What, exactly, is in the CARES Act?
At $2.2 trillion, give or take, the CARES Act is the largest economic rescue package in the history of the U.S. By way of comparison, the law’s small business recovery section alone allocates twice as much money in inflation-adjusted dollars as Congress spent to rebuild an entire continent in the Marshall Plan.
Coverage of this law has often focused on its one-time cash payment and the Paycheck Protection Program. Both of these programs have dominated the news, in part, because they were written to quickly respond to a fast moving economic crisis. Yet, as critics have pointed out, no programs in the CARES Act have actually taken hold with the speed that Congress intended. Passed several weeks into what immediately became one of the worst economic crises in U.S. history, a law that was intended to stop real time business closures and firings immediately began struggling to disperse its allocated funds.
To understand why, and how the law is designed to help stabilize the U.S. economy going forward, it’s important to take a look at what went into the final version. (Note to readers – The full CARES Act is 880 pages long. To keep this article concise, we will focus on the provisions that directly support individual incomes, employment and businesses. This means we will skip sections such as expanded funding for hospitals and health care, most financial aid to state and local governments, and the $3 billion fund established for U.S. territories such as Puerto Rico and the Virgin Islands.)
Title I – Small Business Job Stabilization
Title I of the CARES Act focuses on, as its name says, “keeping American workers paid and employed.” Among other provisions, it provides that during the coronavirus crisis the government will pay the principal and interest on SBA loans, wiping out a significant monthly payment for many small businesses. It also creates some of the most high profile programs under the CARES Act, including:
· The Paycheck Protection Program
This section creates the PPP, the Paycheck Protection Program, one of the most high profile parts of the law. It establishes what is called a 7(a) loan, a lending program administered by the Small Business Administration (the SBA).
Under the PPP any small business that has been in operation since February 15 can get a low-interest, short-term loan to cover losses caused by the quarantines and the coronavirus itself. Freelancers, contractors and other self-employed individuals can apply for these loans as well, making them de-facto small businesses for the purpose of this crisis. Borrowers can use this money to cover payroll and benefit costs, as well as certain overhead such as rent, mortgages, utilities, and interest on debt taken out before February 15, 2020.
The maximum amount of a PPP loan is based on a business’ payroll adjusted upward to cover overhead as well. A business can borrow up to eight weeks’ worth of costs, measured from when it applies for the loan. Anyone who spends at least 75% of the money on pay and benefits will have the loan entirely forgiven, effectively turning it into a grant. Businesses which reduce their payroll (either by laying people off or cutting pay) will also have to repay more of the loan.
The PPP is arguably the most significant employment stabilization aspect of the CARES Act. It provides free money for businesses to pay employees. By tying loan forgiveness to staffing numbers this provision tries to convince small businesses to keep their employees on, and to rehire those laid off during the early weeks of the crisis. The program has been very slow to roll out, however. The private banks which are supposed to dispense these loans have been reluctant to freely lend, in part because the Treasury has only recently confirmed that the government, not the lenders, will assume all risks of nonpayment.
· Education and Training Grants
While the PPP is arguably the most significant element of Title I in the CARES Act, this section establishes other programs as well. Further sections of the law create a series of education, training and advising grants aimed at small businesses, minority and women-owned businesses, and their employees. These grants will create training programs focused on subjects such as applying for federal resources, coronavirus safety, remote work infrastructure and other relevant topics.
Many small businesses most in need of help will not have access to the financial or legal expertise necessary to understand their rights under the CARES Act. These grants are designed to help reach out to them.
· Emergency EIDL Grants
Economic Injury Disaster Loans are a pre-existing program that the SBA runs for small businesses in a disaster zone. These loans are processed and distributed by the SBA itself.
For businesses seeking EIDL loans due to the coronavirus, the CARES Act has reduced the SBA’s application requirements and created an emergency $10,000 up-front loan. The Treasury has instructed the SBA to issue this money within three days of receiving a small business’ EIDL application, with the goal of keeping businesses capitalized while the SBA processes their full loan eligibility.
Even if the borrower is ultimately denied an EIDL loan, the $10,000 is forgiven as long as it is a legitimate small business with no delinquent debts to the SBA. At time of writing businesses were reporting that few of these grants had been issued and none within the three-day emergency window that the Treasury has instructed.
Title II – Individual Assistance
Title II of the CARES Act focuses on issuing direct aid to individuals and workers. The purpose of this section is to help stabilize personal finances for people who lose their jobs, and to prop up spending across the economy. By helping to keep money in the hands of individual consumers, the stimulus bill will try to keep the quarantine from turning into a demand-side recession.
· Employee Retention Credit
To encourage businesses not to lay off workers, the CARES Act creates a limited tax credit called the Employee Retention Credit.
Under this section, employers will receive a credit equal to 50% of the wages that they pay to their employees. Any business that had more than 100 full-time employees in 2019 will receive this credit for any employee who isn’t working. Smaller businesses will receive the tax credit for all employees. Employers can choose to claim this credit for any period between March 12, 2020 and January 1, 2021.
Businesses can receive a maximum credit of $5,000 per employee and can only apply it to the employer portion of Social Security taxes. However this is a refundable credit. This means that if it exceeds the employer’s tax liability, the IRS will issue a payment for the difference.
