Paycheck Protection Program under the CARES Act

Here is a brief summary regarding the proposed Paycheck Protection Program under the CARES Act

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The Keeping Workers Paid and Employed Act was created to prevent workers from losing their jobs and to prevent small businesses from going under due to economic losses caused by COVID-19. The Act is proposed to provide cash assistance through one-hundred percent federally guaranteed loans to employers who certify that they will maintain their payroll during the course of the present emergency. Under the Act, if employers maintain their payroll, the loans would be forgiven. This will assist to help workers remain employed and allow affected small businesses and our economy to quickly recover after the crisis. This proposal would be retroactive to February 15, 2020, to help bring workers who may have already been laid off back onto payrolls.

Obtaining a Paycheck Protection Program loan:

The U.S. Department of Treasury has released the loan application for the Paycheck Protection Program which can be found here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf. Loan applications may be submitted to an SBA approved lending institution as early as April 3, 2020.

Businesses with less than 500 employees are eligible to apply for a loan under 7a of the Small Business Act ( 15 U.S.C. 636(a)). Nonprofit businesses receiving Medicaid expenditures are not eligible. Other businesses may qualify depending upon the size standard in number of employees established by the Administration for the industry in which the business concern, nonprofit organization, veterans organization, or Tribal business concern operates.

A small business may apply for a maximum loan amount which is the lesser of:

(A) the sum of the average total monthly payroll costs of the applicant during the 1 year before the date the loan is made multiplied by 2.5 and any outstanding loan taken pursuant to section 7(b) on or after January 31, 2020; OR

(B) For applicants not in business between February and June 2019, the product obtained by multiplying the average monthly payroll between January 1, 2020 and February 29, 2020 by 2.5 and any outstanding loan taken pursuant to section 7(b) on or after January 31, 2020; OR

           (C) $10 million (acting as a cap)

There is no personal guarantee or collateral required to receive this loan.

The Loan is to be used to pay for: Payroll, sick leave, medical leave, family leave, costs to continue health care benefits, salaries, mortgage or rent payments, utilities and any other debt obligations of the business.

In determining eligibility for the loan, the Lender shall only consider whether the borrower was in operation on February 15, 2020 and whether the business had employees for whom the borrow paid salaries and payroll taxes, or paid independent contractors.

A loan made under subsection 7(b)(2) during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available may be refinanced as part of a covered loan.

Additionally, an employer seeking such a loan must certify that:

  1. The uncertainty of current economic conditions justifies the loan request to support the ongoing operations of the borrower;
  2. The funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  3. The eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
  4. During the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

The cost of participation in the 7(a) program would be reduced for both borrowers and lenders by providing fee waivers, an automatic deferment of payments for one year, and no prepayment penalties for any payment made on the loan on or before December 31, 2020. The interest rate on 7(a) loans is capped at 4%.

The bill would provide $350 billion to support these loans.

Loan Forgiveness:

  • Covered period is February 15, 2020 to June 30, 2020
  • An eligible recipient shall be eligible for forgiveness of indebtedness on a covered 7(a) loan in an amount equal to:
    • Payroll costs
    • Any payment of interest on any covered mortgage obligation
    • Any payment on any covered rent obligation
    • Any covered utility payment

 

  • The term ‘‘payroll costs’’ is defined to include:
    • The sum of payments of any compensation with respect to employees that is:
      • salary, wage, commission, or similar compensation;
      • payment of cash tip or equivalent;
      • payment for vacation, parental, family, medical, or sick leave;
      • allowance for dismissal or separation;
      • payment re quired for the provisions of group health care benefits, including insurance premiums;
      • payment of any retirement benefit; or of State or local tax assessed on the compensation of employees; and
    • The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period; and

 

  • Payroll costs shall not include:
    • the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period;
    • taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period;
    • any compensation of an employee whose principal place of residence is outside of the United States;
    • qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116- 127); or
    • qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116– 127).

 

Limitation on Forgiveness:

 

  • The amount of loan forgiveness under this section shall be reduced by multiplying the total amount of payroll costs, interest on mortgage, rent payments and utility payments (as set forth above) by the quotient obtained by dividing:

 

(I) the average number of full time equivalent employees per month  employed by the eligible recipient during the covered period; by

(II) at the election of the borrower:

(aa) the average number of full time equivalent employees per month employed by the eligible recipient during the period of February 15, 2019 through June 30, 2019; OR

(bb) the average number of full time equivalent employees per month employed by the eligible recipient during the period of January 1, 2020 through February 29, 2020.

 

  • Reduction relating to Salary and Wages: The amount of loan forgiveness under this section shall be reduced by the amount of any reduction in total salary or wages of any employee described in subparagraph below during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.
    • EMPLOYEES DESCRIBED: An employee described in this subparagraph is any employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.

 

  • If a circumstance occurs in which during the period of February 15, 2020 and ending 30 days after the enactment of this Act, there is a reduction, as compared with February 15, 2020, in the number of full-time equivalent employees but not later than June 30, 2020 the eligible employer has eliminated the reduction in the number of full-time equivalent employees, then there shall not be a reduction in the amount of loan forgiveness.

 

  • Similarly, if a circumstance occurs in which during the period of February 15, 2020 and ending 30 days after the enactment of this Act, there is a reduction, as compared to February 15, 2020, in the salary or wages of 1 or more employees of the eligible recipient, but not later than June 30, 2020 the eligible employer has eliminated the reduction in the salary or wages of such employees, then there shall not be a reduction in the amount of loan forgiveness.

 

  • To apply for forgiveness, the employer must provide its lender with documentation verifying the number of full-time employees on payroll and pay rates and provide documents including payroll tax filings reported to the IRS, State income, payroll and unemployment insurance filings, documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments and any other documentation the lender determines to be necessary.

 

  • The employer shall certify to the lender that the documentation presented is true and accurate, and that the loan was used to retain employees, make interest payments on a covered mortgage, or to make rent and/or utility payments.

 

  • Any portion of the loan forgiven under this section shall be excluded from gross income for purposes of the Internal Revenue Code of 1986.

 

Entrepreneurial Assistance:

  • The bill would provide grants to offer counseling, training, and related assistance to small businesses affected by COVID-19:
    • $240 million for SBA Small Business Development Centers and Women’s Business Centers.
    • $10 million for Minority Business Development Agency’s Minority Business Centers
    • $25 million for grants to associations representing resource partners.