Pennsylvania Attorney General Josh Shapiro has issued a warning to Pennsylvania automotive dealers that there has been an increase in consumer complaints relating to automotive dealership practices to the Attorney General’s Office.  That notice, a complete copy of which can be found here, reiterated that both new and used dealers in the Commonwealth have obligations to consumers in the marketing, contracting and sale of vehicles.  Even before this warning, it was critically important that Dealers be mindful of pricing and marketing rules in the current climate of limited inventory and higher pricing.  Now, following the Attorney General’s warning, Dealers should reconfirm they are compliant in all customer facing documents, interactions and marketing.  As always, the McNees Automotive Dealership Law Group is here to assist Dealers in navigating the regulatory space.  The professionals below are available to assist you and your Dealership:


Barbara A. Darkes, compliance, consumer and franchise matters,, 717.237.5381


Sarah Hyser-Staub, investigations and criminal/regulatory defense matters,, 717.237.5473


David Noll, corporate and dealer franchising matters,, 717.237.5453

With every new Presidential administration comes new policy priorities, few more anticipated (for good or ill) than tax policy.  Major tax legislation passed in the last administration doubled the exclusion from federal estate tax from $5 million adjusted for inflation ($5.49 million per individual in 2017) to $10 million adjusted for inflation ($11.7 million per individual in 2021).  With the rule allowing portability of exemption between spouses and a step-up in cost basis for appreciated assets at death, current transfer tax law potentially allows up to $23.4 million in assets to pass from a married couple free from estate or capital gains tax.  The change in executive branch control and the slimmest of Democratic majorities in Congress portends possible changes to transfer taxes.

As of this writing, the Biden administration has not proposed a reduction in the exclusion from federal estate tax, though one is broadly expected by tax professionals and taxpayers.  In conjunction with the America Families Plan, the administration has proposed changes to the capital gains tax, adding higher marginal rates of tax levied on higher earners and applying the top marginal rate of tax on ordinary income to capital gains over $1 million.  In addition, the plan proposes disallowing the step-up in basis at death for some wealthier taxpayers.  These proposals have already received significant pushback from Republicans in Congress and some Democrats in the Senate.

Whether any or all of the proposals come to fruition is unknowable, but it seems reasonable to anticipate some higher rates on capital gains and, perhaps more speculatively a reduction in exclusion.  Taxpayers and advisors are now considering the prudence of gifts and other transfers in advance of any such changes.  Many permutations of possible transfers exist but each should necessarily require a desire on the part of the donor client to irrevocably part with assets, that is, to make gifts that they are comfortable making apart from tax considerations.

Clients who are independently inclined to make irrevocable transfers to children or more remote descendants should consider establishing trusts with broad flexibility to adapt to changes in future income tax rates and transfer tax structures.  Trusts that permit access to beneficial interests by a donor’s spouse (referred to as Spousal Limited Access Trusts, or SLATs) should be considered as well as perpetual trusts that allow distributions to multiple generations.  Certain assets such as closely held interests in businesses such as dealerships may require specific treatment to preserve tax attributes (such as S corporation status) or adhere to external requirements (such as manufacturer or regulatory requirements as to ownership and control).

Clients interested in pursuing tax minimization opportunities should consult with their professional advisors, including members of the McNees Auto Dealer Practice Group.

Way back before the dawn of the coronavirus, when a change in the tax rules seemed like a consequential thing, Congress made a pretty significant change that few people saw coming and which upended decades of accepted wisdom on tax planning with retirement plan funds.

Passed in the waning days of December 2019, and effective as of January 1, 2020, the SECURE (Setting Every Community Up for Retirement Enhancement) Act made several changes to funding and withdrawals from retirement plans, including moving the requirement to start taking distributions to age 72 (from 70 and ½) and allowing withdrawals for certain purposes without penalty.  Most significantly for estate planning, the Act changed the long-standing rules on so-called required minimum distributions (RMDs) from retirement plans following the death of the participant.

