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In the Wake of COVID-19, Can We Make a Mid-Year Adjustment to Our 401(k) Plan?

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By:  Stewart M. McGough

One of our prior newsletter items addressed employers’ concerns with continuing obligations under their pension and 401(k) plans.  It focused on employers’ continuing obligations to fund their defined benefit pension plans and how they could “freeze” those plans to reduce their future contribution obligations.

This newsletter will focus on 401(k) plans and, in particular, the “safe harbor” contribution feature often adopted by employers.

In a 401(k) plan, the employees have the right to defer a portion of their wages and salary by contributing “salary deferrals” to the Plan, and the employer may add its own “profit sharing” feature as well. The employees’ salary deferrals are subject to a special non-discrimination test that in practice often requires the Plan to return to the higher-paid participants some of their deferrals.

Congress encouraged the adoption of 401(k) plans by allowing employers to use one of two safe harbor (“SH“) options to avoid the special non-discrimination test.  One safe harbor is a flat 3%-of-pay employer contribution for all Plan participants regardless whether the participant contributed salary deferrals. The other is a matching feature that obligates the employer to contribute as much as 4% of pay, but only for those employees who make salary deferral contributions.

  1.   Mid-Year Changes.

IRS considered SH features very generous and put stringent rules on their use, effectively preventing an employer from making any “mid-year” change to the SH once an employer adopted it.  This held true whether changing from one SH to another, or if terminating the SH feature during the year.

These rules have been modified by recent legislation under the SECURE Act of 2019 and the CARES Act of 2020. Beginning 2020, an employer who put in a 3% SH feature can suspend or terminate the safe harbor at any time during the year after giving 30 days advance notice to its employees.  But, unless the employer reinstates the 3% SH before the end of the year, the employer loses the “pass” it had on the special testing for deferrals.  That will normally mean that either the employer will have to refund some of the salary deferrals made by its highly-paid employees, or make a special one-time contribution that is shared among its non-highly paid employees.

If the employer changes its mind later in the year (or even during the following year), it can reinstate the 3% SH effective retroactive to the beginning of the year, provided reinstatement occurs by December 1 (for a calendar year plan).  If the reinstatement occurs after December 1 (and even as late as December 31 of the following year), the retroactive reinstatement is still effective, but the contribution increases from 3% to 4%.

This ability to suspend the safe harbor contribution mid-year and reinstate later in the year only applies to the 3% SH, not to the 4% match SH.  If at any time during the year the Plan included the 4% match, no mid-year change can be made that gives the employer the opportunity to reinstate.  In other words, suspending the 4% SH match will mean loss of the “pass” on the special non-discrimination test for that year and each ensuing year until a SH feature is again adopted.

With COVID-19’s enormous disruption to the nation’s workforce, this new ability to modify the safe harbor obligation mid-year should prove to be helpful to those employers with safe harbor.

  1. New Adoption of the SH Feature.

An employer whose 401(k) plan does not already have a 3% SH feature may adopt that feature as late as 30 days prior to the end of the Plan Year (December 1 for a calendar year plan).  The prior rule required adoption 90 days prior to the end of the year.  The 90-day rule still applies if the employer is adopting the 4% match safe harbor.

  1. Modified Notice Requirements

One of the more annoying conditions to a valid safe harbor feature is the requirement that participants receive, prior to the beginning of each year, notice of the SH feature in the Plan.  Participants had to be notified of either feature at least 30 days before the beginning of the Plan Year (or when the SH was being first adopted mid-year).  Certainly, advance notice of a matching contribution feature is warranted, since we can only expect that a participant’s deferral election will be affected by the existence of the match. Why advanced notice was important in the case of a 3% fixed SH contribution still escapes this author. Someone in Congress saw the irrelevance of this, and now the notice requirement in the case of the 3% SH has been eliminated.

We trust these new rules will help employers to navigate the stressful times we are experiencing today. Should you have any questions, call any of us in the Pension Department:

Stewart M. McGough, Esq.:  (315) 477-6225 or smcgough@scolaro.com
Catherine A. Ray, Esq.:          (315) 477-6250 or cray@scolaro.com
Jean A. Borrow, Paralegal:    (315) 477-6258 or jborrow@scolaro.com

 

Special Considerations for Migrant Farm Workers and COVID-19

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By: Melissa L. Green

Many farms, especially those involved in hand-picked and other vegetable and fruit operations regularly employ migrant farm workers to assist with planting, harvesting, and other agricultural needs. The world is responding to an outbreak of respiratory disease caused by a novel (new) coronavirus that has been named “SARS-CoV-2” and the disease it causes has been named coronavirus disease 2019 (“COVID-19”). This article addresses consideration for farm’s who employ workers that are not U.S. citizens, and that are housed onsite by the farm while employed.

     1.  H2-A visas – availability and changes to current protocol

Migrant farm workers working under H2-A Visas may still enter the U.S. in some circumstances, but their travel depends on current restrictions from both the U.S. and their home country. The U.S. is not presently issuing new H2-A Visas.

U.S. Citizenship and Immigration Services (“USCIS”) is temporarily allowing reproduced original signatures on benefit forms and documents. The reproduction must be a copy of the original and may include a scan, photocopy, fax, or similarly reproduced document. The State Department has further advised that it is reviewing these policies and others related to Migrant Farm workers and will update regularly.

The U.S. Department of Agriculture (“USDA”) is attempting to connect available workers (those whose current contracts are expiring) with farmers in need. Additional information can be found at: https://www.farmers.gov/manage/h2a.

          a.  Mexico

Effective March 20, 2002, through April 20, 2020, the U.S. has issued temporary travel restrictions which prohibit non-essential travel between the United States and Mexico. Individuals traveling to and from work, including those in the farming and agricultural industries are exempt from these restrictions. Mexican migrant farm workers who interviewed in person, and were approved for an H2-A Visa last year, may apply for a renewal this year without the need for an in person interview.

