On Friday, March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a federal stimulus package aimed at providing relief to American individuals and businesses during an unprecedented shutdown of much of the American economy.
Through tax credits, emergency grants, forgivable loans, and loan forgiveness, the CARES Act is designed to provide American businesses with the cash flow and debt relief to retain current employees, rehire employees laid off or furloughed, and to generally weather this severe economic downturn.
The CARES Act also seeks to keep individuals and families engaged in the economy by expanding the category of individuals eligible for unemployment benefits, increasing the amount of unemployment benefits, expanding paid family leave, and by providing direct cash payments to most Americans.
Finally, the CARES Act includes specific provisions to aid large corporations, state and local governments, and the health and education sectors.
This summary focuses on the impact that the CARES Act will have on small businesses, including loan forgiveness, access to new and existing grants and loans, tax relief and incentives, as well as employee assistance programs.
The attorneys of Perkins Thompson are prepared to offer you guidance on how you or your business can access emergency assistance provided under the CARES Act.
Small Business Loans and Loan Forgiveness
The CARES Act both expands and creates several loan programs under the Small Business Administration (the “SBA”) in an effort to assist businesses with fewer than 500 employees whose businesses have been affected by COVID-19.
While the SBA and other government organizations are still working on a plan to effectively administer the benefits provided under the CARES Act, below is an overview of loan and forgiveness programs for small businesses.
Paycheck Protection Program
The Paycheck Protection Program (the “Program”) expands the SBA loan eligibility and gives qualified businesses the ability to receive no-fee small business interruption loans from lenders enrolled in the SBA’s 7(a) loan program as well as other approved lenders. The Program is available to:
- Small businesses with fewer than 500 employees
- Small businesses that otherwise meet the SBA size standard
- Nonprofit organizations with fewer than 500 employees
- Sole proprietors
- Independent contractors
- Self-employed individuals who regularly carry on in a trade or business
- Tribal business concerns that meet the SBA size standard
- Qualifying veterans’ organizations
The Program limits the interest rate of the loans to 4% and waives a number of requirements normally associated with SBA loans including any fees, personal guarantees by owners, collateral requirements, and any prepayment penalties.
The maximum amount of such a loan is 2.5 times the borrower’s average monthly payroll costs for the trailing twelve months, subject to a $10 million dollar cap. The loan must be used for the following expenses:
- Payment of payroll costs
- Continuation of group health care benefits
- Employee compensation (for employees earning less than $100,000.00)
- Mortgage interest payments
- Rent
- Utilities
- Interest on any other debt obligations that were incurred before the covered period of February 15, 2020 through June 30, 2020
As discussed below, in some circumstances, all or a portion of the loan may be forgiven and debt service payments may be deferred for up to one year.
Loan Forgiveness
Under the CARES Act, loan forgiveness is available for amounts spent during the 8-week period beginning on the date of the origination of the loan for:
- Payroll costs for employees earning less than $100,000
- Mortgage interest
- Rent pursuant to a lease agreement
- Utility payments
- For borrowers with tipped employees, additional wages paid to those employees
If all employees are kept on payroll for eight weeks, the SBA will forgive the portion of the loan used for the payments noted above. Importantly, the loan forgiveness cannot exceed the amount of the principal.
Businesses will be required to submit a certification that the funds are necessary as a result of the COVID-19 pandemic and should be prepared to submit documentation relating to: payroll taxes, payroll and benefits cost information, financial statements, etc.
Because one goal of the CARES Act is to encourage employers to keep employees on the payroll at normal or close to normal pay rates, there are penalties incorporated into the loan forgiveness program. The amount of any loan forgiveness will be reduced by a reduction in employees during the covered period (March 1, 2020 through June 30, 2020) or a reduction in employee wages in excess of 25 percent.
However, borrowers that rehire employees who have already been laid off due to COVID-19 will not be penalized for having a reduced payroll or reduced salary. Specifically, an applicant will not be penalized for any terminations or reduction in payroll because of COVID-19 if that termination or reduction occurred between February 15, 2020 and 30 days after enactment of the Act (April 26, 2020) so long as the applicant rehires or increases payroll to the appropriate levels to not be penalized by June 30, 2020.
Emergency Economic Injury Disaster Loans
The SBA offers Economic Injury Disaster Loans (EIDL) to help small businesses meet working capital needs caused by a natural disaster. The EIDLs are used to help small business pay expenses such as fixed debts, payroll, accounts payable, and other bills that could have been paid if the disaster not occurred.
The CARES Act expands the eligibility for an Emergency SBA EIDL for the period between January 31, 2020 and December 31, 2020 to any business with less than 500 employees and any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor.
The CARES Act has loosened the requirements for approval and allows for an applicant to be approved solely on his or her credit score or an alternative method to gauge an applicant’s ability to repay rather than requiring a tax return or tax return transcript.
Another benefit provided for under the CARES Act is the ability for the applicant to request from the SBA an advance of up to $10,000 within 3 days after the receipt of the application. The advance may be used to provide paid sick leave to employees unable to work due to the direct effect of COVID-19, maintaining payroll to retain employees during business disruptions or substantial slowdowns, meeting increased costs to obtain materials unavailable from the applicant’s original source, making rent or mortgage payments, and repaying obligations that cannot be met due to revenue losses. This special loan advance will not have to be repaid. The applicant is not required to repay the advance even if the loan is subsequently denied.
Employee Retention Credit for Employers
This provision allows eligible employers to receive a federal tax credit against the Social Security portion of the payroll taxes that it pays.
