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As the world races to respond to the global health crisis resulting from the coronavirus, businesses of all sizes across the United States are scrambling to manage the economic freeze spurred by stay-at-home directives and social distancing orders. Companies are being faced with a shortage or elimination of their workforce, decreased streams of revenue, trade and opportunity, and demands to continue to pay wages and benefits to their furloughed workers. At the same time, millions of Americans are filing for unemployment while companies confront the looming prospect of shuttering their doors and filing for bankruptcy.
In an attempt to allay these unprecedented hardships and fears, the United States Congress has enacted several pieces of legislation to assist individuals, families, and businesses amid this historic downturn in economic activity. On March 25, 2020, the Senate unanimously passed “phase III” of the coronavirus relief program. The 883-page bill, titled Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) passed in the House of Representatives on the morning of March 27, 2020. Later that afternoon, President Trump signed the bill into law.
The CARES Act is currently estimated to provide $2.2 trillion in relief to U.S. taxpayers and businesses. It is the third phase of the largest relief package in modern history, which significantly surpasses the assistance provided by the U.S. Congress during the 2008 financial crisis.[1] The CARES Act provides critical aid by delivering relief primarily in the form of direct payments to most individuals and families, and large loan packages to businesses, corporations, and health care providers. The Act also targets assistance to individuals and businesses that may otherwise not qualify for the aid offered. For instance, the CARES Act includes far more workers than are usually eligible for unemployment benefits, including self-employed people and part-time workers. Similarly, businesses that ordinarily would not qualify for certain loans may now apply due to less onerous terms including, notably, loan forgiveness programs.
The key provisions of the CARES Act, as well as the types of aid provided under the ACT to assist individuals, families, and businesses during this uncertain economic period include the following:
• Small Businesses: The CARES Act creates a Paycheck Protection Program for small employers, self-employed individuals, and “gig economy” workers, with $350 billion earmarked to help prevent workers from losing their jobs and small businesses from closing due to economic losses caused by the coronavirus pandemic. The Paycheck Protection Program provides eight weeks of cash-flow assistance through 100 percent federally guaranteed loans to small employers who maintain their payroll during this emergency. If the employer maintains its payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
Under the Paycheck Protection Program, small businesses, other business concerns, nonprofits and veterans organizations that generally have fewer than 500 employees; the self-employed; sole proprietors; independent contractors; and businesses in the accommodation and food services sector with fewer than 500 employees per location, are eligible for small business loans to cover payroll, health care costs, mortgage interest payments, rent and utility payments, and interest on pre-existing debt obligations.
The Paycheck Protection Program also temporarily raises the maximum government small business loan amount from $5 million to $10 million during the “covered period,” from February 15, 2020 through June 30, 2020. Under the program, the maximum value of a company’s loan will be equal to the lesser of $10 million or the sum of 2.5 times the company’s average monthly payroll cost in 2019. This includes wages for employees as well as expenses for paid sick leave, health care, and other benefits. The program also temporarily guarantees 100 percent of the loans, regardless of size. For any amounts not forgiven, the maximum term is ten years, the maximum interest rate is four percent, zero loan fees, and zero prepayment fee.
The CARES Act also temporarily expands eligibility for Small Business Administration (SBA) economic injury disaster loans and provides an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within 3 days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the emergency advance, eligible businesses must first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent, and mortgage payments. In addition to the entities that are already eligible for SBA disaster loans (small businesses, private non-profits, and small agriculture cooperatives), eligibility is temporarily expanded under the Act to include business entities with 500 or fewer employees; sole proprietorships, with or without employees; independent contractors; cooperatives and employee-owned businesses; tribal small businesses; and private non-profits of any size. To qualify, an applicant must have been in business as of January 31, 2020. Expanded eligibility criteria and the emergency grants are only available between January 31, 2020 and December 31, 2020.
• Large corporations: The CARES Act sets aside approximately $500 billion in loans, loan guarantees, and other investments for large corporations. These loans will be overseen by a Treasury Department inspector general, the period will not exceed five years, and the loan cannot be forgiven. The eligible companies will have to repay the loan to the U.S. government and will be subject to public disclosures and other requirements. Any company receiving a loan under the program is barred from making stock buybacks for the term of the loan plus one year. The Act provides that all loans, their terms and any investments or other assistance provided by the government must be publicly disclosed. There are also limitations placed on executive compensation and benefits of corporations who receive such loans from the U.S. government.
Notably, of the $500 billion earmarked for loans, guarantees and other investments for larger corporations, approximately $58 billion is allocated under the Act to assist airlines in continuing their operations during the period of travel restrictions/reductions resulting from the coronavirus pandemic. A portion of these allocated funds is to be set aside to help cover airline employee wages, salaries and benefits, which includes $25 billion for passenger air carriers, up to $4 billion for cargo air carriers, and up to $3 billion for airline contractors.
• Payroll Tax Credit: The CARES Act provides a refundable payroll tax credit for 50% of employee wages paid by employers that are either forced to fully or partially suspend operations due to a governmental order related to COVID-19, or that experience a year-over-year decline in gross receipts of 50% or more. The payroll tax credit is available to employers regardless of the number of employees. However, employers with more than 100 full-time employees may receive the credit only for wages paid to employees who are not providing services to the employer due to COVID-19 related factors, while employers with 100 or fewer employees may receive the credit for all employee wages paid. The credit is limited to 50% of the first $10,000 in wages per employee, per quarter; and recipients of loans under the Paycheck Protection Program are not eligible for the credit.
