President Trump took unprecedented action over the past weekend signing four executive orders related to the ongoing coronavirus pandemic. These orders include a payroll tax deferral, a temporary increase in unemployment benefits, a statement on reducing evictions, and a continuance of the pause for student loan payments and student loan interest. Several members of Congress have questioned the legal basis for certain of the executive orders, with the exception of the student loan moratorium. It is unclear whether or when Congress may bring a legal challenge to certain of the executive orders. In any case, various federal agencies must implement the executive orders before they can become effective.
The Payroll Tax Holiday Order
The executive order instructs the Treasury Secretary to implement a payroll tax holiday through the exercise of the President’s disaster declaration authority under Internal Revenue Code (IRC) Section 7508A. The payroll tax holiday pertains to the employee’s share of Social Security payroll taxes (6.2%) on wage income for the period Sep. 1, 2020 through Dec. 31, 2020. Further, the payroll tax holiday covers employees who “generally” earn less than $4,000 every two weeks, or $104,000 on an annual basis.
Section 7508A allows the Secretary of the Treasury to defer tax filing and payment due dates for up to one year. Because this law does not authorize the outright waiver of payroll taxes, the withholding obligations of employers will eventually come due unless Congress later acts to waive them. The order directs the “Secretary of the Treasury [to] explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” To date, neither Democratic nor Republican members of Congress have embraced President Trump’s desire for a payroll tax holiday, which leaves the prospects uncertain for the eventual forgiveness of these payroll taxes.
Potential Legal Hurdles for the Payroll Tax Holiday Order
The potential legal challenge with the type of payroll tax holiday in the executive order is that it pertains to the withholding obligation of an employer, and therefore does not directly apply to the amounts remitted to employees. If an employer passes the “savings” from not withholding the employee’s share of payroll taxes to its employees, it will not be possible to subsequently withhold the tax on those same wages. As a result, this could be seen as rendering the putative deferral as effectively being a waiver — something that is not authorized under Section 7508A.
Employer Options in Response to the Payroll Tax Holiday Order
Notwithstanding the Treasury Secretary’s implementation guidance, employers face difficult and potentially costly choices under the executive order for the payroll tax holiday, which include these alternatives:
- The employer assumes that Congress will eventually act by waiving the deferred payroll taxes, and implements the payroll tax holiday by passing the benefits on to employees. If Congress later fails to act, then the employer potentially must claw back money from employees or use its own money to pay the employee’s share of payroll taxes (on top of the gross pay already remitted). And because this would be compensation, as well, the employer would have to gross-up the amount and withhold more payroll taxes on that payment. On the other hand, the Treasury Secretary may require the deferred withholding be taken out of employees’ subsequent wages, which would make employees’ after-tax pay in 2021 smaller than normal. But this mechanism will not work properly for employees who separate from service or who experience decreased wages in 2021.
- The employer could withhold the tax but not pay it to the government, instead using it as an interest-free loan. This would defeat the purpose of the executive order as it would deny any benefit to employees, and could have potential negative public relations consequences because the employer effectively retains its “employee’s money.”
- The employer could withhold the tax and remit it to the government, effectively ignoring the executive order altogether. Not only would this deny any benefit to employees, it would position the employer itself in potential noncompliance with a presidential executive order. Further, if Congress later waives the affected payroll taxes, the employer would need to request refunds of over-withheld amounts, and would then need to remit those refunds to employees.
It is also unclear whether the payroll tax holiday will be optional or required, which should be addressed through the Treasury Secretary’s implementation guidance.
Unemployment Executive Order
This order directs the Secretary of Homeland Security (acting through the Federal Emergency Management Agency (FEMA) Administrator) to make available $44 billion of emergency response funds from the Disaster Relief Fund (DRF) to pay $300 per week to each eligible unemployment claimant. The release of this additional funding from the DRF is contingent on the state accepting and implementing a $100 per claimant per week cost sharing payment. Thus, an unemployment recipient could receive an additional $400 per week, in addition to regular state unemployment benefits, but only if their state is willing and able to cover 25% of the cost of this benefit. The order calls for the state share to be provided out of disaster relief payments previously granted to the states under the CARES Act or out of other funds.
Potential Legal Challenges to the Unemployment Executive Order
The U.S. constitution is the biggest challenge to this order. Article 1, Section 9, Clause 7 provides that “no Money shall be drawn from the Treasury but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” This clause essentially grants Congress the exclusive right to appropriate funds for federal expenditures. These appropriations often grant presidents some leeway in actually directing appropriated funds, but do not allow funds to be re-appropriated from other purposes. This places the unemployment order is the most vulnerable to legal challenges of the executive orders President Trump recently released.
State Responses to the Unemployment Executive Order
Several state governors indicated that their states lack the funds necessary to carry out this initiative. The National Council of State Legislators projected in early July that 33 states will see revenue declines in fiscal year 2021 with 30 of those states seeing declines of more than 5%. Given these projected declines combined with the fact that nearly every state has a balanced budget requirement, many states may be unable to carry out this initiative.
Federal Eviction Statement
This order directs certain federal agencies to take actions to mitigate evictions and foreclosures, but it is not actually a federal eviction moratorium. Homeowners or renters can still be evicted during this time for a failure to pay their mortgage or rent. To minimize federal evictions and foreclosures, the order directs four general actions to be taken:
- The CDC Director and the Secretary of Health and Human Services are to consider whether any measures halting residential evictions are reasonably necessary to prevent the spread of the virus (emphasis added).
- The Secretary of the Treasury and the Secretary of Housing and Urban Development are directed to identify any and all available Federal funds to provide temporary financial assistance to renters and homeowners who, as a result of the financial hardships caused by COVID-19, are struggling to meet their monthly rental or mortgage obligations (emphasis added).
- The Secretary of Housing and Urban Development is directed to encourage and provide assistance to public housing authorities, affordable housing owners, landlords, and recipients of Federal grant funds in an effort to minimize evictions and foreclosures.
- In consultation with the Secretary of the Treasury, the Director of FHFA is directed to review all existing authorities and resources that may be used to prevent evictions and foreclosures for renters and homeowners resulting from hardships caused by COVID-19.
The order generally calls for identification and review of potential resources that could be used to prevent evictions and foreclosures, with the potential exception of those who already receive federal funds for low-income housing.
Student Loan Moratorium
This order calls for the Secretary of Education to implement a continuation of the relaxed conditions to establish economic hardship for purposes of deferring payments on student loans. This action would provide deferments to borrowers, and a waiver of all interest on all student loans held by the Department of Education until Dec. 31, 2020. Students with privately held loans will not see relief under this order. Additionally, the order does not prevent borrowers from making voluntary payments on their covered student loans.
It is unclear whether legal challenges will arise in response to certain of these orders. In any event, there are practical issues that may dampen the effect of the payroll tax order and the unemployment order. Until implementing guidance is issued by the various federal agencies and the potential legal ramifications are sorted, businesses must carefully evaluate measures they plan to take and must proceed with caution. For more information about these four executive orders, please contact us.
Published on August 12, 2020