The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a package of measures introduced in the U.S. Senate in March of 2020 in response to the COVID-19 pandemic.

Key Takeaways

  • The CARES Act is an attempt at the federal level to address issues brought on by the COVID-19 pandemic.
  • The act seeks to provide economic support to the business sector, employees, individuals, and families.
  • It also specifically addresses industries that have been impacted the most, including air transportation, health care, and education.

In the wake of the COVID-19 outbreak, the U.S. economy suffered major disruptions. Quarantines and travel restrictions around the world have interrupted international supply chains and movements of labor. Businesses across the U.S. have faced closures, curtailed operations, and pressure for increased sick leave and work-from-home arrangements. Consumers are subject to quarantines and shelter-in-place orders and are struggling with bottlenecks in the supply of key consumer goods due to panic-buying sprees. Students have seen campuses closed and their educational terms cut short or converted to at-home online instruction. Medical personnel and health care systems face critically low inventories of key protective equipment and medical devices amid massive demand to address the epidemic itself and continuing to provide routine medical services.

The CARES Act is an attempt to address many of these issues at the federal level through economic support to the business sector, employees, individuals and families, and specific industries that have been impacted, including air transportation, health care, and education. Highlights of the act include immediate tax rebates of up to $1,200 per taxpayer; forgivable, subsidized loans to small businesses; direct loans to the hardest hit industries; the relaxation of income tax rules and deadlines; ongoing financial aid to students, schools, and colleges; and direct stabilization of money market mutual funds.   

Small Business Interruption Loans

In order to assist small businesses that have seen their operations halted or cut back by the disease itself, public health measures, or loss of business due to the reaction to COVID-19, the CARES Act extends the qualifications for borrowers and the size of loans that are available through the U.S. Small Business Administration. These loans will also help businesses pay for the increased medical, family, and sick leave they will be required to offer employees under the recently enacted Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act.

Small Business Loans

The CARES Act would fund $349.4 billion to guarantee forgivable loans to small businesses impacted by the coronavirus.

Through the end of 2020, the act extends Small Business Administration (SBA) loans known as 7(a) loans to any business, private nonprofit, or public nonprofit organization with under 500 employees. Borrowers can receive loans equal to 2.5 times their monthly payroll, mortgage, rent, and debt payment expense, up to $10 million. Borrowers can use these loans for a broad range of business expenses, including payroll, paid sick leave, mortgage, rent, utilities, and payments on existing debts. 

The act directs the SBA to collect no fees or reduce the fees for these loans to the maximum extent possible. The normal prepayment penalties are also to be waived. These emergency loans are guaranteed 100% through the rest of 2020, then guaranteed up to 75% to 85% of the original loan depending on loan size. Payments on the loans are deferred for up to one year. There is no limit on the total amount of the commitment that can be guaranteed by the SBA for these loans. The act also raises the size of SBA Express loans for small businesses under the 7(a) program from $350,000 to $1 million for the remainder of 2020.

The CARES Act further provides for forgiveness of the loan amounts used for the costs of maintaining continuity during 2020 for payroll and debt payments, plus additional wages paid to tipped employees. Businesses that lay off workers can be penalized in that the amount forgiven will be reduced in proportion to any workforce reductions (relative to second quarter of 2019 employed workers) or reductions in pay for employees earning less than $100K per year or $33K per quarter. The amount of debt forgiven under this program is not to be counted as taxable income

In order to finance and service the additional volume of loans, the act opens up the eligibility for new lenders to participate in the program as well. It waives the usual criteria for lender eligibility and directs the U.S. Treasury to come up with standards and regulations for FDIC-insured and other specialized lenders to ensure that participation does not affect the safety and soundness of the institution or lender.

To help promote the business interruptions loan program and provide other business support, the CARES Act directs SBA grants to regional Small Business Development Centers, Women’s Development Centers, and Minority Business Development Agencies, which can be used for training, advising, and education for COVID-19-related business challenges, and waives matching funds requirements for these grants.