     2.  Safety concerns for employing and housing migrant farm workers

The United States Center for Disease Control (“CDC”), the United States Occupational Safety and Health Administration (OSHA), and other federal and state agencies have already begun issuing guidance on how to keep employees safe during the COVID-19 pandemic. The farm should take special precautions for workspaces and living quarters for workers as recommended by OSHA and other agencies.

          a.  CDC workplace guidance

The CDC recommends employers take steps to warn employees about the dangers of COVID-19, and to prevent the spread of illness. The CDC provides a variety of print resources to assist with these recommendations, which can be found here: https://www.cdc.gov/coronavirus/2019-ncov/communication/factsheets.html. Special recommendations include informing employees of the symptoms so that they can immediately report to their employer if they become ill, and informing employees of known ways to prevent the spread of illness (i.e., maintain a safe distance, wear personal protective equipment (“PPE”) such as face masks where appropriate, and encourage employees to wash hands).

          b.  OSHA workplace guidance

OSHA has released guidelines for employers based on the employee’s likelihood to contract COVID-19 at work. Many farms operate a number of agricultural operations that may require employees to have close contact with each other, or the public. Under the current OSHA guidelines, this would put a farm’s employees in the medium risk category of contracting COVID-19 while on the job.

For those in the medium risk category OSHA recommends using physical barriers to prevent contact between employees. Physical barriers include face/sneeze guards where appropriate. In the instance of agricultural work masks may be useful where sneeze guards or physical barriers between employees are not practical. OSHA also recommends minimizing face-to-face contact, removing those known to be ill where possible, and providing masks to those known to be ill in order to prevent the spread of illness. This means, at a minimum, anyone known to be ill should be wearing a mask if they will be exposed to other employees, but should be separated from other employees entirely as soon as possible.

         c.  Migrant farm worker housing

OSHA and the CDC have not provided guidance specifically on housing for migrant farm workers. However, farms should consider the following controls on housing in order to comply with other applicable recommendations from the CDC and OSHA. If all workers are housed in the same building an out building should be constructed to accommodate the potentially ill. Sick and well workers should not share restrooms, or other facilities, such as dining areas. If no separate space is available sick workers must be moved offsite to prevent infecting others. Sick workers should seek medical care, and should be encouraged follow the advice of their medical provider with regard to further treatment.

Conclusion

Many farms may encounter road blocks in obtaining assistance from migrant farm workers this season due to current national and international travel restrictions. If possible, farms should consider utilizing Mexican workers who were issued H2-A visas last year, and should seek additional advice about available workers from the USDA. Also, farms should be mindful of recommendations from OSHA, the CDC, and other agencies, in order to keep migrant farm workers safe and prevent the spread of COVID-19.

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken. For additional legal assistance specific to your farm or business reach out to your usual contact at the firm, or contact Melissa Green (mgreen@scolaro.com).

 

 

How Does the CARES Act Impact Me?

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By: Catherine A. Ray

In this unprecedented time, we want to discuss a few other changes that come with the passing of the CARES Act, in addition to the changes discussed in our previous newsletters Coronavirus, Aid, Relief, and Economic Security (CARES) Act and Retirement Plan Update – Modified Distribution Rules under the CARES Act. We hope these changes will provide valuable information to you, our clients, in addition to your families, friends, and employees.

1)         Direct Rebate Payments (“Where’s my check?”).

The most popular CARES Act topic is undoubtedly the direct rebate payment checks expected to be distributed to eligible individuals in coming weeks.

Eligible individuals may receive a credit, in the form of a direct rebate payment, up to $1,200.00 ($2,400.00 for taxpayers filing jointly), in addition to $500.00 for each qualifying child of such taxpayer. Eligible individual taxpayers who had an adjusted gross income (“AGI”) of $75,000.00 or less ($150,000.00 for joint filers; $112,500.00 for head of households) in the 2019 taxable year (2018 for eligible individuals who have not filed their 2019 tax return) will generally receive full direct rebate payments. However, for those taxpayers that exceeded the aforementioned limits, the credit is reduced by 5% of the exceeded amount.

For instance, a single taxpayer who is otherwise eligible to receive up to $1,200.00, but who’s AGI for the 2019 taxable year was $100,000.00, would be ineligible to receive a direct rebate payment, as the credit would be reduced by 5% of the exceeded AGI, totaling $1,250 ($1,200 max – $1,250 = $0 payment). However, a single taxpayer, who has not yet filed his 2019 tax return and who’s AGI in 2018 was $82,000.00, would receive a direct rebate payment of $900.00 ($1,200 max – $300 = $900.00 payment).

Nonresident aliens, individuals who qualify for a deduction on another taxpayer’s taxable return (i.e., a college student whose parents claimed her as a dependent on their joint tax return filing), and trusts and estates do not qualify for a direct rebate payment.

Otherwise eligible individuals will not receive a direct rebate payment unless such taxpayer, his/her spouse (if filing jointly), and child’s (if eligible for a child credit) valid social security number is included on the taxpayer’s 2019 (or 2018 if applicable) tax return.

The Internal Revenue Service (“IRS”) has released additional information on payments in the last few days.

2)         Charitable Deductions/Limits.

The CARES Act provides a new above-the-line deduction for charitable contributions and temporarily modifies charitable deduction limits.

To qualify for the new above-the-line deduction, the charitable contribution must be made in cash by taxpayers who elect not to itemize. If the taxpayer qualifies, a deduction of up to $300.00 may be made to a qualified charity (not including a donor-advised fund). Eligible taxpayers may take this deduction in taxable years beginning after December 31, 2019.

