronavirus-related distributions" and loans from retirement plans of up to $100,000 that are not subject to early distribution taxes under IRC Section 72(t). The CARES Act mirrors prior qualified disaster relief provisions that were enacted to respond to natural disasters from 2017 to 2019 (e.g., flooding and wildfires). For coronavirus-related distributions, the CARES Act allows income to be spread ratably over a three-year period and allows repayment to another eligible retirement plan within the same three-year period. If a loan, rather than a withdrawal, is taken, dollar limits under existing law are increased to $100,000 and repayments are not required to begin for one year.

RMD relief

CARES Act Section 2203 eliminates the requirement for a 2020 RMD. In addition, individuals who attained age 70½ or retired in 2019 and are required to take their 2019 RMDs from an IRA or a tax-qualified plan in 2020 (by April 1), are not required to take such a distribution in 2020. Note that the change in the reference age for the required beginning date to age 72, which was enacted in the SECURE Act, is effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after December 31, 2019 (see Tax Alert 2020-0018).

Definition of coronavirus-related distribution

CARES Act Section 2202 allows a coronavirus-related distribution to be made to an individual who (i) is diagnosed with SARS-CoV-2 or COVID-19 (using a test approved by the Centers for Disease Control and Prevention); (ii) has a spouse or dependent who is so diagnosed; (iii) experiences adverse financial consequences as a result of quarantine, furlough, lay-off, reduction in work hours, inability to work due to childcare; or (iv) is a business owner who must close or reduce hours of operation due to the virus or other factors determined by the Secretary. In all cases, the maximum amount that may be distributed from an eligible retirement plan is $100,000 and includes distributions made in all of calendar year 2020 (retroactive to January 1). There is no statutory requirement that an individual demonstrate that the financial losses equal the amounts withdrawn in a coronavirus-related distribution, only that the virus or disease was diagnosed or that the events resulting in adverse financial consequences occurred. In the case of a tax-qualified plan (e.g., 401(k) plan), the plan administrator may rely on the employee's attestation of diagnosis or financial adverse consequences.

Eligible retirement plans

A coronavirus-related distribution may be taken from an IRA or a tax-qualified plan. In most cases, the tax-qualified plan would be a defined contribution plan, such as a 401(k) plan. In that case, the distribution will not cause the plan to fail plan qualification requirements that otherwise limit distributions to separations from service or other specified events. The rule also appears to apply to a defined benefit plan, but the effect on plan funding and other considerations likely make it undesirable for employers to allow coronavirus-related distributions from these plans.

Taxation of coronavirus-related distributions

A coronavirus-related distribution is not subject to the 10% additional tax under IRC Section 72(t), which typically applies when an individual receives a distribution before age 59½ (or age 55 and separation from service). A coronavirus-related distribution is, however, subject to federal income tax if pre-tax amounts are distributed. Note that because distributions may be made from a Roth IRA or a Roth 401(k), it is possible that the $100,000 distribution could be made from non-taxable accounts. If a coronavirus-related distribution is made from pre-tax accounts in an employer plan (e.g., 401(k)), the normal withholding (e.g., mandatory 20%) and eligible rollover distribution rules do not apply.

The individual generally must include the distribution in income ratably over a three-year period but may instead elect to include the full amount of the distribution in income in the year it is received. In addition, the individual may choose to repay all or some of the coronavirus-related distributions into an eligible retirement plan (an IRA or tax-qualified plan.) Under existing IRS procedures for prior qualified disaster distributions, an individual would be entitled to a refund of tax to the extent that a coronavirus-related distribution is repaid to another eligible retirement plan within the three-year period. For example, in year 2 or 3 after tax has been paid in year 1, the individual would be entitled to file an amended return for year 1 and receive a refund of the federal income tax already paid.


In lieu of a distribution, plan loans may be made up to $100,000 (increased from $50,000) without regard to the normal 50% of account balance limit under IRC Section 72(p).1 These special rules apply for any loans made during the 180 days following the date of enactment, March 27, 2020, and are also limited to individuals who meet the definitions for a coronavirus-related distribution. In addition to the increase in loan amounts, no repayments of the loan are required to begin for at least one year and the normal repayment periods (e.g., five years) are adjusted to begin after the lapse of the one-year grace period.

