New Stimulus Package Makes PPP, FFCRA, and Other Changes
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020. The CAA provides various forms of stimulus and support including extensions and changes to earlier COVID-related legislation. A summary of these measures is below.
Note: On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA), which further amended some of the programs discussed below. For more information, see the ARPA section.
Table of Contents
- PPP Reopened: Second Draw Loans Available
- Employee Retention Tax Credit Extended
- Changes to FFCRA Paid Leave Program
- Employee Social Security Tax Deferral Repayment Deadline Extended
- Tax Exclusion for Employer Student Loan Repayment Benefits Extended
- Changes to Health Care and Dependent Care Flexible Spending Accounts
- Tax Extenders
- Tax extenders
- Employer resources
PPP Reopened: Second Draw Loans Available
Updated: March 30, 2021
The CAA reopens the PPP, enabling borrowers to obtain a second PPP loan, even if an application for forgiveness of an original PPP loan hasn't 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 CAA expands the types of organizations that are eligible for PPP loans. 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.
The CAA also 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.
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.
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 are prohibited from receiving a loan greater than $2 million for all locations combined.
'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.
Generally, PPP forgiveness provisions and measures are the same as applied to the original PPP Loan program, as amended. "Covered periods" (the period in which PPP loan proceeds must be spent) can range from eight to 24 weeks at the election of the borrower.
PPP loans are 100 percent forgivable if proceeds are spent in accordance with program rules. Repayment may be required if certain measures aren't met, such as maintaining the number of employees, stable hours and wage levels. Proportionate repayment of PPP loans may be required if the employer doesn't 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 won't 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.) Forgiveness isn't 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.)
Forgivable Expenses Expanded:
Forgivable expenses now include supplier costs and investments in facility modifications and personal protective equipment to operate safely, including:
- Business software or cloud computing services that facilitate 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 weren't 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 business activities 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.
The CAA clarifies that "other employer-provided group insurance benefits," such as life insurance, are included in payroll costs.
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 wouldn't 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 aren't 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 for four years.
For loans between $150,000 and $2 million, borrowers aren't 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. Lenders and/or the SBA may review and audit all PPP loans.
Tax Treatment of Expenses Paid with PPP Proceeds:
The CAA clarifies the tax treatment of expenses paid for with PPP loan proceeds. It provides that no deduction will be denied or reduced, no tax attribute will be reduced, and no basis increase will be denied, on the basis that such expenses qualify for PPP loan forgiveness.
However, this provision is effective only with respect to a loan for which forgiveness is provided under section 1106 of the CARES Act, as amended, after December 27, 2020 (the date of enactment of the CAA).
Lastly, the CAA permits PPP borrowers to also qualify for the Employee Retention Tax Credit (ERTC). However, as outlined below, PPP loan proceeds can't be used to pay eligible wages for an ERTC claim.
Loan Applications Must Be Filed by March 31, 2021 (Now Extended to May 31, 2021):
Businesses are advised to apply for PPP loans as soon as possible since appropriated funds are limited. However, the SBA and/or lenders may delay the opening of the program for a number of weeks to develop new forms and instructions.
Visit our PPP page for more information on the Paycheck Protection Program and loan forgiveness rules.
Employee Retention Tax Credit Extended
Effective March 2020, the CARES Act provided 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 (a $5,000 credit per employee). Employers qualified if their operation was fully or partially suspended due to government orders or if they 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, subject to the $10,000 cap.
Increased Credit Amount:
The tax credit has been expanded by the CAA and the American Rescue Plan Act. From January 1, 2021 through December 31, 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 (the maximum credit per employee in 2021 is $28,000).
Note: The American Rescue Plan Act also extended the tax credit to new businesses which started after February 15, 2020, with average annual receipts of under $1,000,000. For such businesses, the amount of the credit may not exceed $50,000 per quarter.
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 CAA provides that employers who receive PPP loans may still qualify for the ERTC for wages that aren't paid with forgiven PPP loan proceeds. Prior to enactment, PPP borrowers weren't eligible for this credit unless they had repaid the loan in full by May 18, 2020.
Originally, the CARES Act provided that for employers with more than 100 employees the credit was only available for wages paid to employees for paid time off. Employers with 100 or fewer employees were eligible for the credit for all wages paid (for time worked, in addition to paid time off). This 100-employee threshold for determining qualified wages is changed to 500 for 2021.
The American Rescue Plan Act relaxes restrictions on "Severely Financially Distressed Employers," defined as those that can demonstrate that gross receipts are less than 10 percent of the gross receipts of the corresponding base period (generally the same calendar quarter in 2019). These organizations may apply the credit to all wages paid to employees (up to the applicable $10,000 per employee per quarter limit), notwithstanding that they have over 500 employees. Normally employers with more than 500 full-time employees can only take the credit for wages paid to employees for time that the employee is not providing services (i.e., paid time off).
Claiming the 2021 Tax Credits in RUN Powered by ADP® (RUN):
Eligible businesses can setup specific payroll earning codes to assist in the tracking and reporting of qualified CARES Employee Retention Credit wages and expenses. Two payroll earnings codes are available: CARES Retention Wage and CARES Health Credit. Report your 2021 CARES amounts when processing payroll. The credit will net against the payroll's Federal tax liability (except for FUTA). If the credit exceeds the payroll's Federal tax liability, the remainder of the credit will be applied toward future payrolls' Federal tax liability. If you do not absorb the full credit by the end of the quarter, the credit remaining will be reported as an overpayment on your quarterly tax return. The IRS will refund the overpayment when the quarterly return is processed.
Tax Credit is Retroactively Available to PPP Borrowers:
The CAA provides that the Employee Retention Tax Credit is retroactively available to PPP borrowers. For 2020, the maximum credit remains $5,000 per employee (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.
Eligible PPP loan recipients who wish to retroactively claim the Employee Retention Credit with respect to qualified wages paid in the 2nd, 3rd, and/or 4th quarters of 2020 may file an amended Federal payroll tax return. Contact your ADP Service Team to process any amendments needed.
For more information, select COVID-19 Update on the RUN homepage.
Changes to FFCRA Paid Leave Program
In March 2020, the FFCRA required employers with fewer than 500 employees to provide 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 CAA didn't extend the mandate to provide FFCRA leave beyond 2020, but for those employers with 500 or fewer employees that choose to provide such qualified FFCRA leave wage payments, the CAA 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 CAA doesn't reset these amounts for 2021. Therefore, if such amounts were exhausted for an employee in 2020, any leave payments to that employee in 2021 wouldn't qualify for the tax credit.
Employee Social Security Tax Deferral Repayment Deadline Extended
On August 8, 2020, President Trump 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 CAA extends the repayment period for any amounts deferred through December 31, 2021. However, the CAA doesn't 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
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 CAA extends the tax treatment of such payments through 2025.
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 CAA 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 CAA 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 CAA 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 CAA 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.