For decedents dying before December 31, 2020, most non-spouse beneficiaries of retirement plans (which get rolled over to inherited IRAs) could stretch out the time over which they were required to withdraw funds to their actuarial life expectancy, thereby minimizing the taxable income that had to be realized from the inherited plan benefit in any given year and allowing tax-free growth in the interim.  The SECURE Act effectively said goodbye to all of that.

For most non-spouse beneficiaries, the new rules require that the balance of an inherited IRA must be withdrawn before the 10th year after the death of the account owner.  Withdrawals can be made in any amount over that time period but must all come out and be subject to income tax by the end of year 10.  The new rules do not alter the treatment of spousal beneficiaries and there are exceptions for some disabled, chronically ill, or minor beneficiaries. However for most beneficiaries, there is no longer an option to ‘stretch’ the IRA over time.

For clients, these changes may shift the calculus of how a retirement plan fits into the overall estate plan.  Most significantly, clients currently using trusts to receive plan benefits need to review their plans and possibly make changes to align the trust terms with the new rules.  The income tax consequence of the new rules may weigh in favor of naming plan beneficiaries with lower effective income tax rates and shifting other non-taxable assets to benefit heirs subject to higher rates.  Charitable planning with retirement plan assets may become even more attractive.

Whatever the outcome, it is as ever, crucial to discuss the disposition of these assets in the estate planning process.

As the country and the world plan for the post-pandemic period, there has been much ink spilled as to the changes it will bring in various industries.  Automotive retailing has been greatly affected during the pandemic on multiple levels.  First, many retailers have been unable to open or have only been able to open and transact sales on a limited basis.  Secondly, with the substantial job loss throughout the economy, and consumer confidence ebbing downward, it is clear that many consumers will be much more “tight fisted” as they approach significant purchases at least for the next several years.  Finally, there is currently a glut of unsold used vehicles as well as more vehicles coming off lease every day.  This will have the effect of depressing trade-in values substantially which will affect customer’s choice of vehicle.  So, as we look at these factors and many others, what are some of the changes that can be expected in automotive retailing?

New Vehicle Sales

It can be expected that from the recent high sales numbers, there will be a substantial decline in new vehicle sales for the foreseeable future.  This will again lead (as it did in 2008-2009) to an increase in the age of vehicles in service. Further depressing sales will be the likely decline in purchases by the rental car companies as tourism and travel are reduced for the foreseeable future.  It is estimated that the largest rental car companies in the United States buy collectively nearly two million new vehicles per year.  We can expect them to adjust their respective fleets to reflect their lower expectation of rental demand in the coming months by dumping vehicles, reducing purchases and maintain vehicles in service for longer periods.

A reduction in sales will also lead to a reduction in the number of employees at dealerships, as dealers attempt to cut non-fixed expenses like employment costs. The decrease in employment will be further compounded by the increased use of online transactions.

Online Transactions

The Internet has been a constant source of change for auto dealers over the last 10 to 15 years.  Most buyers are much better informed about vehicles and their choices than they were a short time ago.  Online transactions have been occurring for years, however, there has been an accelerated use of these types of transactions as a result of the “stay at home” orders and closures of dealership sales showrooms.  The systems needed for online sales have developed to the point where contactless online transactions are possible, and many dealers new to the environment are quickly working out the glitches in that system.  Regardless of the number of vehicles that can be sold in this manner, it is clear that online sales could affect vehicle grosses by intensifying competition on the Internet by dealers quoting “rock bottom” prices to secure sales.  In addition, dealers will have to adapt how they sell F&I (Finance and Insurance) products.  Not being face-to-face, but dealing over the Internet makes it much easier for customers to resist purchasing optional F&I products.

Still, most buyers will want to test drive a vehicle before they decide to purchase it.  That being said, once the test drive has occurred, dealers will have to close the deal quickly.  Otherwise, a prospective buyer can then shop based on price on the Internet.  Also, as a result of price competition through online sales, dealers will be much more willing to deliver vehicles to more distant buyers’, thereby enlarging the geographic area that customers are willing to shop (at least digitally speaking).