The CARES Act also temporarily suspends and replaces the charitable deduction limits with more generous limitations on certain cash charitable contributions made in the 2020 taxable year. To qualify for these modified limits, charitable contributions must be made in cash during the 2020 calendar year to a qualified charitable organization (not including a donor-advised fund) and the taxpayer must elect, or in other words opt-in, to use the modified limitations. For individuals, the CARES Act now allows a deduction up to 100% of the individual’s AGI. For corporations, the CARES Act removes the 10% AGI limit and replaces it with a 25% AGI limit.

Charitable deduction limits have also been temporarily increased for food contributions to qualified charitable organizations.

3)         Single-Employer Defined Benefit Plan Minimum Funding Rules.

Good news for Plan Sponsors of single-employer defined benefit plans with minimum funding requirements. The due date for minimum required contributions (including quarterly contributions) otherwise due during the 2020 calendar year has been extended to January 1, 2021. However, payment at such time will be adjusted to include interest (using the effective rate under the Plan) accrued from the original due date to the payment date.

Plan Sponsors may also elect to treat the Plan’s Adjusted Funding Target Attainment Percentage (“AFTAP”) for the last Plan Year ending before January 1, 2020, as the AFTAP for Plan Years which include calendar year 2020.

4)         Foreclosure Moratoriums and Mortgage Payment Relief.

Borrowers experiencing a financial hardship due to the COVID-19 emergency may request forbearance on federally backed mortgage loans (regardless of delinquency status) by submitting a request to their servicer and attesting they are experiencing a financial hardship during the COVID-19 emergency. This applies to mortgages loans secured on residential real property (including individual units of condominiums and cooperatives; and properties comprising of up to 4 dwelling units). Forbearance shall be granted up to 6 months, and can be extended an additional 6 months at the borrower’s request. The servicer may not require additional documentation other than the borrower’s attestation of financial hardship due to COVID-19 and may not charge additional fees, penalties, or interest beyond the amounts scheduled or calculated as if the mortgage was paid timely and full under the terms of the mortgage contract.

In addition, servicers of a federally backed mortgage loan may not initiate foreclosure (judicial, non-judicial, judgement, or order of sale) or execute a foreclosure-related eviction or sale until at least May 17, 2020.

Multifamily borrowers (borrowers of a residential mortgage loan secured by a property comprising of 5+ dwelling units) with a federally backed multifamily mortgage loan may also request forbearance, so long as the borrower was current on its payments as of February 1, 2020, submits an oral or written request to its servicer, and affirms he/she/it is experiencing financial hardship during the COVID-19 emergency. The forbearance period for multifamily borrows is up to 30 days, which can be extended up to 2 additional 30-day periods upon request at least 15 days prior to the end of the original 30-day forbearance period. During the period of forbearance, multifamily borrowers may not evict a tenant or issue a notice to vacate solely for missed rent or other fees and charges, or charge tenants any late fees, penalties, or other charges for late rent payments.

Finally, the CARES Act places a 120-day nationwide eviction moratorium for renters for nonpayment of rent to landlords who have federally backed mortgages, regardless of whether the borrower requests forbearance as described above. During this time period landlords are forbidden to charge any late fees or penalties for delinquent rent payments.

5)         REAL ID Extended Enforcement Deadline.

The CARES Act includes some relief for those of you who have not yet obtained your REAL Identification Card (“REAL ID”). The CARES Act directs the Department of Homeland Security (“DHS”) to extend the enforcement date to at least September 30, 2021. DHS has since announced the new enforcement deadline is October 1, 2021.

 

Next Steps for Small Businesses Coping with COVID-19

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By:  Melissa L. Green

As the effects of the novel coronavirus (COVID-19) continue to escalate, many small businesses are looking to push forward. Relief and significant aid have been provided, and laws are changing at a rapid pace to help protect employees, families, and the public. Employers who are fortunate to continue their businesses should be aware of evolving recommendations regarding workplace standards and the availability of relief. Employers who have been forced to reduce or cease operations, or who fear they will be in the near future, should be aware of important federal and state laws that require providing notification to affected employees, as well as benefits that may be available to those who must be laid off.

Businesses with Ongoing Operations

            Small business owners, who are still in operation, have a variety of new regulations to keep up with and relief available to assist in this uncertain economic time. Employers should monitor and follow the recommendations and regulations being issued by the U.S. Centers for Disease Control and Prevention (CDC) and Department of Labor (DOL).   For example, the CDC recommends educating employees about COVID-19, and provides a variety of resources to employers to properly protect and inform their workforce. Additionally, businesses operating with employees onsite should review the Occupational Safety and Health Administration’s (OSHA’s) guidance on preparing the workplace for COVID-19. Importantly, OSHA recommends businesses create a disaster plan in anticipation of a reduction in workforce due to illness, or the need to care for others who are ill.

Small businesses with continuing operations should ensure several housekeeping measures to ensure longevity of operations given current obstacles. Employers should review or establish succession plans, determine essential functions, and cross train where possible. Further, small business owners should review any applicable insurance policies to determine in what instances the business or employees qualify for benefits (i.e., business disruption, worker’s compensation, and disability). Most importantly, employers should establish policies and procedures to protect workers and stop the spread of illness. Employees should be informed of protocols once established.

Recent federal and state legislation has provided small businesses with relief, and heightened obligations. The Coronavirus Aid Relief and Economic Security (CARES) Act provides low interest loans (a portion of which may be forgivable), grants, and tax benefits to small businesses. Applications for programs under the CARES Act and additional information are available from the Small Business Association (SBA). New York State and the federal government have also recently enacted legislation that requires employers of a certain size to provide employees with paid or unpaid leave to self-isolate or quarantine, or to care for themselves or family members who have contracted COVID-19. Employers should review state and federal resources for additional information regarding new paid time off requirements.

