McConnell Releases Revised COVID-19 Bill

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The US Senate currently has under consideration a "shell" amended CARES Act (as described by Senate Majority Leader Mitch McConnell) (H.R. 748),^[1] which failed a procedural vote this evening along party lines. McConnell stated early this afternoon that, while negotiations with Democrats continue, it was his intention to propose and seek a vote on his package sometime on Monday. That effort is now in doubt. 

Meanwhile, also early this afternoon, House Speaker Nancy Pelosi expressed her disagreement with the current version of McConnell's legislation and indicated that House Democrats would be producing their own legislative package. 

Given the partisan differences expressed today, the scope and substance of the final bill remain highly uncertain. We will provide additional alerts and information as the situation progresses. 

For now, we summarize below the 580-page amended bill, still known as the Coronavirus Aid, Relief, and Economic Security Act (the amended CARES Act), that McConnell released today. It consists of several different Divisions and Titles, which are reorganized from the version released on March 19:

A. Division A—Keeping Workers Paid and Employed, Health Care System Enhancements, and Economic Stabilization

1. Title I—Keeping American Workers Employed and Paid Act, which includes paycheck protection and loan forgiveness, and small business contracting relief.
2. Title II—Assistance for American Workers, Families, and Businesses, which includes unemployment insurance and tax relief.
3. Title III—Supporting America's Health Care System in the Fight Against the Coronavirus, which includes provisions related to medical supplies and health care coverage.
4. Title IV—Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy, including relief to airlines, financial institutions, and sectors critical to national security.

B. Division B—Emergency Appropriations for Coronavirus Health Response and Agency Operations 

Keeping American Workers Employed and Paid Act 

Small Business Loans

This Title amends the Small Business Act (SBA), which, among other things, generally authorizes the Small Business Administration to make loans to small businesses for certain purposes. The SBA allows the Administration to provide loans directly or in cooperation with the private sector through agreements to participate on an immediate or deferred/guaranteed basis.  

The amended CARES Act would amend the SBA, for the period from February 15, 2020 to June 30, 2020 (covered period), to provide loans – with 100% federal-government participation – to additional businesses, up to a maximum, for operational costs, including payroll, rent, health benefits (and insurance premiums), etc.  

Loan Term Overview 

The Administrator may guarantee covered loans under the same terms, conditions, and processes as a loan made under section (a) (loans to small business concerns) of the SBA. No collateral or personal guarantee shall be required for a loan. The interest rate on the loans is the maximum rate in effect on February 15, 2020 for SBA small business loans. There will be no subsidy recoupment fee associated with the loans. 

Eligible Loan Recipients

In addition to "small business concerns" as currently defined under current SBA, eligible businesses include: 

Any business concern, nonprofit organization (excluding those that receive Medicaid funds), or veterans organization if it employs not more than the greater of:

• 500 employees; or
• If applicable, the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, or veterans organization operates. 

For businesses with more than one location, if it employs 500 or fewer employees per physical location and falls within the "accommodation and food services" sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan. 

SBA regulations on entity affiliations are waived for the covered period for: 

• Businesses in Sector 72 under the NAICS with 500 or fewer employees;
• Businesses with franchisor identifier codes; and
• Any business that receives financial assistance from a licensed small business investment company. 

Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Congress's last COVID-19 bill, the Families First Coronavirus Response Act) also may receive loans. 

Loan Maximum, Borrower Requirements and Eligibility, and Permissible Uses for Loan Dollars 

The maximum loan amount is the lesser of: 

• 2.5 times average total monthly payroll costs incurred in the one-year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019);
• For businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 – 2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020; or
• $10 million. 

Borrowers must fulfill certain requirements to obtain loans under the program, including: 

• Making a good-faith certification of the need for the loan to continue operations during the COVID-19 emergency; and
• Maintain an average monthly number of full-time equivalent employees that is not less than the average number during the periods described in the loan maximum section above. 

Businesses may use the loans for: 

• Payroll costs 
  • Includes: compensation to employees, such as salary, wage, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission-based compensation) up to $100,000 in one year, prorated for the covered period; 
  • Excludes: individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside of the US; and sick and family leave wages for which credit is allowed under the Families First COVID-19 relief package; 

• Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Salaries, commissions, or similar compensations;
• Mortgage and rent payments;
• Utilities; and
• Interest on any other debt obligations incurred before the covered period. 