Vehicle Sharing Programs

One potential casualty of the pandemic may be programs where multiple users can share common vehicles.  Car share programs have exploded in metropolitan areas and many suburbs in the last decade.  These programs allow customers a short-term use of a vehicle, that is returned to a fixed location when the customer is done with it.   Due to concerns about the coronavirus, many individuals may be more reluctant to consider vehicle sharing programs.  The main car-share programs in the United States are currently offering substantial discounts for both new and existing customers; likely to combat decreased demand resulting from these risks, at least in part.

Electric Vehicles

Another potential casualty of the pandemic may be electric vehicles.  As consumers become more economical and potentially less willing to purchase more expensive vehicles, the higher cost of electric vehicles (and the lower, current cost of gasoline) may work to make electric vehicles less attractive to the average buyer.

Health and Safety Aspects of Vehicles

Already some manufacturers are moving to address health and safety issues arising from the pandemic.  For instance, several manufacturers have introduced N95 certified air purification systems.  Similarly, Jaguar Land Rover is exploring adding a special ultraviolet light unit to kill bacteria and viruses.  Other car sterilization techniques are being researched industry-wide.  These types of features and products may become significant in a buyer’s choice of a vehicle, especially as fears of contagions linger across the globe.


It is hard to know exactly what the post-pandemic retail world will look like, however, it is clear that the experiences of buyers and the automotive industry will dictate some significant changes in the structure of automotive retailing.

As businesses across the country continue to determine whether to apply for an SBA loan under the “Paycheck Protection Program” (the “PPP”) provided by the Coronavirus Aid, Relief, and Economic Security Act (the “Act”), the US Small Business Administration (the “SBA”) has released additional guidance to interpret the previously issued interim regulations.  While full guidance from the SBA on PPP related issues can be found here, this article highlights two issues many have sought clarification over. Specifically, this article discusses newly provided guidance on size requirements for employer eligibility purposes, and on how to account for federal taxes when calculating “payroll costs.”

Size of Employer Guidance
First, the SBA has clarified that a “small business concern” (as defined in Section 3 of the Small Business Act) is not required to have 500 employees or less to be eligible for a covered loan under the PPP if the business (together with its affiliates) (i) meets the SBA employee-based or revenue-based size standards for its applicable industry (which can be found here); or (ii) meets the SBA’s current “alternative size standard.”  As of March 27, 2020, the “alternative size standard” provides that a business qualifies as a “small business concern” if the business (together with its affiliates): (i) has a maximum tangible net worth of not more than $15 million; and (ii) has an average net income after federal income taxes (excluding carry-over losses) for the two fiscal years before the date of the application of not more than $5 million.

Thus, this additional guidance may provide an alternative outlet to receive a covered loan under the PPP for those who may not originally have been thought to be eligible.  While further clarification may be provided to define “tangible net worth,” the SBA does generally define “tangible net worth” as net worth minus goodwill.  While no interpretations have been issued regarding how to define “net income after Federal income taxes” for s-corporations or other pass-through entities, other SBA regulations calculate  “net income after Federal income taxes” for such pass-through entities as:

  • Net income; minus an amount equal to the sum below:
  • if the business (and its affiliates) is not required by law to pay state or local income taxes at the entity level, an amount equal to the product of (a) the business’ (and such affiliates’) net income, multiplied by (b) the marginal state income tax rate (or by the combined state and local income tax rates, if applicable) that would have applied if the business (and its affiliates) were taxable corporations; plus
  • an amount equal to the product of (a) the business’s (and its affiliates’) net income, less any deduction for state and local income taxes calculated under subsection (ii) above with respect to the business (and its affiliates), multiplied by (b) the marginal federal income tax rate that would have applied if the business’ (and its affiliates) were taxable corporations

While it is not clear whether this methodology will apply at this time, at a minimum it can provide an initial framework for determining if your business is eligible under the “alternative size standard.”

