COVID-19 (Coronavirus) – Highlights of CARES Act
$2 Trillion Dollar Stimulus Bill Signed into Law – But Will it Help You?
A summary of the significant provisions for employers in the over 800 pages of legislation is below.
Paycheck Protection Program (“PPP”)
The “Paycheck Protection Program” (the “PPP”) is the most significant provision of the CARES Act for small businesses. The PPP is administered by the Small Business Administration (the “SBA”) and allows employers to obtain forgivable loans to pay for business expenses, including payroll expenses. Such payroll expenses include health insurance, sick leave, retirement, and other benefits. Businesses can also use the loans to pay for mortgage interest expenses, rent expenses, and utility expenses. Generally, as long as certain conditions are met, the principal balance of these loans will be forgivable after June 30, 2020.
Employers with 500 or fewer employees are eligible for loans under the PPP. Those who are self-employed and also independent contractors and sole proprietors are eligible. Hospitality-based businesses (those whose NAICS code begins with “72”) are eligible as long as the business has 500 or fewer employees in any one location. For example, a restaurant franchisee with 1,000 employees (but no more than 500 employees at any one location) could qualify.
The amount that may be borrowed under the PPP is generally calculated as follows:
The lesser of:
- 2.5 times the average monthly payroll expenses for the year 2019, or
- 2.5 times the average monthly payroll expenses for the period of time from March 1, 2019 to June 30, 2019, or
Example: An employer who has an average monthly payroll of $100,000 over the prior year would be eligible for a loan of $250,000 ($1,000 average monthly payroll times 2.5).
Loans made under the PPP may be used by employers to pay payroll costs, costs related to the continuation of group health care benefits including insurance premiums, employee salaries, commissions or similar compensations, payment of interest on mortgage obligations incurred prior to March 1, 2020 (but not including prepayments or principal payments), rent expenses, utilities, and interest on any other debt obligations incurred before March 1, 2020.
“Payroll costs” include:
- Salary, wage, commission, or similar compensation;
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; or
- Payment of State or local tax assessed on the compensation of employees.
“Payroll costs” do not include:
- The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the “covered period” (March 1, 2020 to June 30, 2020);
- Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period;
- Any compensation of an employee whose principal place of business is outside the United States;
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (the “FFCRA”); or
- Qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA.
Process for Obtaining a Loan
Employers may go to any existing SBA 7(a) approved lender, or additional lenders determined by the SBA and the Secretary of the Treasury to have the necessary qualifications to process, close, disburse and service loans made with an SBA guarantee.
Employers will be required to self-certify (1) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the employer; (2) that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (3) that the employer does not have an application pending for a PPP loan for the same purpose and duplicative of amounts applied for or received under a PPP loan; and (4) during the period beginning February 15, 2020 and ending on December 31, 2020, that the employer has not already received amounts under the PPP.
Additional Benefits of the Loan
The PPP waives guarantee and other servicing fees, does not require certification that the employer is unable to obtain credit elsewhere, waives personal guarantee requirements, caps the interest rate at 4%, provides complete payment deferment relief (including payment of principal, interest and fees) for not less than 6 months and not more than 1 year, waives prepayment penalties, and does not preclude recipients of economic injury disaster loans for purposes other than payroll costs.
Generally, subject to the limitations on loan forgiveness described in the next section below, the principal balance is eligible for loan forgiveness as long as the loan is used for those items defined above as permissible “payroll costs.” This forgiven debt will be treated as cancellation of indebtedness income except that it will not be included in the employer’s gross income.
To apply for loan forgiveness, employers will need to deliver the following documentation to the lender:
- Documentation verifying the number of full-time equivalent (“FTE”) employees on payroll and their respective pay rates for the period of January 1, 2020 to June 30, 2020 (including payroll tax filings);
- Documentation confirming rent, utilities or mortgage interest payment amounts;
- Certification from the employer confirming the truth of the documentation; and
- Any other documentation the SBA may request.