• Unemployment Insurance: The CARES Act expands eligibility for unemployment insurance for workers who are displaced due to COVID-19 in a number of ways. The Act extends unemployment insurance to workers who are otherwise not eligible for such benefits at the state level, as long as their unemployment is connected to the coronavirus outbreak. Pursuant to the CARES Act, eligible workers now include part-time employees, freelancers, independent contractors, gig workers, and the self-employed. The Act specifies that the U.S. government will provide $600 a week to individuals who are eligible for unemployment insurance. The federal assistance will complement existing state unemployment benefits, which typically cover a percentage of an unemployed individual’s previous salary. The Act’s $600 weekly payout to unemployed workers will last for a period of up to four months through July 31, 2020. Additionally, the CARES Act will extend state-level unemployment insurance by an additional 13 weeks. Where, for example, most state unemployment benefits last 26 weeks, the Act extends benefits in those states to 39 weeks. The extended benefits will last through Dec. 31, 2020. The Act also incentivizes states to pay out unemployment benefits as early as possible, by having the federal government cover the first week of benefits for states that pay recipients as soon as they become eligible (instead of waiting the customary one-week period before awarding unemployment insurance).
For workers who have lost jobs as a result of the coronavirus pandemic, but would not typically qualify for unemployment benefits due to insufficient work history, the CARES Act effectively waives work history requirements and allows those workers to receive unemployment benefits. The Act further provides federal funding to be paid to those states that choose to waive the typical one-week waiting period to cover the cost of the first week of unemployment benefits. In addition, the Act provides that certain federal funds will be made available to states to fully fund work share programs under which employees receive partial unemployment benefits if work hours are reduced but not eliminated by their employer.
• Hospitals and Health Care: The CARES Act provides over $140 billion in appropriations to support the U.S. health system. Specifically, the Act provides $100 billion to reimburse eligible health care providers for health care-related expenses or lost revenues (which not otherwise reimbursed) that are directly attributable to COVID-19. Eligible health care providers are defined as public entities, Medicare or Medicaid-enrolled suppliers and providers, and other for-profit and non-profit entities specified by the Health and Human Services Secretary. Funding will be on a rolling basis through “the most efficient payment systems practicable to provide emergency payment.” In addition, the Act provides $1.32 billion in immediate additional funding for community centers that provide health care services for roughly twenty-eight million people; $11 billion in funding for diagnostics, treatments and vaccines; $80 million for the Food and Drug Administration to prioritize and expedite approval of new drugs; $4.3 billion for programs and response efforts of the Centers for Disease Control and Prevention; $20 billion for the Department of Veterans Affairs to purchase more testing kits, medical equipment and personal protective equipment for medical staff, boost the Department’s telehealth capabilities and send veterans outside the VA for emergency care; and $16 billion to the Strategic National Stockpile to increase availability of equipment, including ventilators and masks. Importantly, under the Act, all testing and potential vaccines for COVID-19 will be covered at no cost to patients.
• Individual Tax Credits: Under the CARES Act, “eligible individual” taxpayers can benefit from a tax credit equal to the sum of: (i) $1,200 for single filers ($2,400 for those filing a joint return) plus (ii) an amount equal to the product of (a) $500 multiplied by (b) the number of qualifying children. The aforementioned tax credits will be “phased-out” by 5% of the amount by which such eligible taxpayer’s adjusted gross income exceeds: (i) $150,000 for joint-filers, (ii) $112,500 for heads of household, and (iii) $75,000 for all other types of filers. By way of example, the tax credit will be phased out entirely at $198,000 for joint-filers with no children. The cash payments are based on 2018 or 2019 tax filings. Individuals who receive Social Security benefits, but do not file tax returns, are also still eligible.
• Education: The CARES Act also includes relief for U.S. students and graduates with outstanding federal student debt. All loan and interest payments are deferred through September 30, 2020 without penalty to the borrower for all federally owned student loans. The Act further allows schools to turn unused work-study funds into supplemental grants and continue paying work-study wages while schools are suspended. In addition, the U.S. Department of Education will cease collections on student borrowers in default “until further notice.” Finally, students who drop out of school as a result of the coronavirus would not have the time they are not in school deducted from their lifetime limits on subsidized loan and Pell Grant eligibility. Such students would also not be asked to pay back any grants or other aid they have already received.
• State and Local Governments: The CARES Act further designates $339.8 billion for various programs conducted by state and local governments. Of this amount, $274 billion is allocated to specific COVID-19 response efforts, including $150 billion in direct aid for those state and local governments with cash flow issues because of a high number of coronavirus cases. The amounts allocated under the Act to state and local governments also includes $5 billion for Community Development Block Grants, $13 billion for K-12 schools, $14 billion for higher education and $5.3 billion for programs for children and families, including immediate assistance to child care centers.
At this time, the full scope and breadth of the relief afforded to individuals and businesses (both small and large) under the CARES Act remain to be determined. Given the uncertainty created by the constantly evolving coronavirus pandemic, it is not clear at this time whether the $2.2 trillion in relief provided to individuals and business will be sufficient to address the deleterious effect upon the U.S economy caused by the pandemic. In fact, the U.S. Congress is currently contemplating a fourth phase of the federal government’s coronavirus relief package that reportedly would focus on aid to improve the country’s infrastructure and recovery from the pandemic. The government’s proposed fourth phase may include, inter alia, expanding the country’s broadband and 5G internet to allow more Americans to work from home; modernizing hospitals and community health care centers; and updating outdated water pipelines.
[1] Phase one, which President Trump signed on March 3, 2020, provided $8.3 billion in funds for health agencies and testing, and for small-business loan subsidies. Phase two, enacted March 18, 2020, and worth about $100 billion, provided tax credits for employers offering paid sick leave, and increases to unemployment benefits and food assistance.
Insurance and reinsurance
United States