The Coronavirus Aid, Relief and Economic Security Act (CARES Act) is a $2 trillion stimulus package intended to mitigate the economic impact of the COVID-19 pandemic. It includes relief programs for small businesses and employees, as well as other relief, and contains some modifications to the Families First Coronavirus Response Act. This is a brief overview of small business relief programs and employee financial assistance provided through the CARES Act.
Small Business Administration Programs
The CARES Act establishes several programs designed to assist small businesses through the pandemic and authorizes the Small Business Administration (SBA) to develop guidance and regulations. The SBA has issued some guidance and additional specifications for the programs, but more information is expected.
1. Paycheck Protection Program
The CARES Act allocates $349 billion to the SBA for the Business Loans Program Account for a Paycheck Protection Program (PPP). The program provides capital to cover the costs of retaining employees. The loans are intended to provide 8 weeks of assistance for certain overhead costs through 100% federally guaranteed loans to small employers who maintain their payroll during this pandemic. The program is designed to help workers stay employed and businesses to ride out the crisis.
To be eligible, borrowers need to have been in operation on February 15, 2020 and either had employees for the borrower paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
Subject to specific eligibility requirements, these PPP loans are generally available to:
• Small businesses and certain nonprofits, veteran organizations and tribal small business concerns with fewer than 500 employees;
• Hospitality businesses with fewer than 500 employees at each location;
• Certain franchises; and
• Sole-proprietors, independent contractors, and self-employed individuals.
The CARES Act provides for a waiver of fees and no prepayment penalties. It also eliminates certain eligibility requirements normally required for SBA loans. Borrowers will not be required show an inability to obtain credit from other sources and will not be required to provide personal guarantees or secure the loans with collateral. The loan proceeds can be used to cover:
• Payroll costs (as noted below);
• Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• Employee salaries, commissions, or similar compensations (see exclusions above);
• Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
• Rent (including rent under a lease agreement);
• Utilities; and
• Interest on any other debt obligations that were incurred before the covered period.
SBA 7(a) lenders will approve and make the loans to eligible borrowers, not the SBA itself. Additional lenders are being allowed to participate in the program. Lenders must also provide full payment deferral for impacted borrowers, including payment of principal, interest, and fees for at least 6 months, but not to exceed 1 year.
The program is retroactive to February 15, 2020 to help bring workers back on the payroll who have already been laid off. Loans are available through June 30, 2020. Although the CARES Act provides for loan terms up to ten years with a maximum interest rate of four percent, the SBA has shortened the maturity period to two years and established an interest rate of one percent.
Eligible businesses can receive loan amounts up to $10 million based on a formula of two and one-half times the business’ average monthly payroll costs, which may include:
• Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent);
• Payment for vacation, parental, family, medical, or sick leave (except emergency sick leave paid under the Families First Act);
• Allowance for dismissal or separation;
• Payment required for the provisions of group health care benefits, including insurance premiums;
• Payment of any retirement benefit; and
• Payment of State or local tax assessed on the compensation of employees.
Employee/owner compensation over $100,000 is not eligible as part of the calculation. Compensation for employees who reside outside the United States and for certain taxes are also not eligible.
The PPP also contains a loan forgiveness component for borrowers who have been adversely impacted by COVID-19, which is intended to incentivize small businesses to avoid laying off workers. If the employer maintains payroll, the portion of the loans used for covered payroll costs (excluding compensation over $100,000), interest on mortgage obligations, rent, and utilities would be forgiven, which would help workers to remain employed and assist small business to stay afloat.
There are certain caps on the loan forgiveness amount. If a business reduces its workforce or reduces its amount of employee pay, the loan forgiveness is also reduced proportionally. This is another incentive to keep employees on the payroll. The loan forgiveness is retroactive to cover loans issued from February 15, 2020 to June 30, 2020, which is intended to encourage rehiring.
2. SBA Economic Injury Disaster Loans & Emergency Economic Injury Grants
Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants (Emergency Grants) are two programs designed to work in conjunction with each other. Economic Injury Disaster Loans are lower interest loans up to $2 million, with possible principal and interest deferment, to pay for operating expenses that could have been met but for the disaster. EIDL is available to small businesses and non-profits that have been in operation since January 31, 2020. These disaster loans can be refinanced into a PPP loan.
Emergency Grants provide for emergency advances of up to $10,000 within three days of applying for Economic Injury Disaster Loan to small business (under 500 employees), sole proprietors, independent contractors, tribal small business concerns, private non-profits, and small agricultural cooperatives harmed by COVID-19. The advance does not need to be repaid. The Emergency Grants can be used to keep employees on the payroll, pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations (including debts, rent, and mortgage payments). The Emergency Grants are backdated to January 31, 2020.
3. Small Business Debt Relief
The Small Business Debt Relief (Debt Relief) program provides immediate relief to small businesses with certain non-disaster SBA loans. Under this Debt Relief program, the SBA will cover loan payments (including principal, interest, and fees) for six months. The program is also available to new borrowers who take loans within 6 months of the CARES Act but does not apply to PPP loans. There are specific eligibility requirements and permitted uses for the loan proceeds.
