Analysis: Critical Negotiations on New Coronavirus Response Bill
by Dani Kehoe, Counsel to NAIFA
Negotiations on the next coronavirus crisis response bill are at a critical stage—currently, things are at stalemate. Both House Democrat and Administration negotiators say that they are far apart on the bill’s big-picture issues (i.e., the overall size of the bill, how to deal with federal supplemental unemployment benefits, and money to help cash-strapped states).
On Saturday afternoon, President Trump issued four executive action directives (one executive order (EO) and three memos to relevant agencies) on payroll tax collection suspension, unemployment benefits extension, eviction suspension, and suspension of payments on student loans. Those executive actions have thrown a monkey wrench into already-difficult negotiations. The impact is still a bit unclear.
Last week, both sides (for simplicity’s sake, let’s refer to each side as the Republicans and the Democrats, although there is by no means unanimity of position/opinion “by party,” especially among GOP lawmakers) offered proposals that moved significantly in the other party’s direction. Administration personnel (who are leading the negotiations for the Republicans) offered a $400/week federal supplemental unemployment benefit through the end of the year and $200 billion in new aid to the states. The price tag of their offer inched up well over $1 trillion, but far short of the $3.5 trillion the Democrats want. Democrats said no, insisting on the full $600/week in unemployment benefits and on more money for the states.
Democrats, for their part, offered a $2 trillion package, with most of the cost reduction coming from a shortened time frame for most of their Heroes bill’s benefits. The Republicans declined the offer, saying moving effective dates was “smoke and mirrors” and did no more than set up new negotiations on new, sooner expiration dates.
Most of the last meeting of the week, on Friday, was spent pointing fingers and blaming each other for failure to reach agreement.
There were some discussions about the “tier 2” issues (including our issues—the 7702 tax definition of life insurance, insurer-held bond characterization, subsidies for health insurance for the unemployed (and other health insurance issues), and retirement savings issues). Hill folks believe resolution of these “tier 2” issues will come readily, if not easily, once the big-picture issues are resolved. Hill staffers are adamant that no decisions have been made, but it’s clear that those decisions are pretty close—if and when an overall agreement is reached. But there are no details being shared.
Having said that, here are some guesses about what to expect on tier 2 issues:
a) Life insurance tax issues—It seems likely that if the package is big enough (more than $2 trillion), negotiators will agree to the section 7702 life insurance tax definition provision in the Heroes Act (perhaps with modification). Less likely, but still possible, is agreement to include the insurers’ proposal to re-characterize insurer-held bonds as ordinary rather than capital assets (this is because many lawmakers don’t see the connection to the COVID crisis of the bond issue, and they see it as a corporate tax issue—and corporate tax issues are particularly sensitive in this bill). 7702, on the other hand, is viewed as an individual policyholder issue, and life insurance is generally accepted as a part of the “safety net” individuals are relying on during this COVID crisis.
b) PPP—The Paycheck Protection Program likely will be extended. Its rules will likely be modified to make it easier for PPP borrowers to qualify for loan forgiveness. Congress (both Republicans and Democrats) support making ordinary business expenses paid for with forgiven PPP funds deductible, although Treasury is still resisting that.
c) Health insurance issues—There is apparent agreement on providing subsidies for COBRA coverage. However, there is sharp disagreement over whether subsidized insurance can include abortion coverage. The abortion issue could be enough to kill inclusion of any subsidies in the final package. So far, it is an issue on which no compromise has been found.
d) Retirement savings—There are still unbridged differences on how to deal with bankrupt and near-bankrupt union pension plans, and this disagreement could keep any retirement savings provisions from being included in the bill. However, there appears to be general agreement on providing some funding relief for single-employer defined benefit (DB) plans and for relief from current required minimum distribution (RMD) rules. There are also some technical issues (like making money purchase plans eligible for SECURE Act rules/relief) that could be included in the package.
e) Liability protection—this is a tier-one issue for the GOP, and so inclusion of some kind of liability protection is likely. However, the GOP proposal is viewed by virtually all Democrats as way over-broad. It is also viewed as a bargaining chip. So, although it is likely that there will be some kind of liability protection in a final agreement, the contours of that protection remain unclear. It is important to remember that these guesses are just that—nothing has been agreed to. It’s no more than what people think will be agreed to when/if there’s a final agreement.
What’s Next—Executive Actions: Administration negotiators are hoping that the President’s executive actions will ease some of the pressure for more aid and will weaken the Democrats’ bargaining position. Whether that will happen is unclear—most Hill insiders don’t think the Administration has the authority to do much via executive action. Democrats (through Speaker of the House Rep. Nancy Pelosi (D-CA)) are calling the EO’s “unconstitutional slop” and “illusions.”
The four executive actions are:
(1) Payroll tax: This is a memo to the Secretary of the Treasury directing Treasury to defer the withholding, deposit, and payment of their lower-paid employees’ payroll taxes. (As you know, employers and employees each pay 7.65 percent of wages—6.2 percent for Social Security and 1.45 percent for Medicare.) This directive impacts only the employee share of the tax (which
employers withhold and then remit to the government). It applies only to those employees earning less than $104,000/year. It does not eliminate tax liability; rather, it defers the employer’s obligation to collect and remit taxes owed by the impacted workers.
The payroll tax suspension would last through the end of the year and would waive any penalties or interest on the taxes not paid/remitted. It also directs the Treasury Department to explore ways (including legislation) to eliminate rather than merely defer the tax. And, President Trump said if he is reelected, he will extend the payroll tax holiday past year-end. He also said he would “forgive” payroll tax liability from August 1 through year-end; i.e., make sure the payroll taxes not paid between now and year-end would not have to be paid later. It is likely that such a result would require statutory authority, however, so whether it can be done could depend on the next Congress’ reaction to the proposal.
(2) Unemployment benefits: The memo on unemployment benefits directs FEMA and calls on the States to participate in extending federal supplemental unemployment benefits by $400/week, contingent on the States paying 25 percent ($100/week) of the benefit. The memo specifies that FEMA use up to $44 billion in the Disaster Relief Fund (DRF) to pay the federal $300/week share of these supplemental unemployment benefits; and that the States use the CARES Act-created Coronavirus Relief Fund to pay their $100/week share of the payments. The payments shall continue, the memo says, until either the DRF balance falls to $25 billion or through December 6, 2020, whichever comes first.
(3) Student loans: President Trump also signed a memo that directs the Department of Education to authorize deferral of payments on federally-held student loans, using current authority for waivers of and modifications to the requirements and conditions of economic hardship deferments.
(4) Eviction/foreclosure protection: The Executive Order on evictions/foreclosures states that the Administration “will take all lawful measures to prevent residential evictions and foreclosures resulting from financial hardships caused by COVID-19.” This has been characterized as an extension of the now-expired freeze on evictions authorized by the CARES Act. However, it is unclear what authority the Administration has (“lawful measures”) to reinstate the freeze.
Timing: No negotiations were scheduled for this past weekend, nor are there yet any more meetings on the negotiators’ schedules for this week. But the pressure to enact a bill is intense, on both parties. So, it’s likely that negotiations will resume, probably early this week. The EOs may (probably will) impact the process, but at this point, it’s unclear what that impact will be. We’ll keep you posted, of course.