To support these efforts, the act appropriates: 

Recipient Amount
SBA Loans $349.4 Billion
SBA Admin Budget $325 Million
SBDC, WDC Grants $265 Million
Minority Business Development $10 Million
Total $350 Billion

Relief for Individuals, Families, and Businesses

In order to soften the blow of lost income to consumers, the CARES Act provides an immediate tax rebate credit of a minimum of $600 up to $1,200 per taxpayer plus $500 per child. These amounts (except the per-child payment) are doubled for joint returns. Taxpayers with no tax liability would receive $600, and the amount increases dollar for dollar for those with a tax liability up to $1,200. For those with annual incomes over $75,000 per individual taxpayer, the rebate would phase out by 5% of any income over $75,000, gradually dropping to zero for incomes above $99,000 per year.

These payments will be speedy. The act directs the Treasury to pay them out as rapidly as possible and appropriates $396,450,000 for the Treasury and the Social Security Administration to administer the program. The rebates are to be fully refundable, so even those who earned no income or otherwise had no tax liability will be eligible receive a payment.

Tax Deadlines

The IRS has announced a delayed tax filing deadline, moving it from April 15th to July 15th for 2019 tax returns.

Taxpayers would also be allowed to take tax-favored disbursements or loans from their retirement accounts up to $100,000 to pay for expenses or make up lost income related to the epidemic. These can then be repaid with additional contributions beyond the normal contribution limits during the next three years.

The act creates a new above-the-line deduction of up to $300 for charitable donations and relaxes limits on other charitable deductions to increase charitable giving during the COVID-19 epidemic. These include cash contributions and donations of food, and they apply both to individuals and corporations.

Businesses will also see tax benefits from the act. For corporations, quarterly income tax payments are also delayed, to Oct. 15. Businesses will be able to defer payroll and employment taxes for 2020, as well as pay their 2020 contributions over the following two years. The act also relaxes rules on carrying back operating losses set under the Tax Cuts and Jobs Act of 2017 and will now allow operating losses to be carried back up to five years. It alters a few other measures of the 2017 act.

Assistance to Severely Distressed Sectors of the Economy

Beyond the loan guarantees to small businesses, the act also authorizes additional direct loans and loan guarantees to critical businesses, states, and municipalities. It appropriates $500 billion in direct loans and guarantees to help provide liquidity to cover losses incurred as a direct result of the COVID-19 epidemic. Some of these are already earmarked for the air transportation industry and businesses deemed essential for national security, while the majority is left uncommitted. As further assistance to the hard-hit airline industry, the act suspends air travel and aviation fuel excise taxes for the duration of the COVID-19 emergency.  

Recipient Amount
Passenger Airlines $50 Billion
Cargo Airlines $8 Billion
Businesses Critical to National Security $17 Billion
Other Businesses, States, and Municipalities $425 Billion
Total $500 Billion

The terms, conditions, and eligibility for these loans are left up to the discretion of the Secretary of the Treasury, with the interest rates based on U.S. Treasury securities of comparable maturity. A key aspect of this measure is that it authorizes the secretary to take ownership of warrants, stock options, common or preferred stock, or other equity instruments from borrowers in order to ensure that the Treasury will participate in any future gains to the bailed out companies as they recover. This is not entirely unprecedented. The federal government also took ownership stakes as part of the auto industry bailouts in the wake of the 2008 financial crisis, though it is sure to raise some eyebrows regarding special deals for big business and the specter of government nationalization of business. 

Auto Bailouts

In 2008, the Treasury bailed out GM and Chrysler with similar loan offers to the tune of $80.7 billion through the Automotive Industry Financing Program (AIFP).

However, this does set a few ground rules for these loans and guarantees. First, in order to prevent taxpayer money from being used to fuel big raises or bonuses for corporate executives, the act caps total compensation for employees making over $425,000 at their 2019 pay (or double their 2019 pay in the case of severance packages). Second, for the air transportation industry, it allows the treasury secretary to require that borrowers maintain routes and services to areas and airports served prior to March 2020. 