Businesses that Must Halt Operations

            Many businesses must temporarily or permanently halt operations in light of decreased revenue and other challenges presented by the current pandemic. Federal and state Worker Adjustment and Retraining Notifications (WARN) Acts require many businesses to provide advance notice of layoffs. Although exceptions are made when advanced notice is not possible, which will typically be the case for businesses that must cease operations now, employers must still provide as much notice as possible to employees, and the applicable government agency. Employers should also be prepared to field questions regarding benefits available to terminated employees, payment of paid time off or severance benefits, and the likelihood of rehire.

Employees who are laid off will undoubtedly be looking for information. Employers should review existing company policies regarding payment of vacation time and other paid time off upon termination of employment. Further, individual employment contracts should be reviewed in preparation of termination. Employers should also inform employees about available unemployment benefits. Seasonal employees, who are not being asked to return for the coming season, should apply for benefits even if their current benefits have lapsed, as current legislation allows for a significant expansion of benefits. Further, small business owners, many of whom did not previously qualify for unemployment, may qualify for unemployment under the current, temporary, federal expansion of benefits. It should be noted that the unemployment process is exceptionally slow given the surge in unemployment nationally. Those who apply should be reassured that unemployment benefits are typically retroactive to the last date of employment.

We’re All In This Together

The impacts of COVID-19 are being felt around the world. Small business owners are not alone in their attempts to keep going in the face of adversity, or provide care and compassion in the event of unfortunate, but often necessary, closings. Reducing the spread of illness, and keeping each other safe and well will likely remain top priority for the foreseeable future. Unfortunately, social distancing measures have created physical barriers between us. Fortunately, technological support, ingenuity, and good old-fashioned American grit have allowed us to press on in exciting and heartwarming ways. Laws and regulations are rapidly changing, so it is imperative that employers continue to consult professional resources including legal and financial professionals, and government and agency guidance. Clients who have further questions or specific concerns are encouraged to reach out to their regular contact at the firm (either by phone or email) or to contact Melissa Green (mgreen@scolaro.com).

Resources

U.S. Centers for Disease Control and Prevention

Interim Guidance for Businesses and Employers to Plan and Respond to Coronavirus Disease 2019 (COVID-19) – https://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.html

Resources for Businesses and Employers – https://www.cdc.gov/coronavirus/2019-ncov/community/organizations/businesses-employers.html

Guidance on Preparing Workplaces for COVID-19 – https://www.osha.gov/Publications/OSHA3990.pdf

U.S. Small Business Association

Small Business Guidance & Loan Resources – https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

Paycheck Protection Program (PPP) Sample Application Form – https://www.sba.gov/document/sba-form–paycheck-protection-program-ppp-sample-application-form

Paid Leave Legislation

U.S. Families First Coronavirus Response Act: Employee Paid Leave Rights – https://www.dol.gov/agencies/whd/pandemic/ffcra-employee-paid-leave

New York State New Paid Leave for COVID-19 – https://paidfamilyleave.ny.gov/COVID19

WARN Act Information

U.S. Department of Labor Employer’s Guide to Advance Notice of Closings and Layoffs – https://www.dol.gov/sites/dolgov/files/ETA/Layoff/pdfs/_EmployerWARN2003.pdf

New York State Information Regarding Worker Adjustment and Retraining Notifications – https://labor.ny.gov/workforcenypartners/warn/warnportal.shtm

Unemployment

New York State How to file a claim for Unemployment Insurance Benefits – https://labor.ny.gov/ui/how_to_file_claim.shtm

 

Coronavirus, Aid, Relief, and Economic Security (CARES) Act

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By: Melissa L. Green

This article briefly summarizes three relevant portions of the CARES Act – 1) the Paycheck Protection Program (“PPP”), 2) Emergency Economic Injury Disaster Loans (“EIDL’s”) and Grants, and 3) Tax Benefits.[1] Additional provisions of the CARES Act, not covered in this article, include grant funds for Entrepreneurial Development,[2] increased unemployment benefits, individual subsidies for Americans,[3] Tax Treatment of Coronavirus-Related Distributions,[4] and many others.

Guidelines from the governmental agencies and banks implementing the programs are expected over the next days and weeks to clarify the availability of benefits and application requirements under these programs. As you read through the following and consider your specific circumstances, contact us, your accountant and bank representatives for the most updated information, and do not delay in making your application for benefits.

Qualified individuals and entities may take out loans under the PPP and EIDL programs, as long as the funds are not used for the same purpose (no double dipping). Further, companies may also be eligible for relief under other recent federal legislation (such as the Families First Coronavirus Response Act), but may not receive credit twice for the same expenses under differing programs. Continued guidance is expected regarding a number of issues including the interest rates and personal guarantee requirements following certain applicable covered periods, as discussed further below.

Payroll Protection Program (“PPP”)

 The PPP provides deferred 7(a) Small Business Association (“SBA”) loans to cover the costs of payroll and business related expenses. A portion of the loan is forgivable, and the forgiven amount is not counted as income. The legislation is intended to provide a forgivable loan equal to 8 weeks of eligible business costs, including payroll. The program expands the reach of the 7(a) program to include many not previously qualified to access this resource, such as freelancers, the self-employed, and gig economy workers.

Loan Terms

Who qualifies – businesses with fewer than 500 employees;[5] not for profit entities with less than 500 employees; certain veteran’s organizations; individuals – self-employed, sole proprietor, freelance, and gig economy workers.

Maximum amount – the lesser of 2.5 times the average monthly payroll during the one-year proceeding period or $10 million.

Interest – may not exceed 4%.

Term – loans may have up to a 10 year term.

Personal Guarantee/Collateral – the personal guarantee and collateral requirements associated with typical 7(a) loans are waived during the “covered period.”[6]

Payments – a minimum of the first six months and a maximum of the first year of fees, principal, and interest are to be deferred.[7]

How to Apply – applicants may apply through approved third party lenders; the CARES Act also authorizes the SBA to bring on additional lenders, but this will take time.