The CARES Act applies to wages paid from March 13, 2020, through December 31, 2020, and is available to employers who carried on a trade or business during 2020 and whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order or (2) gross receipts declined by more than 50% compared to the same quarter in the prior year.
Eligible employers will receive a credit against applicable employment taxes for each calendar quarter in an amount equal to 50% of the qualified wages with respect to each employee. The amount of qualified wages taken into account for each eligible employee, however, will not exceed $10,000 per calendar quarter and the credit will not exceed the applicable employment taxes owed for such calendar quarter.
For eligible employers with greater than 100 full-time employees, qualified wages are those wages paid to employees when they are not providing services. For eligible employers with 100 or fewer full-time employees, it is limited to all wages for employees who are actually providing services during this period.
Importantly, qualified wages do not include sick leave wages or family leave wages paid pursuant to the Families First Coronavirus Response Act.
Delay of Payment of Employer Payroll Taxes
This provision permits eligible employers to defer paying their share of applicable employment taxes from March 27, 2020 through December 31, 2020. Half of the deferred taxes would be due on December 31, 2021, and the other half by December 31, 2022.
Employers are typically responsible for paying a 6.2 percent Social Security tax on employees’ wages. The CARES Act permits eligible employers to deposit 50 percent of the deferred taxes on or before December 31, 2021, and the remaining 50 percent by December 31, 2022. However, if taxpayers received loans from the SBA, and such loans were forgiven under the Act, then such taxpayers are not eligible for this relief.
Advance Refunding of Payroll Credits for Required Paid Sick Leave and Paid Family Leave
The Families First Coronavirus Response Act allows employers a credit against payroll taxes for 100% of the employer-paid qualified sick leave wages and qualified family leave wages, subject to certain limitations. The CARES Act allows employers to advance the credit according to forms and instructions that will be provided by the Secretary of Labor.
Expanded Unemployment Benefits
Pandemic Unemployment Assistance
The CARES Act creates a temporary Pandemic Unemployment Assistance program to provide payments to “covered individuals” who are not traditionally eligible for unemployment benefits and who are unable to work as a direct result of COVID-19. Specifically, the CARES Act extends coverage to workers who are: self-employed, seeking part-time employment (if permitted under state law), have an insufficient work history, independent contractors, or otherwise would not qualify for regular unemployment under state or federal law and become unemployed or cannot find work due to COVID-19.
Covered individuals are those who are unemployed, partially unemployed, or unable to work for any of the following reasons:
- They tested positive for COVID-19
- They are experiencing symptoms of COVID-19 and are seeking a medical diagnosis
- A member of their household has been diagnosed with COVID-19
- They are providing care for a family or household member who has been diagnosed with COVID-19
- They are the primary caregiver for a child or other person in the household who is unable to attend school or another facility that is closed as a direct result of COVID-19
- The place of employment is closed, because of a quarantine imposed as a direct result of a COVID-19 outbreak (or they are otherwise prevented from reaching the place of employment as a result of COVID-19)
- They were scheduled to begin a new job and are unable to begin the job or are unable to reach the job as a direct result of a COVID-19 outbreak
- They have become the breadwinner for a household because the head of the household has died as a direct result of COVID-19
- They had to quit their job as a direct result of COVID-19
Importantly, individuals are NOT covered if: they have the ability to telework with pay, are recipients of paid sick leave, paid family medical leave, or other paid leave.
Covered individuals will receive benefits for weeks of unemployment, partial unemployment, or inability to work as a direct result of COVID-19, for as long as the unemployment, partial unemployment or inability to work caused by COVID-19 continues.
The weekly benefit amount is equal to the amount authorized under the state law in which the covered individual performed work. For self-employed individuals, the weekly benefit is calculated under 20 C.F.R. § 625.6.
Unlike the Families First Coronavirus Response Act, the CARES Act applies to all employers regardless of size.
This program is applied retroactively from January 27, 2020 and runs through December 31, 2020.
Emergency Increase in Unemployment Compensation Benefits
The CARES Act also enhances unemployment compensation benefits for all eligible individuals – whether eligible for benefits under the expansion provided for in the CARES Act or under applicable state law.
These enhanced benefits include:
- An additional $600 per week, which amount applies even if this takes employees above their pre-unemployment earnings level;
- The ability to waive waiting periods, a measure already adopted in many states; and
- Up to 13 weeks additional weeks of eligibility, after exhausting state employment benefits (capped at 39 weeks).
States will be fully reimbursed for the amount of Federal Unemployment Compensation paid, as well as related administrative costs incurred by the state.
This provision applies from March 27, 2020 through July 31, 2020.
Revisions to the Families First Coronavirus Response Act
The CARES Act makes changes to the earlier COVID-19 related legislation, the Families First Coronavirus Response Act (“FFCRA”), that are important for employers to understand.
Rehired Employees May be Eligible for Paid FMLA Leave
The FFCRA provides emergency paid FMLA leave to eligible full-time and part-time employees who have been employed with a covered employer for 30 calendar days or more.
The CARES Act modifies this provision to provide that employees who were “laid off” by an employer on or after March 1, 2020, may qualify for emergency paid FMLA leave if they are later rehired by the same employer. However, to be eligible for this exception, the rehired employee must have worked for the employer for at least 30 of the last 60 calendar days prior to layoff.
Clarification Regarding Emergency Paid Leave Caps
The CARES Act clarifies that individual and aggregate pay, tax credit, and tax credit advance caps for emergency paid sick leave and emergency FMLA leave under FFCRA apply “for each employee.”
Perkins Thompson will continue to monitor the implementation of the CARES Act. If you have questions, please email Bill Sheils. Alternatively, Bill can be reached directly at (207) 400-8113.