Pension funding holiday

CARES Act Section 3608 provides a pension funding holiday for contributions to a single-employer defined benefit pension plan that otherwise would be required to be paid in calendar year 2020. Specifically, no minimum required contributions under IRC Section 430(j) that would be due in 2020 must be paid. The due date of delayed contributions is January 1, 2021, and interest accrues from the original due date until the contribution is made. In addition, the plan may elect to treat the plan's adjusted funding target attainment percentage (AFTAP) as equal to the AFTAP for the last plan year that ended before January 1, 2020. This substitution could defer the time at which the plan may become subject to limitations on forms of benefit payments, limits on benefit accruals, or plan amendments.


The coronavirus-related distributions and loan provisions are voluntary, which means that employer-sponsored plans are not required to allow these new distributions or loans, although many will presumably do so to assist their employees. In addition, the CARES Act allows delayed plan amendments so that employers and IRA custodians and trustees may operationally allow coronavirus-related distributions (and loans in the case of employer plans) prior to amending the plan or contract terms.

It is expected that the IRS will administer coronavirus-related distributions in a manner similar to other qualified disaster distributions. For example, the IRS created Form 8915 for individuals to report prior disaster-related distributions and repayments. Because there is no mandatory income tax withholding on coronavirus-related distributions, individuals who take such distributions will need to plan for the federal income tax payments that are due ratably over the three-year period unless they make a qualifying recontribution before such taxes are due.

Sponsors of single-employer defined benefit pension plans subject to minimum required contributions will benefit temporarily from the CARES Act's funding relief provision. Additional funding relief may be granted in future legislation as this will be an important issue for some employers.

Health plans

Telehealth services

CARES Act Section 3701 creates temporary rules for health savings accounts (HSAs) to facilitate telehealth services and other remote care. Effective from March 27, 2020, for plan years beginning on or before December 31, 2021, telehealth coverage is ignored for purposes of the rule prohibiting an HSA-eligible individual from being covered by another health plan that is not a high deductible health plan (HDHP). In addition, an HDHP is not required to impose any deductible for telehealth services or other remote care.

Certain over-the-counter products treated as qualified medical expenses

Effective for amounts paid in 2020 or later, CARES Act Section 3702 contains a permanent change to the rules for HSAs, Archer MSAs, health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs), adding menstrual care products to the list of qualified medical expenses and repealing the requirement (added by the Affordable Care Act in 2010) that a prescription be obtained for over-the-counter drugs.

Group health plans

The Families First Act requires group health plans to cover FDA-approved COVID-19 testing without cost-sharing if the testing has been approved, cleared, or authorized under the Food, Drug, and Cosmetic Act (see Tax Alert 2020-0586). CARES Act Section 3201 expands this coverage requirement to include COVID-19 testing even if the test is not yet approved, cleared, or authorized if (1) the developer has requested or intends to request emergency use authorization and the request has not been denied; (2) the test is authorized by a state that has notified the HHS Secretary of its intent to review COVID-19 testing; or (3) the test is determined appropriate by the HHS Secretary.

CARES Act Section 3202 requires group health plans to reimburse a COVID-19 test provider at its previously negotiated rate (as of January 31, 2020). If no rate was previously negotiated, reimbursement must be at the provider's publicly-listed price (unless a lower price is negotiated). Additionally, CARES Act Section 3203 requires group health plans to cover any item, service, or immunization intended to prevent COVID-19 without cost-sharing within 15 business days of it being rated as "A" or "B" by the US Preventive Services Task Force or recommended by the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention.


The health plan modifications made by the CARES Act generally ease consumer access to certain medical care needs unique to COVID-19.

The temporary HSA rules allowing telehealth services and other remote care are optional — group health plans are not required to provide these benefits. Similarly, the permanent changes to the over-the-counter prescription drug rules are not mandatory. Given that all these amendments have been the subject of lobbying efforts for many years, they are likely to be popular with employers.

While the permitted changes concerning telehealth and remote care are not required, the coverage requirements imposed on group health plans are. As a result, group health plan sponsors may want to consider whether required coverage is provided.

