CARES Act Assistance for Employers and Employees—The Paycheck Protection Program, Employee Retention Tax Credit, and Unemployment Insurance Benefits: Assessment of Alternatives (Part 2) (IN11329, Version 1)

Summary

Insight IN11329 of the Congressional Research Service, dated April 13, 2020, by Molly F. Sherlock, Jane G. Gravelle, Katelin P. Isaacs, Sean Lowry and Julie M. Whittaker, comparing the Paycheck Protection Program, the Employee Retention Tax Credit and Unemployment Insurance under the CARES Act. Firms receiving a Paycheck Protection Program loan cannot also claim the credit, and retained employees are generally ineligible for unemployment benefits during retention. It notes that the choice best for a firm may differ from the best for its employees, and that Short-Time Compensation lets workers keep the $600 Federal Pandemic Unemployment Compensation weekly payment.

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INSIGHTi

CARES Act Assistance for Employers and
Employees—The Paycheck Protection
Program, Employee Retention Tax Credit, and
Unemployment Insurance Benefits:
Assessment of Alternatives (Part 2)

Molly F. Sherlock, Coordinator
Specialist in Public Finance

Jane G. Gravelle
Senior Specialist in Economic Policy

Katelin P. Isaacs
Specialist in Income Security

Sean Lowry
Analyst in Public Finance

Julie M. Whittaker
Specialist in Income Security

April 13, 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) includes numerous
provisions to assist employers and employees during the COVID-19 economic downturn. This Insight
Congressional Research Service
7-....
www.crs.gov
IN11329

CRS INSIGHT
Prepared for Members and
Committees of Congress
Congressional Research Service 2

compares (1) the Small Business Administration’s (SBA’s) Paycheck Protection Program (PPP); (2) the
Employee Retention Tax Credit (ERTC); and (3) Unemployment Insurance (UI). Firms that receive a PPP
loan cannot also claim the ERTC. Additionally, when employees are retained due to a firm’s receiving a
PPP loan or claiming an ERTC, employees are generally ineligible for UI during the period of retention.
This Insight highlights factors employers might consider in choosing which program offers them the best
support. The optimal choice from the firm’s perspective may not necessarily be what is optimal from their
employees’ perspective.
In addition to PPP or ERTC, employers may take advantage of the temporary federal financing of the
Short-Time Compensation (STC) benefit. STC allows businesses and employees to keep their
employment relationship (with reduced hours and prorated UC) while allowing workers to qualify for the
additional $600 Federal Pandemic Unemployment Compensation (FPUC) weekly payment. Not all states
have STC and it has historically been little used (approximately 10,000 individuals were receiving STC
benefits in January 2020).
A companion product to this Insight, CRS Insight IN11324, CARES Act Assistance for Employers and
Employees—The Paycheck Protection Program, Employee Retention Tax Credit, and Unemployment
Insurance Benefits: Overview, coordinated by Molly F. Sherlock, compares the PPP, ERTC, and UI. This
comparison is summarized in Table 1.

Table 1. Eligibility for and Benefits Provided by CARES Act Employers and Employees
Supports
Provisions Eligibility Benefits

Paycheck Businesses that meet the SBA’s regular size Loan amount of 2.5 times monthly payroll, up to
Protection Program standards, as well as businesses and $10 million. Payroll costs capped at $100,000 on an
nonprofits with 500 or fewer employees annualized basis for each employee.
(with some exceptions). Loan for expenses up to eight weeks can be
forgiven if borrower meets certain payroll and
employee retention criteria.
Employee Retention All firms adversely affected by COVID-19 50% credit for up to $10,000 of wages paid per
Tax Credit (adversely affected firms are those that are employee, beginning March 12 through the end of
required to suspend operations or who have 2020.
gross receipts 50% less than prior year gross
receipts in the quarter).
Firms with 100 or fewer employees can claim
the credit for all workers; those with more,
only for workers not working/providing
services.
Unemployment Recently unemployed individuals, including Additional $600 weekly Federal Pandemic
Insurance those who were self-employed, independent Unemployment Compensation (FPUC) benefit
contractors, or gig economy workers. supplements most UI payments through July 2020;
13 weeks of additional coverage for regular
Unemployment Compensation (UC, typically 26
weeks);
Up to 39 weeks of Pandemic Unemployment
Assistance (PUA) for certain individuals affected by
COVID-19 and not eligible for regular UC.
Short-Time Compensation (STC) benefits
temporarily are partially or fully federally financed.

Source: CRS Insight IN11324, CARES Act Assistance for Employers and Employees—The Paycheck Protection Program, Employee
Retention Tax Credit, and Unemployment Insurance Benefits: Overview, coordinated by Molly F. Sherlock.
Congressional Research Service 3

Comparative Benefits
Employers may choose to take a PPP loan, claim an ERTC, or lay off employees. As discussed below, this
decision may vary depending on the firm’s number of employees.