The Treasury Secretary has the authority to extend authority to additional private sector players (beyond those already eligible under the SBA) to make loans under this program. Participating lenders are entitled to reimbursement of 5% of the balance of the financing outstanding at the time of disbursement of the loan. 

In evaluating eligibility of borrowers, a lender shall consider whether the borrower: 

• Was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid; and
• Is substantially impacted by public health restrictions related to COVID-19. 

Businesses that receive a loan under this program may not receive a disaster loan under section (b)(2) of the SBA for the same purpose (but if a business already has a SBA disaster loan from the period between February 15, 2020 and March 31, 2020, it may still seek relief under this program). 

Finally, the loans qualify for the amended CARES Act's broader loan forgiveness provisions. Specifically, indebtedness is forgiven (considered canceled indebtedness and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period: 

• Payroll costs;
• Interest payments on covered loan obligations;
• Covered rent obligations; and
• Covered utility payments. 

Forgiveness amounts will be reduced for any losses in employees or reductions in wages. Within 90 days of determining the forgiveness amount, the Administrator must remit payment plus interest to the lender. 

Additional Provisions 

The amended CARES Act also:

• Waives certain fees that would otherwise apply under the SBA, as well as the usual requirement that a small business concern be unable to obtain credit elsewhere; 
• Businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for payment deferment relief for not more than one year; lenders are required to provide such relief during the covered period (if secondary market investors decline to approve a lender's deferral request, the Administration must purchase the loan); 
• Puts limits on secondary market sales of the loans; 
• Mandates a 0% risk weight of the loans for banking agencies' risk-based capital requirements; 
• For banks that modify the loans in a troubled debt restructuring related to COVID-19, they temporarily are not required to comply with FASB's TDR disclosure requirements; 
• Effective January 1, 2020, increases the loan limit for the SBA's express loan program to $1 million (from $350,000); 
• Increases authorized commitments for loans under section (a) of the SBA, including those under this new program, to $349 billion. 

Expansion of SBA Disaster Loan Program 

In addition to expansion of the SBA's general loan provisions described above, the amended CARES Act expands the SBA's disaster loan program. The covered period for this section is January 31, 2020-December 31, 2020. In addition to current eligible entities, the following may receive SBA disaster loans: 

• Startups with 500 or fewer employees;
• Sole proprietorships and independent contractors;
• Cooperatives with 500 or fewer employees; and
• ESOPs with 500 or fewer employees. 

The bill makes the following additional changes to the SBA disaster loan program during the covered period: 

• Waives rules related to personal guarantees on advances and loans of $200,000 or less;
• Waives the "1 year in business prior to the disaster" requirement;
• Waives the requirement that an applicant be unable to find credit elsewhere; and
• Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or "alternative appropriate methods to determine an applicant’s ability to repay."

Applicants for disaster loans during the covered period may request an advance from the Administrator up to $10,000, which does not have to be repaid, even if the loan application is later denied. Advances may be used for purposes already authorized under the disaster loan program, including: 

• Providing sick leave due to direct effect of COVID-19;
• Maintaining payroll during business disruptions during slow-downs;
• Meeting increased supply chain costs;
• Making rent or mortgage payments; and
• Repaying debts that cannot be paid due to lost revenue. 

The amended CARES Act would deem all states and their subdivisions to have sufficient economic damage to small business concerns to qualify for assistance under this loan program (rather than the current state declaration and certification approach). 

Loan Payment Subsidies for Certain Loans

This section covers loans guaranteed by the Small Business Administrator under: 

• The general loan subsection of the SBA;
• Title V of the Small Business Investment Act; or
• The SBA's microloan program. 

With respect to these loans, the Administration "should encourage lenders to provide payment deferments, when appropriate, and to extend the maturity of covered loans, so as to avoid balloon payments or any requirement for increases in debt payments resulting from deferments provided by lenders" during the COVID-19-declared emergency. 

Additionally, for these loans, the Administrator shall pay (and relieve the borrower of any obligation to pay) the principal, interest, and any associated fees owed in a regular servicing status:

• For loans made before this bill is enacted not on deferment, for the six-month period beginning with the next payment due;
• For loans made before this bill is enacted that are on deferment, for the six-month period beginning with the next payment due after deferment; and
• For loans made within six months of enactment of this bill, for six months after the first payment is due. 