Forgiveness

 Eligible Costs – the following costs, paid during the 8 week period following loan origination, are eligible for forgiveness up to the total principal of the loan: payroll costs; mortgage interest; rent; and utilities. Pay roll costs include – salaries, wages, cash tips, paid leave, severance, group health care, retirement, state and local payroll taxes, and money paid to independent contractors. The following payroll costs are not eligible – employee or owner compensation over $100,000, taxes imposed or withheld under chapters 21, 22, and 24 of the IRS code, compensation of employees whose principal place of residence is outside of the U.S., qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

Interest – Any loan amounts not forgiven are carried forward as an ongoing loan with max terms of 10 years, at a maximum interest rate of 4%, because principal and interest are deferred for the first 6 months to one year of the loan term it appears that the amount forgiven will not accrue interest, but additional information should obtained from the lender regarding interest on the forgiven amount.

Employee Retention – the amount of loan forgiveness will be reduced by a proportional amount when the employer terminates employees and/or decreases employee salaries[8].

Emergency EIDL’s and Grants

The purpose of the Emergency EIDL Grant program is to provide qualified businesses and individuals with prompt access to up to $10,000.00 in aid. In practice, Emergency EIDL’s are typically converted to traditional 7(a) loans (the type available under the PPP) through refinance, but qualified entities and individuals may use either or both resources, as long as the funds are not used for the same purpose.

Loan Terms

Who qualifies – businesses, private not for profits and cooperatives with not more than 500 employees; sole proprietorships (with or without employees) and independent contractors; Employee Stock Ownership Plans (“ESOP”); and certain tribal entities.

Maximum amount – $2 million

Interest – 3.75% for small businesses; 2.75% for not for profit entities

Term – loans may have up to a 30 year term.

Personal Guarantee – the personal guarantee requirement is waived for loans under $200,000.00.

Payments – terms established with lender.

How to Apply – EIDL’s are issued through the SBA.

Grant

Emergency Funds – those applying for EIDL’s may request an advance on the loan of up to $10,000.00, to be paid within 3 days of the loan application. The entire amount advanced is considered a grant, and will be forgiven even if the applicant does not qualify for the loan. However, where an applicant transfers into the 7(a) program (i.e., loans made under the PPP) any amount of loan forgiveness under the PPP will be decreased by any EIDL Grant funds.

Tax Benefits

Below is a summary of just some of the tax benefits contained in the CARES Act. Your tax advisor should be consulted for your specific circumstances, and as discussed above, there are numerous other components to the Act, and research should be ongoing in this area to determine how the act may affect you and your business.

Employee Retention Credit – employers may receive a 50% credit on wages incurred from March 13, 2020 through December 31, 2020, up to $10,000.00 per employee, where business operations were fully or partially suspended and gross receipts declined by more than 50% compared to the same quarter in 2019.

Payroll Tax Delay – businesses and self-employed individuals may defer the employer’s share of social security owed for 2020 over a 2 year period with 50% due by the end of 2021 and 50% due by the end of 2022.

Net Operating Losses – net operating losses for the years 2018, 2019, and 2020 may now be carried back 5 years.

Business Interest Expense – business interest expense deduction cap was increased to 50% (from 30%).

Student Loans – employers may pay up to $5,250.00 per year toward an employee’s student loans and it will not count toward the employee’s income.

Resources

Summaries of the Bill

Small Business Owner’s Guide to the CARES Act

https://www.sbc.senate.gov/public/_cache/files/9/7/97ac840c-28b7-4e49-b872-d30a995d8dae/F2CF1DD78E6D6C8C8C3BF58C6D1DDB2B.small-business-owner-s-guide-to-the-cares-act-final-.pdf

https://www.uschamber.com/co/start/strategy/cares-act-small-business-guide

Legislation

CARES Act

https://www.congress.gov/bill/116th-congress/house-bill/748/text#toc-HB37C431F57484034A3D8B58B1EC16623

Families First Coronavirus Response Act

https://www.congress.gov/bill/116th-congress/house-bill/6201/text

 

For further information regarding your particular circumstances, or if you need legal assistance, reach out to your normal contact at the firm, or contact Melissa Green (mgreen@scolaro.com).

Footnotes

[1] This information is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken. Each situation is different and any specific questions should be referred to legal counsel. Since the onset of COVID-19, legislation and regulations are subject to raid change. This article is intended to be for informational and discussion purposes only.

[2] Provides grant funds to educate small businesses and their employees regarding the availability of Federal resources, hazards of COVID-19 and the best teleworking practices to prevent the spread of COVID-19; funds are provided to agencies to establish grant programs for the funds, and specific grant programs will be announced by relevant agencies at a later date.

[3] One issue highlighted regarding subsidies is the availability of funds for young adults claimed as dependents on their parent’s income tax returns, in these instances it appears young adults may not claim a subsidy on their own behalf; additional guidance is expected on this issue.

[4] Individuals who elect to receive a “coronavirus-related distribution” from qualified employer plans, may not be subject to the traditional 10% tax penalty, subject to amount restrictions. Coronavirus-related distributions made from both eligible employer sponsored retirement plans and individual retirement accounts (“IRAs”) are exempt from the 10% early distribution penalty tax. Distributions are still subject to regular income tax, but it may be spread over three years.

[5] Exceptions are made for certain multisite businesses subject to minimum employee requirements at each site; “businesses” include – corporations, partnerships, limited liability corporations, joint ventures (with no more than 49% participation by a foreign entity), sole proprietorships, associations, trusts, or cooperatives.

[6] The “covered period” is from February 15 through June 30; there is concern that lenders will attempt to impose stricter collateral or personal guarantee requirements after the covered period. Loan terms should be reviewed carefully as further guidance is sought on the issue.

