The CARES Act and the Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law today allocates $350 billion for a Paycheck Protection Program (“PPP”) meant to provide immediate relief to small businesses (less than 500 employees) and other eligible entities impacted by the COVID-19 pandemic.
Process: The process for securing a PPP loan is fairly simple. The law allows Small Business Administration (“SBA”) approved lenders to provide eligible businesses loans of up to $10 million (based on a formula tied to payroll costs) for payroll and other expenses incurred between February 15, 2020 and June 30, 2020. To determine loan eligibility, a lender need only consider whether the borrower was in operation on February 15, 2020 and paid employee salaries and payroll taxes or paid independent contractors. There are separate provisions for new or previously closed businesses. The Act waives fees for both borrowers and lenders.
Loan Terms: A borrower is eligible for a loan equal to 2.5 months of regular payroll expenses, capped at $10 million. A borrower does not have to provide a personal guarantee or collateral to get a PPP loan. The loans have a maximum interest rate of 4% and only start to mature following the date the employer applies for loan forgiveness (see below). The loan can have a maximum maturity of ten (10) years from such date.
Allowable Uses: Employers can use the funds from loans for (1) Payroll costs; (2) Group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (3) Employee Salaries, commissions, or similar compensations (up to $100,000) (4) Payments of interest on mortgage obligations; (5) Rent (including rent under lease agreement); (5) Utilities; and (6) Interest on any other debt obligations incurred before the covered period.
Loan Forgiveness: A portion of the loan may be forgiven in an amount equal to payments made on eligible employee payroll costs, interest payments on a covered mortgage obligation, rent, and utility payments made during the first 8-weeks after the origination date of the loan. However, forgiveness amounts will be reduced proportionately for a reduction in employees compared to the prior year or reductions in salary in excess of 25%. ( Note that any loan funds used to pay any employee whose annual salary is in excess of $100,000.00 will not be eligible for forgiveness.)
In an effort to incentivize employers to rehire employees who have been laid off due to COVID-19, employers who rehire the laid-off employees by June 30, 2020 will not be penalized for having reduced payroll at the beginning of the forgiveness period.
Of note, Section 2302 of the CARES Act provides that employers can defer paying their portion of the social security payroll tax through December 31, 2020. However, if an employer’s PPP loan is forgiven, the employer will not be eligible for the payroll tax deferral.
Additional Guidance: The SBA is required to issue regulations within 15 days after the enactment of the CARES Act.
If you have additional questions, we invite you to contact one of our Attorney authors directly.