· Expansion of Unemployment Benefits
The CARES Act dramatically expands unemployment benefits. While each state sets its own standards and weekly payments, the law increases those payments by $600 a week per recipient. Individuals can collect unemployment benefits for up to 39 weeks and workers who are traditionally ineligible, such as freelancers, contract workers and the self-employed, can file. These changes will last until the end of 2020, and the federal government will compensate states for the additional expense.
This section of the law also reduces some of the traditional requirements for unemployment benefits. Most notably it eliminates the waiting periods imposed by many states, and functionally waives the requirement that someone prove they’re actively seeking work. It also expands what is known as “short-time compensation,” which allows workers to file for partial benefits if they lose some of their income without being laid off altogether. (Like with the PPP, the goal of this is to help keep the employer/employee relationships intact so that businesses can more easily reopen once the quarantines lift.)
Economists have raised concerns that, like the PPP’s eight-week limit, it is very possible that the coronavirus crisis and any subsequent recession may last considerably longer than the 39-week limit this section imposes.
· Individual Payments
Every taxpayer in the country will receive a payment worth $1,200, or $2,400 in the case of joint tax filers, plus an additional $500 per child. This amount is reduced for individuals who make more than $75,000 and couples making more than $150,000.
This payment is processed as an advanced refund tax credit which can’t be reduced or offset by most government debts that would ordinarily reduce a tax credit, although it does create an exception for past-due child support.
Title IV of the CARES Act requires that any bank with federally-backed mortgages allow individuals to request a forbearance on their mortgage, suspending payment on the note. If a borrower affirms in writing that they are experiencing a financial hardship due to the coronavirus, the lender must issue a forbearance of up to 360 days with no additional fees or penalties assessed.
Landlords (holders of “multifamily mortgage loans”) may request the same forbearance from their banks as individual homeowners. Any landlord that accepts this forbearance cannot evict tenants or charge late fees for the duration of the forbearance however they may still require that tenants pay in full or face eviction once the landlord’s forbearance has run out.
In addition, for 120 days after the passage of the CARES Act, most renters and homeowners cannot be evicted for failure to make rent or mortgage payments. This does not suspend payment on those obligations. At the end of the 120-day moratorium, the resident must make all back payments in full or face eviction.
The CARES Act does not create a forbearance for renters.
The IRS has temporarily waived the restrictions on early withdrawals or loans from a retirement account. For 2020, individuals can take out money from their 401k and IRA accounts without tax penalties and can put that money back in as available.
Some charitable contributions are also now considered above the line tax deductions, meaning that taxpayers can claim a deduction for that contribution even if they take the standard deduction. At time of writing a taxpayer can claim up to $300 worth of contributions made in 2020 on their 2020 taxes.
Title IV – Business Stabilization
Where Title I of the CARES Act focuses on helping small businesses to stabilize their employment, Title IV attempts to stabilize the large-scale sector of the economy. This section has come under criticism as it gives limited instructions on how the Treasury should spend the allocated funds.
· Emergency Relief Lending
This section appropriates $500 billion to for the Secretary of the Treasury to make “loans, loan guarantees, and other investments in support of eligible businesses, states, and municipalities” that are “related to losses incurred as a result of coronavirus.” (CARES Act, Section 4003(a)) This section suggests earmarks for certain industries by capping the amount of money that the secretary may lend to them, such as $25 billion to the airline industry and $17 billion for national security industries. Otherwise, working with the Federal Reserve Board of Governors, the Treasury can use this money to make loans to and purchase debt from businesses, state governments and municipal governments.
This section of the CARES Act also issues a non-binding direction for the Secretary of the Treasury to establish a lending program specifically targeted at mid-sized businesses and non-profits (defined as having between 500 and 10,000 employees). While the bill is specific that the Secretary “shall endeavor” to do this, it also provides little beyond a direction to generally try.
· Employment and Business Oversight
Any private business which receives loans or loan guarantees under this section must commit to retaining at least 90% of the employees it had on payroll as of March 24, 2020. The business must also commit to restoring at least 90% of the workforce it had in place as of February 1, 2020, as well as full pay and benefits, within four months of the president declaring an end to the state of emergency.
Firms must also give the government partial ownership in the form of equity interest or prioritized debt. In addition, these loans require that any executive or employee making more than $425,000 receives a pay freeze that lasts until one year after the loan is paid off. For that same period of time no company that accepts a CARES Act loan can buy back its own stock or stock in its parent company, or issue dividends.
· Government Oversight
The CARES Act temporarily suspends certain government oversight laws. This includes the requirement that the Federal Reserve Board hold meetings that are open to the public. It also includes oversight on appointments to Housing and Urban Development, the Securities and Exchange Commission and the Commodities Futures Trading Commission. For the duration of the coronavirus crisis, these bodies may now immediately appoint officers to fill temporary and term appointments without having to go through the ordinary competitive and open application process.
The CARES Act also establishes an inspector general to oversee the distribution and management of the business lending funds. This office is placed within the Treasury. The CARES Act specifically allows the president to appoint the inspector general and to remove this individual largely at his discretion. At time of writing President Donald Trump had already replaced the inspector general appointed to ensure ethical use of the CARES Act funds.
The Act also provides for a Congressional Oversight Commission which will monitor how this money is spent. At time of writing, Congress had not yet formed this commission.
The CARES Act explicitly bans any funds from being issued to businesses controlled by the president, the vice-president, members of Congress, heads of executive branch departments or their immediate family members.