Interplay Between Federal Taxes and Payroll Costs

Another issue clarified by the guidance linked above is that amount of “payroll costs” (which are used to calculate both the maximum loan amount and the amount of the loan subject to forgiveness under the PPP) is not reduced by taxes imposed on an employee and required to be withheld by the employer, but also does not include the employer’s share of the payroll tax.  This is because under the Act, the definition of “payroll costs” specifically excludes “taxes imposed or withheld under Chapters 21, 22 or 24 of the Internal Revenue Code of 1986 during the covered period.” As such, the guidance clarifies that “payroll costs” are calculated on a gross basis without regard to federal taxes imposed or withheld.  The SBA indicated that this interpretation would further advance the legislative purpose of the PPP.

By way of example, the SBA guidance provides that: “an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs.  The employee would receive $3,500 and $500 would be paid to the federal government.  However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.”

If you would like further advice on loan calculations and forgiveness amounts, please review our CARES Act article which includes an overview of the PPP and the Act generally.  As the SBA continues to issue additional guidance in all areas surrounding the PPP and the Act, we will continue to update you with all the information you need so that your business is equipped to make the best decision it can. As always, please do not hesitate to reach out to any professional in the McNees Corporate & Tax Group with any questions you may have.

With guidance from the Small Business Administration (“SBA”) and the Internal Revenue Service (“IRS”) still forthcoming, and the existing guidance changing, many business are struggling to understand their options under the Coronavirus Aid, Relief and Economic Security Act (“Act”).  We previously published guidance on the Payroll Protection Program (“PPP”) and Disaster Relief Loans which can be found here.  In addition to those loan offerings, the Act also created other relief options for businesses some of which can be used in conjunction with the PPP loans.

Employee Retention Credit

First, the Employee Retention Credit is available to employers (i) for so long as operations have been fully or partially suspended by government order relating to COVID-19 or (ii) if gross receipts are down 50% or more from receipts in the same calendar quarter of last year, in which case the credit will continue until the business’s receipts exceed 80% of the corresponding quarter in the previous year’s receipts.  Special rules apply to tax exempt organizations.  No business accepting a PPP loan is eligible to take this credit, but those that are eligible will receive a credit equal to 50% of the “qualified wages” with respect to each employee in each applicable calendar quarter, up to a maximum of $10,000 in wages per employee over all eligible quarters.  For purposes of this credit, “qualified wages” means wages and compensation (as defined in the Internal Revenue Code) paid between March 12, 2020 and January 1, 2021 (i) for employers of over 100 employees, wages to employees not providing services as a result of the events qualifying the employer to take the credit, and (ii) for employers of less than 100 people, (a) all wages paid as a result of a complete or partial closure, or (b) wages paid in a calendar quarter in which the employer qualifies due to a reduction in receipts, and such amount, regardless of how arising hereunder, includes the amount paid or incurred by the employer for any group health plans.  If an employer takes this credit and later applies for and receives a PPP loan, the employer will have to recapture the credit taken or utilize other withheld taxes that are to be required to be paid to the IRS. The IRS has issued a very helpful FAQ concerning this process which can be found here.

Credits may not be claimed for any increase in wages over those paid in the 30 days prior to eligibility.  The amount of the credit is then reduced by the amount of sick and family leave credits available under the Families First Coronavirus Relief Act (“FFCRA”) and credits would be negated if certain duplications of deductions arise in limited circumstances.  Since passage, the IRS clarified the reduction for FFCRA credits would be only to the extent such wages are counted in duplication, but both credits would be available to the extent the employer has both paid leave wages refunded under the FFCRA and wage credits under the Employee Retention Credit.

Employers are also eligible, in some circumstances, to request an advance payment of their credit.  The credit can first be taken as a reduction against any tax deposits for the applicable quarter, but may then file a Form 7200 to claim the refund in advance.

