By: Perry MacLennan
On March 27, President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act, a historic $2 trillion stimulus package to provide financial assistance to individuals and businesses.
Importantly for employers, a key provision in the CARES Act is the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), which provides forgivable loans for businesses in order to maintain payroll and keep workers employed at or near current wage levels. Businesses may also use the loans for other basic costs like rent, interest payments and utilities. Forgiveness is based upon the percentage of your workforce retained during this period.
Below are details about the Paycheck Protection Program:
- Eligible Businesses
- Small businesses under traditional SBA standards, but much more broadly, businesses or nonprofits with less than 500 employees (although certain exceptions/workarounds) focused on the restaurant/lodging industry and certain franchise operations.
- Entities must have been operational by February 15, 2020 and had payroll taxes.
- Borrower cannot apply/carry both PPP and Economic Injury Disaster Loan (EIDL) for COVID-19 but can carry previous, non-COVID-19 EIDL and participate in PPP.
- Loan Amount Formula
- The lesser of:
- Average monthly payroll cost during the prior year X 2.5, or
- $10 Million
- Ex: If the employer had an average monthly payroll of $900,000 over the prior year, it would be eligible for a loan of $2.25 million ($900,000 average monthly payroll X 2.5)
- Use of Loan Funds/Forgiveness
- Eligible expenses include payroll, insurance, rent, interest and utilities.
- Forgiven in the amount equal to what is spent on Qualifying Costs within an eight-week period after origination.
- Qualifying Costs: payroll, interest on secured debt, rent and utilities (in place prior to February 15, 2020).
- Forgiveness reduced if reduction in workforce or wages.
- Any amounts not forgiven or repaid by December 31, 2020 will convert to a maximum 10-year loan at a maximum interest rate of 4%; the loan will remain 100% guaranteed.
- Forgiveness of debt under the PPP is not taxable.
- Payroll Maintenance
- The amount forgiven is reduced if the borrower reduces its average workforce during the eight-week period beginning with the date the loan is originated compared to prior periods or reduces salary/wages by more than 25% compared to the prior quarter.
- Reductions in the amount forgiven will be voided if the employer rehires employees or restores wages by June 30, 2020.
- The amount attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by:
- The quotient of average full-time employees during the eight-week period beginning with the date the loan is originated divided by the average full-time employees for the period:
- From February 15, 2019 through June 30, 2019; or
- January 1, 2020 through February 29, 2020, as determined by the recipient.
- The amount attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25% of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period. Only employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100,000 are included in this calculation.
- Loan Terms
- Covered loan period is 2/25/20 through 6/30/20
- Loans are available for up to a 10-year term (amortized) at 4% interest, with six months (and up to one year) deferral of principal and interest payments. Notably, certain SBA requirements are waived. Loans are available with:
- No personal guaranties of shareholders, members or partners;
- No collateral;
- No proving recipient cannot obtain funds elsewhere;
- No SBA fees (may still have to pay lender processing fee); and
- No prepayment fee.
- Borrower must make a good-faith certification that funds are needed for COVID-19 related purposes, the funds will be used to retain workers and that its request is not duplicative with other SBA funds for the same purpose.
- Delegates authority to all existing 7(a) lenders to expedite approvals/distributions.
- Authorizes bank and non-bank lenders to participate in PPP program.
- New lenders in the program can only participate in PPP and not other 7(a) loans.
Chris Gantt-Sorenson, Perry MacLennan and Demetrius Pyburn hosted a webinar to address this Program and the FFCRA update on April 1, from 3:00 – 4:00 PM.
If you have questions, please contact a member of the HSB Employment Law practice team.
For additional resources on COVID-19, please access HSB’s resource page.