[7] The exact length of time appears to be at the lender’s discretion.

[8] Salary reductions not in excess of 25% of the total salary or wages will not trigger the employee retention provision; this provision also does not apply to a reduction in salaries for those earning over $100,000.00 per year.

Retirement Plan Update – Modified Distribution Rules Under The CARES Act

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By: Stewart M. McGough

Headlines trumpeting the CARES Act that was signed into law on Friday, March 27, 2020, focused on trillions of dollars to be furnished to individuals and businesses in response to the novel coronavirus pandemic hitting the country. But stuck into the legislation were some helpful temporary changes to the distribution and tax rules that apply to defined contribution (DC) retirement plans and individual retirement accounts (IRAs). This news item will list those changes.

     1.   Only Defined Contribution Plans and IRAs. The new rules apply only to IRAs and the following defined contribution retirement plans — 401(k), profit sharing, 403(b) annuities and custodial accounts, and 457(b) salary deferral arrangements sponsored by governments and their agencies. They do not apply to defined benefit plans.

     2.  Restricted to COVID-affected individuals. The new rules allow distributions from plans and IRAs, and loans from plans other than IRAs, to any IRA owner or beneficiary of a retirement account who is “COVID-affected” (any one of the following):

  • An individual diagnosed with the SARS-CoV-2 virus or with the COVID-19 disease that develops from the virus
  • A spouse or dependent who is so diagnosed
  • An individual employed with some business, government or NGO who “experiences adverse financial consequences” as a result of any of the following actions taken due to the pandemic:
    • Quarantine
    • Furlough
    • Lay-off
    • Reduction in hours
    • Having to care for a child because day care is unavailable due to the pandemic
  • A business owner (which includes those who are self-employed and those who own business entities) who closes the business or reduces the hours of the workforce due to the pandemic

In the case of retirement plans, the employee merely needs to provide a certification to the plan administrator that the employee fits within one of these categories. Of course, if the plan administrator knows the facts of the situation to be other than as presented by the employee, those facts should not be simply disregarded.

     3.  Distributions. The Act allows distributions in 2020 to a COVID-affected individual totaling up to $100,000 from one’s account and regardless of one’s age. For example, the 401(k) rules prohibit an individual from drawing out any of his or her salary deferral contributions from the Plan until age 59½. Many Plans prevent any distribution so long as the individual is still employed with the sponsoring employer.

The new temporary rule allows a distribution regardless of the individual’s age and regardless of any other restrictions that the Plan may have in place. The Plan sponsor will have to adopt an amendment to the Plan to permit the distribution, but that amendment need not be adopted until the end of the 2022 plan year (this aligns with the date by which required changes have to be made to the Plan under the SECURE Act enacted this past December).

Any qualifying distribution will be subject to regular income tax but will be exempt from the 10% penalty tax that normally applies if the individual is under age 59½ on the date of distribution.

Normally, there is 20% income tax withholding on single sums distributed from a qualified plan. The Act waives this for qualifying distributions, so the individual can use all of the distribution immediately.

To alleviate the income tax burden, the individual can spread the income that is recognized from the distribution ratably over as many as 3 years (2020-2022). That could mean a sizeable tax savings if the family’s income is significantly impaired over the next year or so.

     4.  Repayment of Distribution. A COVID- affected individual who receives a distribution will have the option to repay the distribution to the Plan, or to any other plan in which the individual is participating (including an IRA), within 3  years of the distribution. In effect, the distribution would become an interest-free loan. How this will be reported will have to come from future IRS guidance, but presumably the employee would have to amend his/her return from the prior year(s) in which the income was claimed to reclaim the taxes paid in the earlier years.

     5.  Loans. Prior law limited loans to individuals from their retirement plans (no loans are permitted from IRAs) to the lesser of 50% of their account balance or $50,000. The Act allows a COVID-affected individual to borrow his or her entire account balance up to $100,000 from now until September 25, 2020. If the individual has any loan already outstanding, the highest principal balance that existed over the prior 12 months must be deducted from the $100,000 maximum to arrive at the available loan amount.

A COVID-affected individual who already has a loan outstanding, or who obtains a new loan under the Act’s expanded limits, is given a grace period of all of 2020 on any repayment scheduled to be made in 2020. While interest will still accrue on the outstanding loan balance, the repayment period is extended out by the length of the grace period.

     6.  Required Minimum Distributions – 2020 a Grace Year. DC Plans and IRAs must distribute to account owners a required minimum distribution (RMD) each year to individuals who have attained age 72 (a DC Plan participant who is not a 5% owner of the employer can delay this until he or she actually retires from service).   The age use to be 70½ before 2020.

The Act allows any individual who began receiving RMDs prior to 2020 to opt to receive a distribution of as little as $0 in 2020.  Then, beginning in 2021, the RMDs would pick up again, but there would be no “make-up” distribution required in 2021. You do not have to be a COVID-affected individual to obtain this relief.

What if you already received your scheduled 2020 RMD? There is no special rule under the Act that allows return of that distribution to the distributing plan. However, you can take advantage of the 2020 exemption rule by rolling the distribution to a qualified plan (that accepts rollovers), or to an IRA, if done within 60 days of the distribution.

If an individual who is over age 70½ is scheduled to begin to receive his first RMD by April 1 of this year, he or she can delay that distribution until 2021. There would be no “make-up” distribution in 2021.

 

Certainly, there’s a lot here to digest and we hope these changes will benefit our clients and all plan and IRA participants. Always feel free to call any of the members of the Pension Department for answers to any of your questions on this or any other topic.