Delay in Payment of Employer Payroll Taxes

The Act also authorizes the delay in employers paying their social security tax for the period of March 26, 2020 (the date of the Act’s passage) to December 31, 2020.  One half of the deferred taxes would then be due at the end of 2021 and the other half at the end of 2022.  The Act further provides limited relief for self-employment taxes for self-employed individuals, with 50% payable as usual and the remaining 50% payable in 25% increments at the end of each of 2021 and 2022.  The above deferrals are all available without penalty and as immediate offsets to amounts due.  Finally, as with the Employee Retention Credit, this deferral is not available for employers receiving forgiveness of a PPP loan or a related loan arising under Section 1109 of the Act; however, there is no such prohibition for self-employed individuals.  There is an open question as to whether employers are permitted to defer their social security taxes for the period after securing a PPP loan, but before any forgiveness of the loan.  There will likely be future guidance forthcoming on this and many other open issues under the Act.


The McNees Corporate & Tax Practice Group are continuing to follow guidance issued by the IRS on these matters. Please reach out to any member of the Corporate & Tax Practice Group with questions about the tax changes discussed in this article or other elements of the CARES Act.

In response to the COVID-19 pandemic, the Pennsylvania Department of Environmental Protection (“PADEP”) recently announced the availability of a process for requesting temporary suspensions of environmental permitting and regulatory compliance obligations.  Regulated entities experiencing difficulties in meeting the terms and conditions of their environmental permits or complying with environmental regulatory provisions due to COVID-19 should consider submitting a form request to PADEP for relief. Completed forms must be submitted to While PADEP’s offices remain closed, program staff continue to work remotely to process submitted requests.

Unless a temporary suspension is granted by PADEP, PADEP has confirmed that regulated entities must continue to comply with all environmental permitting and regulatory compliance obligations.  As the risk of enforcement and civil penalties for noncompliance remain, regulated entities should take this time to plan accordingly.  Due to the potential high volume of temporary suspension requests in the near future, stakeholders should review their environmental permits and compliance programs to identify potential impacts due to workforce availability, resource constraints, and other limitations related to COVID-19 in the coming weeks.

The federal Environmental Protection Agency (“EPA”) has also issued a Memorandum detailing EPA’s intention to exercise enforcement discretion with regard to various environmental permitting and regulatory compliance obligations in response to the COVID-19 pandemic. While the EPA Memorandum does not directly apply to the environmental regulatory programs administered by PADEP, the guidance should be reviewed with respect to EPA-only permits and regulatory requirements that you may have.

With uncertainty looming in all corners of the world due to the continued COVID-19 pandemic, many employers are questioning how they can support the fixed costs of their business, especially in the face of total or partial shutdowns mandated by State governments.  Those same shutdowns make other costs, like employee wages, liabilities that often cannot be supported by limited operations.  In an effort to alleviate such challenges, on March 27th President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides certain small- and medium-sized businesses the ability to obtain a 100% federally guaranteed “Paycheck Protection” loan that can be used to maintain payroll and facilities costs, among other things.

Title 1 of the CARES Act, the “Keeping American Workers Paid and Employed Act,” which amends Section 7(a) of the Small Business Act (the “SBA”), allows eligible businesses to receive an SBA loan in the maximum amount of $10 million which can be used for payroll and benefits costs, insurance premiums, interest on mortgages, rent, utilities, and interest on other debt obligations.  Additionally, borrowing employers who apply the entire loan to maintain payroll costs and/or to make other covered payments are potentially eligible to have the entire loan amount forgiven.

Borrower Eligibility

During the covered period of February 15, 2020 to June 30, 2020, the CARES Act expands the list of eligible businesses who can apply for SBA loans to: (i) small business concerns; (ii) nonprofit organizations; (iii) tribal businesses; and (iv) sole-proprietors, independent contractors and other self-employed individuals.  Specifically, and subject to certain exceptions, potential borrowers must employ less than 500 employees in order to be eligible.

Another major change is to the “Affiliation” provisions that apply to traditional SBA loans. Generally, the SBA determines whether an entity qualifies as a small business concern by counting employees including those of all domestic and foreign affiliates.  However, these provisions are now waived in the following circumstances: (i) if the physical location for which the loan is requested is by an accommodation and food services company; (ii) for franchises assigned a franchise identifier by the SBA; and (iii) any business that received funding under the Small Business Investment Act.  Further information regarding the SBA’s affiliation rules can be found here.