Executive compensation

Limitations on employee compensation for recipients of loans or financial assistance

CARES Act Title IV provides for economic stabilization for distressed businesses and the passenger airline and air cargo industries. The Federal Reserve also may provide support to other eligible businesses. Businesses receiving such support must meet specific criteria, such as a prohibition on dividends, capital buy-backs, and employee reductions. Two specific provisions under CARES Act Sections 4004 and 4116 require limitations on employee compensation for businesses that avail themselves of loans or financial support. Under these limitations:

No officer or employee whose total compensation exceeded $425,000 in 2019 may receive:

  • Total compensation in any 12 months during the applicable limitation period that exceeds the total compensation received by the officer or employee in 2019 or
  • Severance pay or other benefits upon termination of employment more than twice the total compensation received by the officer or employee in 2019.

Further, no officer or employee whose total compensation exceeded $3 million in 2019 may receive total compensation in any 12 consecutive months during the applicable limitation period of more than $3 million, plus 50% of the excess over $3 million of total compensation received by the officer or employee in 2019. For example, if an employee received $4 million in total compensation in 2019, the employee may not receive more than $3.5 million during any 12 consecutive months during the limitation period ($3 million + (50% * $1 million).

For the purposes of both CARES Sections 4004 and 4116, total compensation is defined to include salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business. The provisions generally do not apply to employees whose compensation is determined through an existing collective bargaining agreement.

The limitation period during which the compensation restrictions apply depends upon which loan or support program is used. Loans under subtitle A (for air carriers and other distressed businesses) require limits on compensation payments during the period the loan is outstanding plus one year after the loan is no longer outstanding. Financial support under subtitle B (e.g., air carrier worker support) limits compensation payments during the two-year period beginning March 24, 2020 and ending March 24, 2022.


The compensation limitations are reminiscent of the limitations that were imposed on banks and other financial services organizations participating in the Troubled Assets Relief Program (TARP), which imposed certain tax deduction limits on compensation in excess of $500,000. In contrast, the CARES Act prohibits the actual payment of compensation during the limitation period.

Additional guidance is necessary to understand the definition of total compensation under the CARES Act, so employers can identify the impacted officers and employees and apply the limitations, as well as how compensation that relates to multiple years should be taken into account. For example, it is unclear how compensation that is awarded in one year, that may vest in a later year, and be paid in a future year, should be considered in determining an officer or employee's total compensation for a 12-month period.

Businesses may need to modify existing employment agreements, severance, and deferred compensation arrangements in order to participate in the CARES Act's loan and financial support provisions, which may raise other questions, including the operation of the IRC Section 409A deferred compensation rules.

Employer payments for student loans

IRC Section 127 excludes up to $5,250 per year of employer-provided educational assistance from an employee's income. CARES Act Section 2206 amends IRC Section 127 to temporarily treat an employer's payment of principal or interest on an employee's student loan as excludable employer-provided educational assistance. To be excluded, the payments must be made after March 27, 2020 and before January 1, 2021. The income exclusion, including the loan payments, remains capped at $5,250 per year.


For many years, employers have sought ways to help their employees repay their student loans in a tax-favored manner. Despite the CARES Act's very limited scope, some employers may view this as a stepping stone for future expansion.

Expansion of DOL authority to postpone deadlines

Under prescribed circumstances, ERISA Section 518 authorizes the Labor Secretary to postpone deadlines under ERISA (such as deadlines affecting COBRA continuation coverage, special enrollment, claims for benefits, and appeals of denied claims) for up to one year. CARES Act Section 3607 expands the list of prescribed circumstances under ERISA Section 518 to include a public health emergency declared by the Secretary of Health and Human Services (HHS) pursuant to Section 319 of the Public Health Service Act. Because the HHS Secretary declared a public health emergency in response to COVID-19 on January 31, 2020, employers should expect guidance from the Department of Labor identifying postponed ERISA deadlines.


The grant of authority for the Department of Labor to postpone deadlines may affect both employers and employees by postponing deadlines that apply to employee benefit plans, plan sponsors, and plan participants and beneficiaries.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Catherine Creech (
   • Stephen Lagarde (
   • Andrew Leeds (
   • Bing Luke (
   • Rachael Walker (


1 Employers sponsoring tax-qualified plans may want to consider whether the non-tax Employee Retirement Income Security Act (ERISA) requirements for plan loans are met. For example, the CARES Act does not provide a statutory override of the Department of Labor regulation at 29 C.F.R. § 2550.408b-1(f), which imposes a 50% account balance limit on plan loans. Presumably the Department of Labor would waive this provision to facilitate the loans contemplated by the CARES Act. Otherwise, many participants would be forced to take distributions in lieu of loans.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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