Healthcare Response 

The CARES Act directs various federal agencies and industries to marshal medical resources to address the current and future outbreaks. It orders studies on medical device supply-chain security, mandates that national stockpiles include protective masks and equipment, expedites approval of drugs and medical devices to treat epidemics, mandates notification from the industry of critical drug and medical device supply-chain interruptions, and waives Food and Drug Administration approval for COVID-19 tests produced by states or recognized test developers.

For patients, the act requires that health insurance plans cover the full cost of COVID-19 testing and that testing companies publish prices on which this benefit will be based. It also requires full insurance coverage of immunizations or preventive services for COVID-19, which have yet to be developed.

For healthcare providers, the act has a range of measures. It appropriates $1.32 billion in grants for COVID-19 testing by federally funded healthcare centers. It authorizes expedited staffing of permanent direct hires for the National Disaster Medical System. It extends federal support for telemedicine with grants of $29 million per year for the next five years to telehealth networks and resource centers, and it also extends federal support for rural healthcare with grants of $79.5 million per year for the next five years. Importantly, it protects volunteer healthcare workers from liability for treatment of COVID-19 in preemption of state laws, allowing healthcare providers to treat patients and work to contain outbreaks where they might otherwise not be licensed or face liability. The act also streamlines patient medical record information sharing for the epidemic and authorizes home delivery of medical nutrition services for patients who are self-isolating.

For federal health agencies, the CARES Act increases procurement flexibility for the Public Health Service, and it expedites approval of drugs to prevent transmission of animal disease to humans.

It also modifies various healthcare mandates and expands Medicare’s ability to cover treatment and services for those affected by the virus. It increases flexibility for Medicare to cover telehealth services, authorizes Medicare certification for home health services by nurses and PAs in addition to doctors, and increases Medicare payments for COVID-19-related hospital stays and durable medical equipment. 

Education Provisions

With schools and college campuses closed in multiple states over the COVID-19 crisis, the CARES Act contains a range of measures to offer financial relief and help maintain educational continuity during the emergency period. To help schools and federally funded programs, the act waives numerous provisions of federal law for students and schools.

For students who receive various forms of financial aid, the act generally keeps their aid in place despite disruptions to their school year. It authorizes use of financial aid grants specifically for the purpose of emergency aid to students. For students whose work is interrupted, it continues payment of work-study aid and aid awards for voluntary service-based aid programs, even if students cannot work due to the emergency. It waives suspension or recoupment of financial aid grants and loans if students cannot complete their semester, and it waives satisfactory progress requirements that are tied to financial aid. For federal student loans, the act suspends payments and interest on them for three months, with an option to extend for another three months.

For Students

Most financial aid will be maintained despite campus closures and interruptions to studies. Existing federal student loans will be deferred for up to six months.

The act also allows greater administrative and financial flexibility for schools. For a broad range of educational programs, it allows the Secretary of Education to waive certain regulatory and statutory requirements for schools and colleges, such as those requirements related to assessments, accountability, allocation of funds, and reporting. It also allows deferments for HBCU capital financing loans. 

Labor Provisions

The CARES Act does not contain significant new federal requirements for labor markets, but it does modify some of the provisions of other recently enacted laws. It modifies Emergency Family and Medical Leave Expansion Act paid leave to $200 per day or $10,000 total, and pay under the Emergency Paid Sick Leave Act to $511 per day or $5,110 total per employee for their own use as well as to $200 per day or up to $2,000 total to care for others and any other substantially similar condition. 

Medical and Sick Leave

The Emergency Family and Medical Leave Act and the Emergency Paid Sick Leave Act, enacted earlier in March, mandate paid leave for sickness or to care for stricken family members for vast numbers of American workers.

Treasury Guarantee of Money Market Mutual Funds

The CARES Act authorizes the Treasury to use the Exchange Stabilization Fund to guarantee money market mutual funds (MMMFs). This was previously done during the 2008 financial crisis to prevent MMMFs from dropping below par with the dollar and prevent a potentially catastrophic run on MMMFs, but it was later prohibited under the Emergency Economic Stabilization Act of 2008. This will complement the Federal Reserve’s Money Market Mutual Fund Liquidity Facility, established in March 2020 in response to extreme market volatility.