Stewart M. McGough           (315) 477-6225
Catherine A. Ray                    (315) 477-6250
Jean A. Borrow                      (315) 477-6258

 

Relief for Small Businesses During the COVID-19 Pandemic

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As America, and the rest of the world, is shocked by the impact of the COVID-19 pandemic numerous small businesses are seeking financial help to weather the inevitable financial storm.  While we await additional federal assistance, which is expected to benefit small businesses, those who are impacted by the COVID-19 Pandemic may qualify for small business loans from the U.S. Small Business Association (“SBA”).  Further, central New York businesses may qualify for bridge loans, after being approved for an SBA Loan, from Onondaga County or the Syracuse Economic Development Corporation.  The following is a brief summary of current options for financial assistance.

1.  Federal – SBA

Economic Disaster Injury Loans

Small businesses may qualify for Economic Injury Disaster (“EID”) or 7(a) Loans through the SBA.  EID Loans provide up to $2 million dollars at a rate of 3.75% for small businesses impacted by the COVID-19 pandemic.  Long-term repayment plans (up to 30 years) are available, but specific terms depend on each applicant.  Small businesses may apply online (https://disasterloan.sba.gov/ela/), but it is recommended that they contact their local Small Business Development Center for assistance with their application.  The Onondaga Small Business Development Center is operating remotely, and local businesses may contact them at: http://www.nyssbdc.org/selector/ReqForCons/formi.aspx.

7(a) Loans

The SBA offers 7(a) (up to $5 million) and 7(a) Small (up to $350,000) Loans to small businesses in cooperation with other lenders.  Under either program the SBA guarantees funding for a percentage of the loan based on the amount borrowed.  The interest is based on lender terms, but may not exceed the SBA maximum (currently 4%).  Typical processing time for these loans is 5-10 days.  There are collateral requirements for loans in excess of $25,000.00.  Borrowers should seek further information from lenders authorized to issue 7(a) and 7(a) Small Loans.

SBA Express

An SBA Express Loan is a small loan (up to $350,000), with a faster processing time than traditional 7(a) or 7(a) Small Loans.  The SBA responds to SBA Express Loan Applications within 36 hours, but guarantees just 50% of the loan (as opposed to 75%-85% for 7(a) Loans).  Terms are determined with individual lenders, but rates may not exceed the SBA maximum.  There are no collateral requirements for loans up to $25,000; the lender must use its existing collateral policy for loans over $25,000.

2. New York State

New York State works in cooperation with the New York Small Business Development Center (NYSBDC) and the SBA to issue SBA loans.  There are no loan programs unique to New York State to assist small business owners with COVID-19 related expenses at this time.

3. Central New York – Onondaga County and the City of Syracuse

Traditional SBA loans are approved in approximately 20 days and funded in approximately 90 days.  Given the current financial turmoil being experienced by small businesses around the country, these processing and lending times are only expected to increase.  Onondaga County and the City of Syracuse are both offering bridge loans to small businesses who have been approved for, but are waiting to receive, SBA loans.  The $500,000 revolving funds will provide 0% interest short-term (180 days) loans of up to $25,000.  The Syracuse application can be found at: http://www.syrgov.net/SEDCO_Home.aspx.  Those interested in applying through Onondaga County can be assigned an advisor with the Onondaga County Small Business Development Center here: http://www.onondagasbdc.org/covid-19.html.

Additional funding options may be available for small businesses located in other regions.  Further, federal, state, and local relief options are in flux in light of the rapid changing of events.  This information will be updated as new relief options are released.  For additional information or if you need legal assistance, reach out to your normal contact at the firm, or contact Melissa Green (mgreen@scolaro.com).

Employer Notary Requirements for New York State

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The State of New York requires a number of personal legal documents be notarized. In light of the current global pandemic, the state of New York has relaxed notary laws to allow notary acts to be performed electronically. Under the relaxed regulations, notaries may witness a signature via a live video feed, notarize an electronic form of the document and return it electronically, and accept and return the original signed document by mail for final execution. The following a summary of the new requirements:

  • The person seeking the Notary’s services, if not personally known to the Notary, must present valid photo ID to the Notary during the video conference, not merely transmit it prior to or after;
  • The video conference must allow for direct interaction between the person and the Notary (e.g., no pre-recorded videos of the person signing);
  • The person must affirmatively represent that he or she is physically situated in the State of New York;
  • The person must transmit by fax or electronic means a legible copy of the signed document directly to the Notary on the same date it was signed;
  • The Notary may notarize the transmitted copy of the document and transmit the same back to the person; and
  • The Notary may repeat the notarization of the original signed document as of the date of execution provided the Notary receives such original signed document together with the electronically notarized copy within thirty days after the date of execution.

Now more than ever, it is important to ensure that Wills, Powers of Attorney, and other important legal documents are up to date and reflect your wishes. The attorneys and support staff at Scolaro Fetter Grizanti & McGough, P.C. are available to assist with notarial acts, as well as the preparation of important legal and estate planning documents which may require notarization. If you need legal assistance reach out to your normal contact at the firm, or contact Melissa Green (mgreen@scolaro.com) for further assistance.

 

How Are Your Accounts Titled?

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There is no question we are facing issues unlike any we have seen before.　 As a result, it is important to ensure not only that your estate planning and power of attorney documents are up to date, but that your bank and other accounts are properly titled for ensuring access to them now and so your family and others have access to them in the event of your death.　 Banks are open – courts are not.　 One of the courts closed here in New York is the Surrogate Court – the equivalent of our probate court.　 Why is this relevant to how your accounts are titled?　　When someone passes away, any accounts that are titled solely in the account holder’s name are immediately “frozen” under the law.　 There can be no access to those accounts until a legal representative or executor of the estate has been appointed by the Surrogate Court.　 Even in the best of times, this is a process that can take a few weeks if not more to get through the paperwork of probating a person’s estate.