Short-Time Compensation Programs
Workshare or short-time compensation programs are complements to unemployment programs. These programs allow workers who work only a portion of the week to collect unemployment benefits in addition to their regular pay. The CARES Act provides funding of short-time compensation to employers who reduce employee hours instead of laying off workers, while maintaining health benefits and retirement benefits for employees. Employers must submit their short-time compensation program plans to the State for approval and satisfy other program requirements. The program ends December 31, 2020.
Delay of Pension Plan Payments
The CARES Act also allows for certain pension and retirement plans to delay due dates for employer contributions and to waive required distribution rules. Single-employer pension plan companies may delay until January 1, 2021 the due dates for any contributions that would otherwise be due in 2020. The CARES Act also allows for a waiver of the required minimum distribution rules for certain defined contribution plans and IRAs for 2020.
Refundable Payroll Tax Credit:
The CARES Act includes a refundable payroll tax credit through which employers would be able to receive a payroll tax credit for 50% of the wages paid to employees, up to $10,000 per employee. It applies to employers fully or partially prohibited from operating during the crisis, or whose receipts declined more than 50% for that quarter from 2019. The credit maximum is the amount of payroll taxes owed in the quarter. If the amount of the credit exceeds the limits, the employer can seek a refund of the excess.
Delay of Employer Payroll Taxes
Eligible employers are permitted to defer the payment of their share of payroll taxes owed between now and December 31, 2020. Under this program, payment of 50% of the payroll taxes owed can be delayed until December 31, 2021, and the other 50% until December 31, 2022.
Employee Relief – Use of Retirement Savings
The CARES Act includes a program that assists employees having financial difficulties due to COVID-19 by permitting them to utilize certain retirement savings to get back on their feet. One program allows workers adversely impacted by COVID-19 to withdraw up to $100,000 from their 401(k) or another defined contribution plan without the 10% penalty for early withdrawal. It is applicable to withdrawals made between January 1, 2020 and December 31, 2020. Workers can also take larger loans against their accounts. Loan limits are increased from $50,000 or half of the account balance to loans of $100,000 or the full account balance. More specifically, these programs are available to workers diagnosed with COVID-19, or whose spouse or dependent is diagnosed, or who experience “adverse financial consequences” because of the pandemic.
Employee Relief – Increased Unemployment Benefits
The CARES Act provides for expanded and additional unemployment benefits beyond those previously included in the Families First Coronavirus Response Act that preceded the CARES Act. The Families First Coronavirus Response Act allocates funds to enhance State unemployment programs through agreements with State governments.
The CARES Act expands traditional unemployment insurance benefits. For example, individuals who are self-employed, seeking part-time employment or are independent contract workers who are unable to work as a direct consequence of the COVID-19may now to apply for unemployment benefits during the crisis. In addition, individuals who would not otherwise have sufficient work history to qualify may now be eligible for unemployment benefits. In applying for these expanded benefits individuals will be required to self-certify that they are able and available to work but are unemployed due to the following:
• The individual has been diagnosed with COVID-19 or is experiencing symptoms and seeking medical diagnosis;
• A member of the individual’s household has been diagnosed with COVID-19;
• The individual is caring for a family or household member who has been diagnosed with COVID-19;
• The individual is the primary caregiver of a child or other person in the household who is unable to attend school or other facility that is closed because of a COVID-19 closure and such school or facility care is required for the individual to work;
• The individual cannot reach his or her place of employment because of a quarantine imposed as direct result of the COVID-19 public health emergency;
• The individual is unable to reach the place of employment because the individual has been advised by a health care provider to self-quarantine due to COVID-19 concerns;
• The individual was scheduled to start work but does not have a job or cannot reach the job as a direct result of COVID-19 public health emergency;
• The individual becomes the breadwinner of the household because the head of the household has died because of COVID-19;
• The individual has had to quit his or her job as a direct result of the COVID-19 public health emergency; or
• The individual’s employer has closed because of the COVID-19 public health emergency.
Individuals are not eligible for these benefits, however, if they are receiving paid sick or paid family leave or if they are able to work remotely.
A benefit of $600 per week is also available for up to four months (until July 31, 2020). These monies are in addition to standard State unemployment benefits.
The CARES Act also provides for 13 weeks of additional unemployment benefits that will be available through to December 31, 2020. Many states, including New Jersey, allow for up to 26 weeks of unemployment. As a result, up to a total of 39 weeks of benefits may now be available to eligible individuals. Further, the CARES Act leaves open the possibility for an expansion of benefits, but as it stands now, the maximum available is 39 weeks.
In addition, the CARES Act provides for funding to permit the first week of unemployment to be paid to individuals who are eligible. This would eliminate the imposition of any one-week waiting period that would otherwise be required before benefits can be accessed.
The Small Business Administration and the United States Department of Labor have already begun to adopt regulations and rules and to issue guidance giving greater clarity on how these programs are being implemented. More information can be found at www.sba.gov and www.dol.gov.
This summary is for informational purposes only and is not intended to constitute legal advice. This information may not be reused or published without prior permission from KSBranigan Law.