Beyond the size requirements, borrowers must make various certifications in order to receive the loan.  Specifically, potential borrowers must certify that: (i) the uncertainty of the current economic conditions makes the loan necessary to support ongoing operations; (ii) that the funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments; (iii) that it does not have another application pending for a loan for the same purpose and that no duplicative amounts have been received; and (iv) that from February 15, 2020 until December 31, 2020 it has not received 7(a) SBA loan for the same purpose.

“Paycheck Protection” Loan Terms

After determining eligibility, potential borrowers may apply for a maximum loan amount that is the lesser of:

  • the entity’s average total monthly payroll costs for the 1-year prior to the date the loan is made, multiplied by 2.5; plus the outstanding amount of any SBA Disaster Loans made from January 31, 2020 until the date the SBA Loan is made available, or if the entity was not in business from February 15, 2019 to June 30, 2019, then the total monthly payroll costs from January 1, 2020 through February 29, 2020, multiplied by 2.5; plus any SBA Disaster Loans made from January 1, 2020 until the date the SBA Loan is made available; or
  • $10 million.

For purposes of this calculation, “Payroll Costs” are salary, wages, commissions, or similar compensation, payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment for group health care benefits (including insurance premiums), payment of state or local taxes assessed on compensation, and the sum of compensation to a sole proprietor or independent contractor that is not more than $100,000 per year.  There are, however, limitations on this definition, as “Payroll Costs” do not include: (i) payroll costs for employees whose principal residence is outside of the United States; (ii) federal payroll tax withholding; and (iii) employee compensation in excess of $100,000.

One more important point to note is that businesses who recently received an SBA Disaster Loan may refinance such loan into the SBA Loans provided under the CARES Act.  Further, subject to the loan forgiveness provisions discussed below, these loans have a maturity date of up to 10 years, require no guaranty or collateral, and have a maximum interest rate of 4%.  Borrowing entities are also eligible for deferment for a period of 6 to 12 months (including interest, principal and fees).

Loan Forgiveness

An additional benefit to this loan program is that eligible borrowers may receive loan forgiveness for certain costs during the first 8 weeks they receive the loan including payroll costs, interest on mortgages, rent payments, and utilities.

There are, however, limitations on the loan forgiveness.  First, the forgiveness amount may not exceed the principal amount of the loan.  Next, the forgiveness amount may be further reduced if borrowers have reduced the number of employees or the employees’ salary compared to a prior period.  However, the borrower has the capability to re-hire employees or make up salary reductions.  Amounts of the loan that are forgiven are excluded from gross income for federal tax purposes.

SBA Disaster Loans

The new “Paycheck Protection” loan offerings come as a supplement to the SBA Disaster Relief Loans currently available.  The Disaster Relief Loans are still available and are expanded under the CARES Act.  Those loans have similar eligibility requirements, i.e. the same expanded borrower base versus traditional SBA loans.

Disaster Relief Loans can be used for a broader set of costs but are subject to lower borrowing limits ($2 million) and will be collateralized against a business’s assets (including real estate) when that option is available.  Disaster Relief Loans over $250,000 require a personal guaranty.   Finally, these loans can have a maturity date of up to 30 years.  Borrowers using Disaster Relief funds for expenses that are not “covered payments,” and therefore subject to loan forgiveness, may not desire to refinance these loans into the business loan program.

While further guidance from the SBA on eligibility requirements, loan terms and forgiveness limitations are expected in the coming days, we recognize the reality that clarification on these points may be required immediately.  With this in mind, please feel free to reach out to any professional in the McNees Corporate & Tax Group with any questions you may have

With COVID-19 headlines dominating the news cycle, and with no end in sight to the uncertainty that the virus brings, affected businesses are wise to consider whether the current pandemic qualifies as a “force majeure.”    In the last few weeks, the Chinese government has issued “force majeure certificates” to domestic business as a way of shielding companies from breach of contract claims, American businesses are sending mass e-mails to customers explaining that the virus prevents the company’s performance or operations, and businesses in an array of industries have sent formal inquiries to their service providers seeking confirmation of continued performance.