The amended CARES Act also instructs the Administrator to work with the FDIC, OCC, and state banking regulators to: 

• Not require lenders to increase their reserves based on payments received from the Administrator under this section;
• Waive statutory limits on maximum loan maturities for the loans described above; and
• Extend lender site visit requirements to account for volume increases, travel restrictions, etc., during the COVID-19 emergency. 

Emergency Rulemaking Authority for Small Business Administration 

The Administrator is directed to issue regulations to carry out all of the Title I provisions within 15 days of enactment of the amended CARES Act and waives the notice requirements under the Administrative Procedures Act for such rulemakings. 

Assistance for American Workers, Families, and Businesses 

Subtitle B of Title II of Division A of the amended CARES Act provides for tax relief for individuals, and Subtitle C provides tax relief for businesses. Most of the significant provisions have not changed from the March 19 version, but changes are noted below. 

Recovery Rebates

The amended CARES Act provides for recovery rebates of up to $1,200 ($2,400 for joint filers) for US taxpayers. The mechanism for paying the rebates is an advance refundable tax credit. The rebates are subject to certain special rules: 

• Amounts are increased by $500 for each child; and
• Amounts are phased out for taxpayers making $75,000 ($150,000 for joint filers, and as added by the amended CARES Act, $112,500 for heads of household). 

The amended CARES Act removes the provision limiting the rebate to the individual's taxable income, thus permitting low-income taxpayers to receive rebates without the need for the provision in the prior bill that would have allowed taxpayers with insufficient tax liability to utilize a refundable tax credit, but at least $2,500 of qualifying income, to be eligible for a rebate check.  

The amended CARES Act exempts the rebates from offset to pay debts owed to other federal agencies, state income tax obligations, and unemployment compensation debts (but not for past-due support). It also requires the Treasury Department (Treasury) and the Internal Revenue Service (IRS) to coordinate with the Social Security Administration and other agencies to conduct a public awareness campaign regarding the availability of the rebates. 

Extend Filing and Payment Deadlines

The amended CARES Act eliminated the extension of various filing and payment deadlines because Treasury and the IRS already extended filing and payment deadlines for returns and payments due on April 15, 2020 (including estimated and self-employment taxes) in Notice 2020-18. 

However, the amended CARES Act still postpones the due date for depositing employer payroll taxes and 50 percent of self-employment taxes related to Social Security and Railroad Retirement and attributable to wages paid during 2020. The deferred amounts would be payable over the next two years – half due December 31, 2021, and half due December 31, 2022. 

Charitable Contributions

The CARES Act encourages individuals to contribute to churches and charitable organizations in 2020 by relaxing some of the limitations on charitable contributions. These provisions did not change from the March 19 bill: 

• Allowing a deduction of up to $300 of cash contributions, whether or not the taxpayer itemizes deductions; and
• Suspending the 50% limitation on individuals, increasing to 25% the 10% limitation on corporations, and increasing to 25% the 15% limitation on food inventory. 

Treatment of Losses

Certain changes to the loss provisions made by the Tax Cuts and Jobs Act (TCJA) are suspended in an effort to allow companies to utilize greater losses as well as to claim refunds for certain losses. Specifically, the CARES Act: 

• Suspends the TCJA's 80% of taxable income limit on net operating loss (NOL) carryovers for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020;
• Allows NOLs arising in 2018, 2019, and 2020 to be carried back five years; and
• Suspends the limitations on excess farm losses and on the use of a pass-through business' losses against non-business income for three years, so that the limits would not apply to tax years beginning in 2018, 2019, and 2020. 

Limitation on Business Interest Expense

The CARES Act would temporarily increase the limitation on interest deductions imposed by the TCJA. Specifically, the Act would increase the 30 percent of adjusted taxable income (ATI) threshold to 50 percent of ATI, for tax years beginning in 2019 and 2020. (Special tax year 2019 rules would apply to partnerships.) It would also allow a taxpayer to elect to use tax year 2019 ATI in lieu of tax year 2020 ATI for the purpose of calculating its tax year 2020 limitation. 

Corporate AMT Credits

The corporate AMT was repealed as part of the TCJA, but corporate AMT credits are allowed as refundable credits until 2021. The CARES Act accelerates the ability for companies to recover those AMT credits.  

Retirement Provisions

The CARES Act makes several welcome changes in the retirement space.

