As the COVID-19 pandemic continues to ravage employer and employee alike, the federal government has stepped in and is attempting to provide relief to both. Their first attempt was the Families First Coronavirus Response Act (FFCRA) which, among other things, provided compensated sick leave to employees whose lives have been overturned by COVID-19.
On Friday, March 27th, 2020 the House of Representatives and the Senate have now both passed the CARES Act, which will provide similar relief for businesses. The CARES Act provides numerous benefits to employers who find themselves burdened by the pandemic.
What’s Included in the Legislation
Small Business Interruption Loans
The major provision of the CARES Act for most businesses is the introduction of forgivable loans for businesses that require additional funds for their operations. This program is an extension of the loan program outlined in the Small Business Act (SBA), many of the terms and conditions are identical.
– All employers with less than 500 employees are eligible to receive this loan. Sole proprietors and independent contractors are also eligible for this loan.
– Hospitality and dining services have special eligibility requirements. They will be eligible if their individual locations have less than 500 employees.
To be eligible, the employer will have to attest to the following statements:
– This loan is necessary for the employer to operate through the COVID-19 pandemic;
– These funds will be used for employee benefits/payroll and retention of employees; and
– The business has not applied for any other loans or has received duplicate amounts under this law.
The loan maximum is $10,000,000. However, this will not be the ceiling for all employers. This number can be reduced for the following reasons:
– Previous outstanding loans with the SBA;
– If 2.5x the monthly payroll costs of the employer in the previous year (on average) do not reach $10,000,00, the loan maximum will be the smaller amount. If the employer was not around in the previous year, then the employer must take 2.5x payroll costs between January 1 and February 29, 2020.
The CARES Act places some strings on the reception of federal aid. Specifically, the employer may only use this aid for the following purposes:
– Employee salaries (and other compensation)
– Mortgage payments/rent
– Payroll support (ex. Paid leave, group health care benefits)
– Debt obligations incurred before the coverage period
This loan program ends on December 31, 2020.
Loans made under this law are subject to a generous forgiveness program. Borrowers have the opportunity to qualify for complete deferment of payment on the loans for up to 1 year. This includes interest, fees, and the principal.
A loan recipient will be forgiven for indebtedness on a loan under this law equal to the cost of maintaining payroll continuity for the period of March 1-June 30, 2020 (coverage period). This includes employee salaries (but not salaries of $100,000 or greater) and employee benefits. All required payments under the FFCRA would fall into this forgiveness program.
There are two specific ways in which the amount of forgiveness an employer can receive will be reduced.
– Reduction for Employee Loss: Forgiveness will be reduced if the number of full-time equivalents during the coverage period is fewer than the number of full-time equivalents during that same period in 2019.
– Reduction for Employee Pay Cut: Forgiveness will be reduced by any reduction in excess of 25% of compensation to an employee in comparison to the previous full quarter (subject to $100,000 maximum salary or $33,333 salary during coverage period).
Any employer wishing to participate in loan forgiveness must provide documentation to the lender of pay rates and employment numbers to verify compliance with this law.
SBA Disaster Loan Program Extension
In addition to the loan program detailed above, the federal government is also expanding the SBA Disaster Loan Program. In addition to those businesses already eligible for Disaster Program loans, businesses with 500 or fewer employees as well as sole proprietorships and independent contractors are eligible for the expanded disaster loans.
The law waives the requirement for a personal guarantee on all loans $200,000 or lower. It also waives the requirement that an employer be in business for at least 1 year prior to the disaster. Finally, businesses no longer have to show that they were unable to find credit elsewhere.
While an application for a loan under the Disaster Loan Program Extension is being processed, a business may request an advance of $10,000 for that loan. The business need not repay that $10,000 even if the application is later denied. However, the advance may only be used for the following purposes:
– Providing sick leave to COVID-19-affected employees
– Repaying debts
This enhancement will be effective from January 31, 2020 to December 31, 2020.
Other Important Provisions
– The law delays payments under the IRS Section 6654 (failure to pay estimated tax) to an October 15 due date.
– Payroll taxes under the Social Security Act and the Railroad Retirement Act are deferred to December 2021 and December 2022.
– An HDHP will no longer fail just because it does not provide for telehealth services.
– HSAs and FSAs may now use funds for over-the-counter medical products.
– Employee Retention Credit: if an employer has been negatively affected by COVID-19 (business partially or fully suspended), then the employer may be eligible for Employee Retention Credit from the government. This credit would be the equivalent of 50% of the first $10,000 in wages for each employee.