What is “Force Majeure”

The defense of force majeure will excuse a party’s performance under a contract if the non-performing party can establish:  (i) that a force majeure “event” has occured (ii) that such event has prevented such party’s performance under the contract, and (iii) that the non-performing party attempted to mitigate the consequences of its non-performance.

Force Majeure Event

Because force majeure provisions are creatures of contract and did not evolve from the common law, courts are relatively strict in reading these provisions and will hesitate to deviate from the plain language of the contract.  In particular, this means that the enumerated list of events that constitute a force majeure under your contract are given merit by the court.  Conversely, courts often treat events critically if the alleged events are not specifically listed in the contract, like those events falling under a catch all phrase such as “all other events outside the reasonable control of the party.”

In the case of COVID 19, a court is likely to accept the virus as a qualifying event if the contract’s force majeure provision lists any illness concept: disease, pestilence, epidemic, pandemic, etc.  If not, the traditional concept of an “Act of God” would likely apply.  An “Act of God” is an action that arises naturally and is not the fault of any person (or group of persons).  Nearly all force majeure provisions list an “Act of God” as a force majeure event sufficient to excuse contract performance.  While many legal writers are currently speculating that courts will review force majeure cases stemming from COVID 19 less stringently than they have historically, it is more likely that courts will acknowledge the virus as an “Act of God” and decide cases within existing jurisprudence under this concept.

If a Force Majeure provision includes neither an illness concept nor an “Act of God” concept, the unprecedented nature of the global pandemic we now face means a business may very well have a viable argument that COVID-19 qualifies as a different kind of force majeure event..  For example, governmental action and civil unrest are both commonly-enumerated force majeure concepts, and a reasonable mind could interpret either of these concepts to COVID 19 and its related impacts, especially as more government authorities issue orders and enact legislation with respect to the virus.

Two important notes for businesses: (1) generally a breach by a subcontractor is not a force majeure event the general contractor can avail themselves of, and (2) prior knowledge or foreseeability of the event generally bars the use of force majeure.

Prevention of Performance

Second, the force majeure event must actually impact performance.  The degree to which performance must be impacted will depend on the language of each particular contract.  Most commonly, the provision will state that the event has  “prevented” performance.  A well discussed example of this is an employee strike that prevents a factory from operating.  Because the factory cannot operate, it cannot provide goods under its contracts.  When evaluating a force majeure defense, courts will look closely at whether the alleged event is the actual cause of non-performance, or if a force majeure event has occurred but is being used to avoid an unrelated breach.

In the context of COVID 19, this inquiry will be simple for most contract parties.  In Pennsylvania, where the governor has closed non-essential businesses, many businesses cannot perform functions that require their employees to be at work.  Similarly, with many government offices closed, the inability to obtain permits or government approvals actually prevents businesses from proceeding with numerous business activities.

Required Mitigation

Finally, force majeure provisions generally require the non-performing party to mitigate the effects of the force majeure event.  Even if the contract is silent on this aspect, a court is likely to impose a mitigation requirement.   Courts have varied substantially on what the non-performing party must do to satisfy this mandate.

In general, a contract will specify what type of effort must be taken to mitigate (i.e. best efforts, reasonable efforts, aggressive efforts).  Courts generally accept the specified standard, but several courts have imposed higher standards.   If the contract is silent, the courts often apply a reasonable efforts standard.

What actually constitutes sufficient mitigation efforts is fact specific to each contract, industry, and type of required performance.  If a party has documented no mitigation efforts, a court will look unfavorably on any attempt to avoid liability for such party’s breach.

Other Contract Matters

Because force majeure is a contract concept, the other provisions of the contract still apply.  In the force majeure context, careful attention should be paid to the notice requirements of the contract.  Notice provisions state how and when another contract party must be notified under the contract.  With COVID 19, it can be tricky to establish when the force majeure event occurred.  In this case, promptly notifying contract parties is the best course of action.  This is why businesses have sent mass mailers to notify customers of closures and many national brands are sending form letters to their landlords and service providers notifying them of ongoing business disruption.