Although the March 19 bill broadly extended the tax return filing date for individuals until July 15, which would also have moved the due date for 2019 IRA contributions to July 15, 2020, the provision was removed in the amended CARES Act because of Notice 2020-18. However, the extension in Notice 2020-18 applied only to federal income tax returns and payments, so it does not extend to IRA contributions. 

In addition, the amended CARES Act waives the 10% additional tax for premature distributions related to the coronavirus for amounts not to exceed $100,000 (the distribution provision), subject to the following rules, which have not changed substantively from the March 19 bill.  

• The distribution provision covers retirement plans and IRAs;
• Amounts distributed may be repaid at any time over the three-year period commencing on the date the distribution was received (and there is no requirement that the repayment occur in one tranche);
• Amounts can be paid to a qualified plan or an IRA so long as the account is one to which a rollover contribution could be made under the code;
• The distribution provision applies to individuals who have been diagnosed with COVID-19, their spouse or dependent, or a person who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or suffered reduced working hours, or who is unable to work due to lack of child care. The amended CARES Act allows a plan to rely on a certification provided by the participant;
• To the extent that the amounts are not repaid, the income inclusion with respect to any coronavirus distribution can be included ratably over the three taxable years beginning with the taxable year in which the distribution was received; and
• Distributions will be deemed to meet the permissible distribution requirements of section 401(k), which essentially means that they will satisfy the hardship distribution provisions of the code. They will be treated as exempt from tax withholding and exempt from the trustee to trustee transfer rules (that require a plan to offer a trustee to trustee transfer to participants taking distributions). 

In addition, the amended CARES Act increases the dollar amount available for loans from qualified plans from $50,000 to $100,000 and increases the percentage test limit for loans from half the present value of the participant's benefit to the present value of his entire benefit under the plan. Furthermore, if the loan repayment is due between the date of the amended CARES Act's enactment and before the end of the year, the amended CARES Act allows the repayment to be delayed for one year from the original due date. In the unlikely event the amended CARES Act does not get enacted until after July 5, 2020, loan repayments due after December 31, 2020 and within 180 days from the amended CARES Act's enactment will be due 180 days from the amended CARES Act's enactment. 

The amended CARES Act adds a provision permitting a one-year delay in required minimum distributions (RMDs) for defined contribution plans described in Code section 401(a), as well as for defined contribution plans described in section 403(a) and (b), IRAs, and section 457 plans. Thus, the change does not appear to apply to defined benefit plans. The delay applies to both 2019 RMDs that needed to be taken by April 1, 2020 and 2020 RMDs. The amended CARES Act also adds the special rollover rule similar to the one enacted in 2009, allowing amounts subject to the RMD rules in 2020 to be rolled over. 

The CARES Act delays the due date for amendments to plans, so long as the plan is operated as if the amendment is in effect and any subsequent writing is retroactive, as follows: 

• Amendments required because of the Act need only be made by the last day of the plan year beginning on or after January 1, 2022; and 
• In the case of governmental plans, that date is the last day of the plan year beginning on or after January 1, 2024. 

The amendments made by to the retirement provisions apply for calendar years beginning after December 31, 2019, allowing participants who have already taken plan distributions the benefit of these provisions. 

Finally, the amended CARES Act expands the circumstances under which the Secretary of Labor can postpone certain filing deadlines. Currently, the Employee Retirement Income Security Act of 1974 (ERISA) allows the Labor Secretary to delay filing deadlines by up to one year if the President has declared a "disaster" under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) or if there has been a terroristic or military action. As of March 23, 2020, President Trump has only declared the COVID-19 pandemic a "national emergency" (which is different than a "disaster"). The amended CARES Act amends section 518 of ERISA to permit the Labor Secretary to postpone certain filing deadlines by up to one year if the Secretary of the Department of Health and Human Services (HHS) declares a "public health emergency" pursuant to section 319 of the Public Health Service Act. HHS Secretary Alex Azar did just that on January 31, 2020.

Aviation Excise Taxes

The CARES Act provides an excise tax holiday from the date of enactment through the end of 2020 for aviation ticket taxes (both passengers and freight) and taxes on kerosene used in commercial aviation. 

Section 382 Relief

The amended CARES Act instructs Treasury to issue guidance ensuring that ownership interests arising from loans and loan guarantees provided by the federal government under the CARES Act do not trigger a change in ownership for section 382 purposes. 

