U.S. House of Representatives passes historic $2.2 trillion stimulus package
The U.S. House of Representatives approved the historic $2.2 trillion stimulus package known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act that passed the Senate earlier this week. The far-reaching legislation stands as the largest emergency aid package in US history – and represents a massive financial injection into a struggling economy with provisions aimed at helping American workers, small businesses and industries dealing with the economic disruption.
There are many titles within the CARES Act; however, in this article we explain two significant sections under Title 1 – Keeping American Workers Paid and Employed Act, which includes paycheck protection and loan forgiveness and small business contracting relief.
Title I – Keeping American Workers Paid and Employed Act
The CARES Act amends the Small Business Act (SBA) to create a new business loan program category. For the period February 15, 2020 through June 30, 2020 (covered period), the law allows the Small Business Administration (Administrator) to provide 100% federally-backed loans up to a maximum amount to eligible business to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. Subject to certain conditions, loan amounts are forgivable (see below).
General Loan Terms and Program Operations
The SBA allows the Administrator to provide loans directly or in cooperation with the private sector through agreements to participate on an immediate or deferred (guaranteed) basis. Lenders authorized to make loans under the SBA’s current Business Loan Program are automatically approved to make and approve loans under this new program, and they may opt to participate in the program under the terms and conditions established by the Department of Treasury.
Additionally, the Treasury Secretary may extend such authority to additional private sector lenders under criteria established by Treasury (including, for example, allowing additional lenders to originate loans.)
The Administrator may guarantee covered loans under this program on the same terms, conditions, and processes as a loan made under the SBA’s current Business Loan Program. No collateral or personal guarantee is permitted to be required for a loan. The interest rate on loans under the program is not to exceed four percent. There will be no subsidy recoupment fee associated with the loans and no prepayment penalty for any payments made. Additionally, the Administrator has no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes (see discussion below of permitted uses).
A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program as soon as these new loans are made available. The CARES Act specifically allows SBA Disaster Loan recipients with economic injury disaster loans made since January 31, 2020 for purposes other than the permitted loan uses under this program to receive assistance under this program.
Eligible Loan Recipients
The CARES Act provides businesses with fewer than 500 employees (including sole proprietors, independent contractors, non-profits, and eligible self-employed individuals) access to nearly $350 billion in loans. There is a special eligibility rule for business in the hospitality and dining industries. For business with more than one physical location, if it employs 500 or fewer employees per location and is assigned to the “accommodation and food services” sector (Sector 72) under the North American Industry Classification System (NAICS), the business is eligible to receive a loan.
Loan Maximum, Borrower Eligibility Requirements, and Permissible Uses
These loans are generally limited to the lesser of:
- The sum of 1. Average monthly “payroll costs” for the 1 year period ending on the date the loan was made (an alternative calculation is available for seasonal employers) multiplied by 2.5 and 2. Any disaster loan (discussed below) taken out after January 31, 2020 that has been refinanced into a paycheck protection loan, and;
- $10 million
There are very few borrower requirements to obtain a loan under the new program. Those requirements included a good-faith certification that:
- the loan is needed to continue operations during the COVID-19 emergency;
- funds will be used to retain workers and maintain payroll or make mortgage, lease and utility payments;
- the applicant does not have any other application pending under this program for the same purpose, and
- from February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program.
Businesses may, in addition to uses already allowed under the SBA’s Business Loan Program, use the loans for payroll costs including the following:
- wages, commissions, salary, or similar compensation to an employee or independent contractor;
- payment of a cash tip or equivalent;
- payment for vacation, parental, family, medical or sick leave;
- allowance for dismissal or separation;
- payment for group health care benefits, including premiums;
- payment of any retirement benefits, and;
- payment of state or local tax assessed on the compensation of employees.
Payroll costs do not include the following:
- the compensation of any individual employee in excess of an annual salary of $100,000;
- payroll taxes;
- any compensation of an employee whose principal place of residence is outside the U.S., or
- any qualified sick leave or family medical leave for which a credit is allowed under the new Coronavirus Relief Act passed last week.
In evaluating eligibility of borrowers, a lender must consider whether the borrower was operating on February 15, 2020 and had employees or independent contractors for whom the borrower paid.
Loan Forgiveness of Payment Deferral Relief
The CARES Act also provides businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest and fees) for six months to one year. Lenders are required to provide such relief during the covered period. The Administrator has 30 days from enactment of the CARES Act to provide guidance to lenders on this process.
The program loans qualify for the CARES Act’s broader loan forgiveness provisions. Specifically, indebtedness is forgiven (and excluded from gross income) in the amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period, which is an 8-week period beginning on the date of the loan as follows:
- payroll costs (as defined above);
- mortgage interest;
- rent;
- certain utility payments.
To seek the loan forgiveness the borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments.
There are also provisions that could reduce the amount forgiven if the employer either:
- reduces the workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or
- reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period
This reduction can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period.
Article contributed by Brian Jamnik. For additional information, contact us at info@herbein.com.
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