Another common question is what to do when no force majeure provision exists in a contract.  Historically, a court will not introduce the force majeure concept into a contract that does not contain such a provision.  Force majeure is only one legal concept that is implicated by COVID 19, and the common law has developed several potentially relevant defenses to contract performance.  Contracts that do not contain force majeure provisions are still subject to common law concepts of public policy (which excuses performance under a contract if the purpose of the contract is illegal) , frustration of purpose, and commercial impractability.

In the past few months, we have seen significant changes to the laws governing employee benefits, from the new hardship withdrawal regulations for 401(k) participants, to the SECURE Act, to the new individual coverage health reimbursement arrangement (“HRA”).  Here is what you need to know for 2020:

Starting December 20, 2019:

  • Qualified Plan loans may no longer be distributed through credit cards or similar arrangements.
  • Employers sponsoring defined contribution plans have an optional safe harbor method they can use to satisfy the prudence requirement in their selection of an insurer as an in-plan annuity provider if they engage in an objective, thorough, and analytical search for the insurer and determine that the insurer is financially capable and the relative cost is reasonable.

Starting January 1, 2020:

  • Employers may offer individual coverage HRAs to certain classes of employees to whom they do not offer health insurance.
  • The age for required minimum distributions from a retirement plan has increased from 70 ½ to 72. Participants who turned 70 ½ in 2019 will fall under the old rules and will receive their initial RMD prior to April 1, 2020.
  • The age for allowable in-service distributions from a pension or 457(b) plan has decreased from age 62 to 59 ½.
  • Participants may withdraw up to $5,000, penalty free, within a 1-year period from their retirement plan for any qualified birth or adoption.
  • Certain retirement plans may make trustee-to-trustee transfers to another employer-sponsored retirement plan or IRA of a lifetime income investment or distribution.
  • If an employer offered a nonelective “safe harbor plan”, the employer was required to provide a safe harbor notice to its participants prior to the beginning of the plan year informing the participant of his or her rights and obligations under the plan and meeting other content requirements. The safe harbor notice requirement is now eliminated.
  • The default contribution rate under an automatic enrollment safe harbor plan is increased from 10% to 15% for years after the participant’s first deemed election year. The cap on the default rate for the first deemed election year is 10%.
  • Under a safe harbor plan, the plan either provided for a matching contribution or provided for a nonelective contribution of at least 3% of an employee’s compensation. Now, the plan may decide which method to use up until the 30th day before the close of the plan year.  Any amendments after that time but before the close of the following plan year are allowed if a nonelective contribution of at least 4% of compensation is made.
  • Changes in nondiscrimination rules applicable to closed pension plans will allow existing participants to continue to accrue benefits.
  • Retirement plans adopted after the close of a tax year but before the due date of the employer’s return may be considered adopted as of the previous year.
  • Plans must be in operational compliance with the following hardship withdrawal regulations:
    • Plans are no longer allowed to suspend deferrals when a participant requests a hardship withdrawal.
    • Hardship withdrawals may be made for losses incurred on account of a FEMA-declared disaster, provided the participant lives or works in the designated area.
    • Participants may take a hardship withdrawal for the qualifying medical, educational, and funeral expenses of primary beneficiary.
    • With respect to a hardship withdrawal request, the plan administrator may rely upon the participant’s written representation that he/she has insufficient cash or liquid assets to satisfy the financial need.

The cap on start-up tax credits for establishing a retirement plan will increase to up to $5,000 (depending on certain factors) from $500. Small employers who add automatic enrollment to their plans also may be eligible for an additional $500 tax credit per year for up to three years.

And if you are planning for the future, starting January 1, 2021, employers must allow part-time employees who work at least 500 hours per year for 3 consecutive years to participate in 401(k) plans. These employees will be excluded from nondiscrimination and coverage testing and top-heavy rules.