In many cases, having accounts titled in one person’s name rather than jointly or in some other form is for estate planning purposes, asset protection or for other personal reasons.　 But, if the court is closed, these accounts will remain frozen until the estate’s legal representative is appointed and even if the courts reopen soon, the backlog could be significant leading to additional delays in having the legal representative appointed.

If you establish a joint account with right of survivorship (JTWROS) with a co-owner upon your death, the account immediately belongs to the joint account owner – there is immediate access to that account by your co-owner.　 If an account is established so it is Payable on Death (POD), Transferable on Death (TOD) or “In Trust For” another individual (ITF), there is the immediate ability to have those accounts available to the party named.　 Again, there is no need to go through the probate process.　 It is important to remember that although you may have a Power of Attorney or POA for someone, that POA terminates upon the Principal’s death – there is no ability to utilize a POA for someone after their death for any purposes.

If you are operating your business as a sole proprietorship or under a “dba” as opposed to a corporation or limited liability company, the accounts for that business are your individual accounts and if you die, those accounts are also frozen in the same manner as an individual account.　 You should consider having another trusted person on those accounts who will ensure that the business can continue to operate, bills can be paid, receipts processed, etc.　 This is one of the many reasons businesses operate as Limited Liability Companies or Corporations.　 Unlike a person, those entities do not die and if properly structured business operations can continue rather than having all the assets of the business go through probate.

The banks are open now – take advantage of it!　 You can take these steps now without any legal technicalities.　 Talk to your banker or brokerage advisor as to how you can best set up your accounts so there can be immediate access to those accounts in the event of your death – especially if you see that there is a need for your family.　 If you have any questions, please do not hesitate to contact us.

 

What is a Family Business Succession Plan?

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It is not simply having a will that leaves assets to family members and it is not simply a buy-sell agreement that provides that if Dad dies, Uncle Bob buys him out and vice versa. Succession planning involves many components of a well-coordinated plan that are based on the particular circumstances that exist within the business or farm and most importantly it must be in writing and kept up-to-date. These components include:

Estate Planning – Family business-based wills and trusts that do not simply divide assets among heirs. What entities are involved and who is to own and manage them needs to be carefully thought out and set forth.

Asset Protection Planning – Utilization of limited liability entities and trusts to protect assets for not only the current generation, but future generations, is critical to succession planning to protect assets not only from third parties but from “non-business” heirs.

Management and Knowledge Transfer – Establish a plan today that allows the junior generation to benefit from the years of experience of the senior generation and the many relationships that have been established by the senior generation over the years. For example, the time for the next generation of owners/managers to meet the banker for the first time should not be at Dad’s funeral.

Succession Planning Agreements – Planning for expected and unexpected events that will arise in the future such as death, disability, divorce, departure etc. with proper agreements such as buy-sell agreements among the owners of the operation and employment and long-term incentive arrangements with key employees who may not be owners, but are critical to the continued success of the business operations.

Lifetime Planning – Implementing the appropriate lifetime strategies to protect assets from plaintiffs in lawsuits, minimize or eliminate estate taxes including spouses in matrimonial matters and possibly to protect assets from being improperly managed by owners who should no longer be in controlling positions.

Opportunities for succession planning today are greater than ever. Federal estate and gift exemptions are nine times what they were twenty years ago. In 2017, there is a federal estate and gift exemption of $5,490,000.00 for each individual. With a properly structured plan a married couple can benefit from almost an $11,000,000.00 exemption. Proposed legislation in Congress nearly doubles the present exemptions. This affords opportunities not only for transfers at death, but utilizing long-standing and accepted planning strategies to remove significant assets from a taxable estate during life – and this can be done in a manner that benefits both the senior and junior generations. State laws such as New York must be taken into consideration as well, but many states have followed the federal lead in lessening the impact of estate taxes on closely-held business owners. In New York, our present exemption is at $5,250,000 and the present laws provide that New York’s exemption will match the federal exemption in 2019. So, does that mean that if the federal exemption increases to almost $11,000,000 New York’s will as well? – – – We’ll see.

Your Succession Plan Audit

Questions to Ask

  1. Are wills up to date? Do they reflect current tax laws, provide for family business and nonbusiness heirs in an equitable, but not necessarily equal manner?
  2. Are financial powers of attorney, living wills and health care powers of attorney in place to ensure that the proper agents are in place for principals who cannot act on their own?
  3. Review and update Operating, Partnership and Shareholders Agreements. Are management, operational and tax-related provisions up to date and reflective of the business’s operations?
  4. Are there the proper entities such as corporations and limited liability companies established to protect assets from liability? Is there a need for multiple entities to shield assets from the liabilities arising in other entities? E.g. having real estate in a separate entity, preferably an LLC?
  5. Are written leases in place to substantiate tax positions being taken on the tax return – including leases between related parties?
  6. Are key employees being properly respected by having long-term incentive arrangements in place to ensure their future participation in the operation?
  7. Is there a buy-sell agreement in place that addresses death, disability, divorce, departure, and other events which lead to the termination of an owner’s involvement in the operation?
    • Is the agreement up to date with all owners as parties?
    • Does the agreement reflect the need to ensure perpetuation of the business to the next generation?
    • Are the buy-out terms manageable from a cash flow perspective upon the occurrence of a triggering event? Is the agreement properly funded with insurance?
    • Is the valuation provision relevant to the operation and is it up to date?

Regardless of when a plan was put into place, it needs to be periodically reviewed and maintained just like any equipment utilized in a business. If changes are needed, they should be made while everyone is alive, well and in agreement on issues rather than after a death or another difficult situation has arisen. It is also critical to review your plan with your advisory team – your attorney, accountant, financial consultant and other advisors.

If we can be of any assistance in working with you on the creation of your own family business succession plan or to review your present plan with you, please do not hesitate to contact us.
 

 
To view this article in PDF format, please click here [Family Business Succession Plan].

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