TCJA Technical Corrections

The CARES Act would adopt a few TCJA technical corrections: 

• Qualified improvement property;
• Effective date of NOL provisions; and
• Technical corrections related to section 461(l). 

The amended CARES Act removed two of the technical corrections that were contained in the March 19 bill due to the lack of support by Democrats, as follows: 

• Treatment of overpayments with respect to taxpayers making a section 965(h) election; and
• Restoration of limitation on downward attribution of stock for purposes of subpart F and GILTI. 

Note that all of the TCJA technical corrections would be permanent, whereas the other tax provisions generally are temporary.

Economic Stabilization and Assistance to Severely Distressed Sectors 

This Title, in an effort to bring liquidity to businesses and the markets, broadly authorizes the Treasury Secretary to make loans, loan guarantees, and other investments in support of eligible businesses, states, and municipalities up to an aggregate of $500 billion. The funds are to be made available according to the following caps: 

• $50 billion in loans/loan guarantees to passenger air carriers;
• $8 billion in loans/loan guarantees for cargo air carriers;
• $17 billion loans/loan guarantees for "businesses critical to maintaining national security" (not defined); and
• Any amounts not used as provided in the first three categories plus $425 billion shall be available in support of programs or facilities established by the Federal Reserve Board for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states or municipalities by:
  • Purchasing obligations or other interests directly from issuers; or
  • Purchasing obligations or other interests in secondary markets or otherwise. 

The Treasury Secretary is charged with determining the form, terms and conditions of these loans, loan guarantees, or other investments (including covenants, reps and warranties, audits, etc.). Rates on any loans made by the Secretary shall be based on the risk and current average yield on outstanding marketable obligations of the US of comparable maturity. 

The Secretary has 10 days following enactment to publish procedures and requirements for applications for assistance. The Secretary has full discretion to make loans/loan guarantees in the first three categories if he determines: 

• The applicant is an eligible business for which credit is not reasonably available at the time of the transaction;
• The intended obligation by the applicant is prudently incurred;
• The loan or loan guarantee is sufficiently secured or is made at a rate that:
  • Reflects the risk of the loan or loan guarantee; and
  • Is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of COVID–19;
• The duration of the loan or loan guarantee is as short as practicable and, in any case, not longer than 5 years;
• Except to the extent required under a contractual obligation in effect as of the date of enactment of this Act, the agreement prohibits the eligible business from repurchasing any outstanding equity interests while the loan or loan guarantee is outstanding;
• The agreement requires the eligible business to maintain its existing employment levels as of March 13, 2020, to the extent practicable, while the loan or loan guarantee is outstanding; and
• For purposes of lending to businesses critical to maintaining national security (category 3), the eligible borrower must have incurred or is expected to incur covered losses such that the continued operations of the business are jeopardized, as determined by the Secretary. 

Contingent on the financial success of any of the businesses in categories one through three, the federal government may, via contract, participate in the gains of the business through warrants, stock options, and the like.  Any agreement entered into under one of the first three categories must provide that from March 1, 2020 until March 1, 2022, no officer or employee of the business whose compensation (salary, bonuses, stock, or other financial  benefits from the business) exceeded $425,000 in 2019 (other than an employee under a collective bargaining agreement) will receive any greater annual compensation than s/he did in 2019 or severance or other termination benefits greater than two times his/her compensation in 2019. 

For assistance under the fourth category (Fed programs or facilities), the issuer of the obligation or interest that is purchased must agree not to repurchase any outstanding equity interests while the assistance is in place/outstanding (this requirement may be waive by the Secretary upon a determination by him that it would reduce the effectiveness of the program or that it is not necessary to protect the interests of the federal government). Loan forgiveness is not available for principal amounts of obligations issued by eligible businesses, states, or municipalities that are acquired under a Fed program or facility. 

Amounts collected under this section shall be deposited: 

• In the Airport and Airway Trust Fund for amounts collected under categories one or two, up to the difference between its projected deposits for FY 2020 and its actual deposits during FY 2020; and
• For everything else, in the Treasury as miscellaneous receipts. 

To administer this section, the Secretary is authorized to enter into service contracts and to issue regulations or other guidance appropriate to carry out these provisions. The Secretary may also designate financial institutions (e.g., broker-dealers, depositories, etc.) as financial agents of the US and reimburse them for performing duties assigned them by the Secretary.

[1] The shell amended CARES Act was the House-passed repeal of the Cadillac tax, which was repealed in December.