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March 28th, 2020
Aid for Small Business and Employees Affected by COVID-19
On Friday afternoon, the House passed and the President signed the Coronavirus Stimulus package, now known as the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act pumps $2.2 trillion into the American economy to combat the effects of the Coronavirus. Below is a summary of the key provisions of the CARES Act that will provide assistance to workers and small businesses.
Paycheck Protection Program (“PPP”)
This portion of the CARES Act provides $350 billion to help prevent small business closures and job losses. Here is what we know so far:
- The Small Business Association (“SBA”) will work with local banks to facilitate the PPP Loans to “Eligible Recipients”.
- Eligible Recipients under the PPP include businesses and certain nonprofits with fewer than 500 employees, self-employed individuals, independent contractors, and “gig economy” workers.
- The size of PPP Loans would equal 250 percent of an employer’s average monthly payroll costs (subject to a cap of $100,000 of annual salary per employee), with a maximum loan of $10 million.
- For eligibility purposes, applicants will have to show that the business was operational on February 15, 2020 and that it had employees or independent contractors for whom it paid wages and applicable payroll taxes.
- Allowable uses for funds received from a PPP Loan are: payroll, insurance group premiums, payment of mortgage interest, rent, utilities and “interest on other debts”.
- PPP Loan Applicants will have to provide a good faith certification attesting that “the uncertainty” of the “current economic conditions” make this loan necessary to support their “on-going operations”; that the funds will be used for the permitted purposes; and that they are not currently receiving funds from or have an application pending for a similar SBA loan.
- The PPP waives the SBA loan requirements of collateral or a personal guarantee. All PPP Loans are guaranteed by the federal government.
- All fees associated with PPP Loans are waived, and all payments (including interest payments) are deferred for one year and there is no prepayment penalty.
- The period for PPP Loans is from February 15, 2020 through December 31, 2020,during which time applications may be submitted.
The CARES Act provides loan forgiveness as follows:
- The lender will forgive the portion of the PPP Loan used for payroll, utility payments, and rent or mortgage interest payments made over an eight-week period beginning on the date of origination of the loan. To be eligible, the utility services, mortgages, and leases must have been in place before February 15, 2020. For example, payments made toward a lease entered into on March 1, 2020 will not be eligible for forgiveness. Also, payroll costs for compensation above $100,000 are not eligible for loan forgiveness. In aggregate, the forgiveness amounts cannot exceed the principal amount of the loan.
- An application for forgiveness must include: (a) state and federal payroll tax filings; (b) documents (such as cancelled checks) showing payments for mortgage interest, rents, and utilities; and (c) a certification by the borrower that these documents are true and accurately represent the amounts for which the borrower is seeking forgiveness. The lender has 60 days from the date of the application to determine forgiveness.
- The amount of loan forgiveness will be reduced proportionally by: (a) any reduction in employees retained compared to the prior year and (b) the reduction of pay of any employee in excess of 25% of the prior year’s compensation. However, borrowers who re-hire workers previously laid off due to the COVID-19 crisis will not be penalized for having a reduced payroll at the beginning of the period.
- Any portion of a PPP Loan not forgiven must be paid back within a maximum term of 10 years and a maximum rate of 4%, commencing on the date the application for forgiveness is submitted.
- Any cancelled indebtedness under the PPP will not be included in the borrower’s taxable income.
According to the CARES Act, PPP Loans will be available immediately. Treasury Secretary Steven Mnuchin said that new regulations would make it possible for “almost all FDIC-insured banks to make the SBA loans” and that he expects “by the end of next week” to have “a very simple process where these [loans] can be made and dispersed in the same day.”
We will continue to monitor developments on the procedures to apply for PPP Loans and update our clients as soon as we have that information.
Expansion of Unemployment Insurance
The key details of this portion of the CARES Act are:
- Eligibility is expanded to include independent contractors, free-lancers, and “gig” workers.
- The federal government will augment the state unemployment payments by $600 over the next four month. This means, for example, that someone receiving the maximum amount of unemployment in California of $450 per week will now receive weekly checks of $1,050.
- Enhanced checks are scheduled to be received in approximately three weeks.
- People who are currently receiving paid sick leave or any other paid leave benefits are not eligible to receive payments pursuant to this provision of the CARES Act.
- People can apply for unemployment insurance benefits via the website for their state’s agency that administers unemployment insurance (in California the website is www.edd.ca.gov).
Direct Payments to American Families
The CARES Act allocates $301 billion in “household payments” which include:
- A $1,200 payment to each single adult making less than $75,000 per year. Married couples with no children making a combined $150,000 or less will receive a total of $2,400 and taxpayers filing as head of household would get the full payment if they earn $112,500 annually or less. Payments above these levels decease and stop altogether for single people earning $99,000 or married couples without children making a combined $198,000. These income levels are based on 2019 tax returns, or 2018 returns if a 2019 return has yet to be filed.
- A $500 payment will be sent to households for each child in it under the age of 16.
- There is no application process for these payments and if the IRS already has a taxpayer’s bank account information, it will transfer the money via direct deposit.
- People will not receive these payments if someone declares them as a dependent or if they do not have a valid social security number (with exceptions for members of the military).
There are many more provisions of the CARES Act that benefit American families and businesses, and we will provide information on those in the coming days. In the meantime, if you have any questions regarding any of the CARES Act provisions summarized above, or any other employment law questions, please contact, Tricia Legittino at (310) 579-9632 firstname.lastname@example.org, Wendy Stryker at (212) 705-4838 email@example.com or any other member of the Frankfurt Kurnit Employment Compliance, Training & Litigation Group.
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