Small Businesses (100 or Fewer Employees)
For many employers with 100 or fewer employees, a forgivable PPP loan may be the most attractive
option. These loans can cover payroll and some non-payroll expenses, and can potentially be forgiven. A
potential disadvantage of the PPP is that to receive full loan forgiveness, any decreases in full-time
employment levels and compensation amounts made between February 15, 2020, and April 26, 2020,
must be restored (in full for employment and within 75% of original compensation) by June 30, 2020.
Another PPP loan limitation is its short term (covering eight weeks of eligible expenses); employees
might be laid off or see a cut in compensation after the loan is exhausted.
Whereas these businesses may prefer a PPP loan, lower-wage and median-wage employees may be better
off under expanded UI benefits. The additional $600 per week FPUC payment alone is worth $15 per
hour for a 40-hour week. Some who become unemployed, however, could lose access to employer-
sponsored benefits (e.g., health insurance coverage, retirement account contributions). Workers would
likely be even better off under STC, as it allows attachment to the workforce and would preserve benefits,
while providing employees up to $600 in FPUC. Higher-wage workers would tend to be better off under
PPP, keeping their job and current level (or at least close) of compensation.
In many cases, the ERTC would appear less beneficial to employers than a PPP loan or laying off
employees, as it provides the employer with up to a 50% wage subsidy subject to a cap. The credit is
limited to $5,000 per employee. Additionally, not all businesses will necessarily qualify for the ERTC
because this tax credit can only be claimed by businesses required to suspend operations or that have
experienced a 50% reduction in gross receipts. The ERTC might be attractive from an employer’s
perspective for some highly compensated employees (because the PPP loan payroll costs are capped at
$100,000 on an annualized basis for each employee). However, since credit-eligible wages are limited to
$10,000 per employee, the credit would only offset retention costs for highly compensated employees
over a short period of time. For low-wage employees with longer periods of unemployment (more than
the eight weeks a PPP loan would cover), the ERTC could also be attractive.
Self-employed individuals (sole proprietors and partnerships) and independent contractors are eligible for
the PPP and UI under the expanded UI program, even if they have no employees (because their net
income from the business qualifies as compensation) but generally not for the ERTC. However, self-
employed individuals that operate as a Subchapter S corporation (a corporation that elects to be taxed as a
pass-through business) may be eligible for the ETRC for earnings paid to themselves as employees.
Subchapter S owner-employees generally attempt to minimize amounts paid as wages. PPP would be
more attractive to these individuals under the same circumstances as other small firms, but self-employed
individuals who have low incomes and smaller relative overhead would be more likely to choose UI
benefits, especially during the period when the $600 FPUC weekly benefit is available.

Larger Small Businesses (More than 100 and Fewer than 500 Employees)
For employers who had more than 100 employees in 2019, the ERTC can only be claimed for wages paid
to employees who are on the payroll but not working. Thus, the relative benefits among these three
options appear similar to the case for employers with 100 or fewer employees, except that the ERTC
would be less attractive.
Congressional Research Service 4

Large Businesses (More than 500 Employees)
PPP loans are generally not available for employers with more than 500 employees (unless they meet the
special rules for the accommodation and food services industry). Thus, for these employers, two options
are available: the ERTC or layoffs. As was the case above, lower- to median-compensated employees may
be better off if laid off and receiving UI than if they are retained, at least in the short term. In contrast,
more highly compensated laid-off employees may be less well off because UI benefits will not fully
compensate for their lost wages. For highly paid employees, employers who find it valuable to retain and
subsidize employees with no work to do (perhaps envisioning only a brief interruption and a costly
rehiring process), and who have had to suspend operations or experienced at least a 50% decline in gross
receipts, might choose to retain some employees and get the 50% tax credit for wages paid to these
individuals (even though the maximum credit amount is $5,000 per employee).
Highly compensated individuals who are owner-employees of Subchapter S firms with no employees or
limited wages paid to others could find the ERTC preferable to UI.

Unemployed Workers
Workers may face reduced hours or become involuntarily unemployed (temporarily or permanently laid
off, or placed on furlough). Some workers who are involuntarily unemployed because of COVID-19 may
be eligible to receive UC, and others may be eligible for PUA based upon its temporary COVID-19
requirements (Section 2102(a)(3)(A)(ii)(I)(ii)) of the CARES Act). Workers affected by COVID-19 may
seek to use workplace leave (either paid or unpaid).
Despite the temporary expansion of UI, workers and employers may find opting for leave (even if unpaid)
or reduced hours preferable to a complete separation from employment. Workers in job-protected leave or
in partial employment status may be able to keep health care and other workplace benefits. Additionally,
the continued employment and attachment to an employer may improve the individual’s long-term
employment prospects in an uncertain economy, and it also provides a skilled labor force for the employer
if the economy improves.
In general, workers cannot quit a job in an attempt to receive UI benefits. According to recent guidance
from the U.S. Department of Labor (DOL), quitting a job without good cause in order to obtain UI
benefits, including the $600 weekly FPUC benefit as well as the PUA benefit, is fraud. Additionally, it
should be noted that regular, state-funded UI programs already disqualify individuals who refuse suitable
work without good cause, among other eligibility requirements for UI benefits.

IN11329 · VERSION 1 · NEW
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