Provisions in the year-end stimulus bill known as the Consolidated Appropriations Act, 2021 (the Act) benefit beleaguered nonprofits in a number of ways. The COVID-19 relief measures clarify important elements for recipients of Paycheck Protection Program (PPP) loans, and offer fresh funding for new loans (PPP2) that might be particularly important. An employer tax credit was also enhanced and employee benefit modifications extended.
Here are some of the ways your organization can take advantage of the newest stimulus legislation and find some stability in these trying times.
Several provisions in the Act impact employee benefits offerings. There are temporary relief measures and relaxation of status change rules that affect medical flexible spending accounts (FSAs), dependent care FSAs, and cafeteria plans. Relief extends to status changes for cafeteria plans, and the update allows employees to carry over any unused expenses from FSAs, including dependent care FSAs, from the 2020 plan year to the 2021 plan year and from the 2021 plan year to the 2022 plan year.
The Health FSA spend down of unused account balances is similar to dependent care FSA for the 2020 and 2021 plan years, and the dependent care FSA age of 13 is relaxed. Plans can now reimburse expenses for a child up to age 14 for the 2020 plan year.
These updated provisions are temporary and voluntary, not mandatory, and they must be administered in accordance with the legislated changes and communicated to all participants. Plans must be amended by the end of the calendar year following the plan year to which it takes effect.
Employer Assistance with Student Loans
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers who offered Internal Revenue Code Section 127 Educational Assistance Plans could reimburse student loans up to $5,250 annually for qualifying employees. This provision was set to expire on Dec. 31, 2020, but the Act has now extended it through 2025.
Retirement plans now have partial plan termination relief. For your organization to qualify, the plan participant count as of March 31, 2021, must be at least 80% of the participant count on March 13, 2020. Distributions from eligible retirement plans for qualified disaster distribution may also be available to your employees.
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) has been extended to employers who claimed PPP loans. However, to the extent that wages were used to justify forgiveness of any PPP loan, they may not be used again to calculate the ERTC. This limits the potential benefit for recipients of PPP loans but expands eligibility for the credit for others.
Refundable payroll tax credits for paid sick and family leave enacted in the Families First Coronavirus Response Act (FFCRA) have been extended through the end of March 2021. This provision is effective as if included in FFCRA and modifies the tax credits to apply as if the corresponding employer mandates were extended through the end of March 2021. The extension does not require the employer to provide the leave. It simply extends the credit for employers who voluntarily provide the leave. This extension allows self-employed individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit for paid sick and family leave.
Employer Tax Credit for Paid Family and Medical Leave
The Act extends the employer credit for paid family and medical leave through 2025. This permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees for family and medical leave.
The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages. It is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per taxable year.
This tax credit is a separate general business credit from the credit created by the FFCRA. Taxpayers who claim the credit provided by the FFCRA, described above, may not count those wages for purposes of calculating the employer tax credit for paid family and medical leave.
Changes to the PPP
Additional funding for organizations hard hit by the pandemic was a significant component of the year-end stimulus bill. The Act allocated $284.45 billion for PPP2 loans, $43.5 billion in Small Business Administration (SBA) debt relief, and $20 billion for certain live venues, independent movie theaters, and cultural institutions that continue to be shut down or have severe operational restrictions caused by the COVID-19 pandemic.
In addition to providing another round of PPP loans, the Act also provides new guidance and clarifications on existing PPP loans. As the Dec. 31, 2020 safe harbor date for calculating headcount has expired, now is the time for nonprofit managers to focus on PPP loan forgiveness and whether to access funding under the PPP2.
Accessing the PPP2
The PPP2 comes with new guidelines for potential borrowers, targeting organizations with 300 or fewer employees. It also reduces the maximum loan amount from $10 million to $2 million. The PPP2 could be beneficial to organizations that did not previously qualify or were on the fence about applying for loans from the federal program.
The Act solidifies that the SBA will require a Loan Necessity Questionnaire for certain PPP loans. The Not-For-Profit version of the Loan Necessity Questionnaire was finalized on Nov. 30, 2020. This requirement is separate and distinct from the PPP loan forgiveness application and applies to nonprofit borrowers with PPP loans of $2 million or more.
PPP lenders will provide the questionnaire to applicable borrowers, and it must be completed and returned within 10 days of receipt. The questionnaire covers:
- Revenue comparisons between 2019 and 2020;
- Impact on business operations (both governmental restrictions and voluntary restrictions);
- Mitigation costs incurred by your organization; and,
- Liquidity assessment showing the resources available.
The questionnaire allows for the borrower to explain answers and requires documentation for certain answers. Borrowers must perform three certifications and sign the questionnaire, and it is suggested having legal counsel review the questionnaire before submitting it.
Tax Treatment of PPP Loans
The Act also provides clarification of tax treatment of PPP loans. It reiterates that any amount of PPP loan that is forgiven will not result in taxable income. It also clarifies that deductions are allowed for otherwise deductible expenses used to justify PPP loan forgiveness. These clarifications are effective as of the date of enactment of the CARES Act and apply to any PPP2 loans from this round.
Many of the new stimulus provisions and law changes have particular relevance for nonprofit organizations. To understand what the new stimulus updates mean for your organization, seek out expert advice.
Nate Smith is a director in the CBIZ National Tax Office. His email is firstname.lastname@example.org