Limits on Loan Forgiveness
If an employer reduces its workforce after obtaining a loan, the amount of principal eligible for forgiveness will be reduced. Further, if an employer has already laid off employees prior to the enactment of the CARES Act, that employer will have to rehire its employees or otherwise close the gap between its workforce number as of February 15, 2020 and its workforce number on the date that is 30 days after the enactment of the CARES Act. This rehiring must occur no later than June 30, 2020.
Additionally, any reduction in compensation to employees in excess of 25% of the employees’ compensation as of February 15, 2020, will also lead to a reduction in the amount of principal eligible for forgiveness. However, employees making more than $100,000 may have their salaries reduced by more than 25% and not have such reduction counted against the amount the employer is entitled to forgive.
Emergency Relief and Taxpayer Protections
Mid-sized businesses (those with 500 to 10,000 employees) are also eligible for loans under the Emergency Relief and Taxpayer protections portion of the CARES Act if they make a “good-faith certification” that they will comply with certain requirements listed in the CARES Act.
Among other things, the business must certify that it will do certain things meant to maintain its workforce, including:
- It intends to re-store at least 90% of its workforce as of February 1, 2020, including re-storing all compensation and benefits for employees as of the same date. This restoration must be accomplished no later than 4 months after Health and Human Services declares an end to the public health emergency related to COVID-19;
- It will not outsource jobs during the term of the loan (which cannot exceed five years) and for two years after repaying the loan.
Employee Retention Tax Credit
The CARES Act also provides for a new “employee retention tax credit.” This tax credit is not available to employers that receive the small business PPP loans set forth above. Eligible employers will get a refundable payroll tax credit for 50% of the wages paid by employers during the COVID-19 crisis. It applies to wages paid between March 13, 2020 and the end of the year.
This tax credit is available to employers whose:
- Operations were fully or partially suspended due to a COVID-19 related “shut-down order,” or
- Gross receipts declined by more than 50% when compared to the same quarter in the previous year.
Amount of Credit
The tax credit is provided for the first $10,000 of compensation (including health benefits) paid to an eligible employee . The credit is capped at $5,000 (50% of $10,000 qualified wages) per employee for all calendar quarters.
For employers with more than 100 full-time employees, “qualified wages” may include the employer’s contribution to the employees’ health insurance costs but will exclude any amounts that the employer already received a tax credit for under EFMLA or EPSL (the Family Medical Leave and Paid Sick Leave provided for under the Families First Coronavirus Response Act). Further, “qualified wages” must be wages paid to employees when they are not providing services due to COVID-19 reasons.
For employers with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.
Payroll Tax “Holiday”
Under this section, employers may defer payment of their portion of Social Security taxes that they would otherwise be obligated to pay. Any deferred payroll taxes would be required to be paid over the next two years, with half of the owed amount being required to be paid by December 31, 2021, and the remaining half by December 31, 2022.
Changes To The Families First Coronavirus Response Act (“FFCRA”)
Clarification Regarding Re-Hired Employees
The CARES Act also makes changes to the recently enacted FFCRA. The CARES Act adds new language to the EFMLA portion of the FFCRA to address leave entitlement for “rehired employees.” The new language states that for purposes of the EFMLA, the term “employed for at least 30 calendar days” (which makes an employee eligible to receive benefits under the EFMLA) includes an employee who was laid off on or after March 1, 2020, had worked for the employer for not less than 30 of the last 60 calendar days prior to their layoff, and was rehired. In other words, this new language provides that rehired employees who meet these criteria will be eligible for EFMLA without having to “restart the clock” on the 30-day requirement if they are rehired.
The CARES Act also includes language confirming an employer’s ability to obtain an “advance” refunding of tax credits by withholding employment tax deposits. The IRS recently announced that it would be issuing guidance on this points.
Unemployment Insurance Provisions
The CARES Act expands unemployment assistance by creating a Pandemic Unemployment Assistance program through December 31, 2020. For weeks of unemployment, partial unemployment, or inability to work caused by COVID-19, between January 27, 2020 and December 31, 2020, the Act provides covered individuals with unemployment benefit assistance. The benefit amount is generally the amount determined under state law plus an additional $600 until July 31, 2020. Although the additional $600 per week is only available for the next four months, the maximum entitlement period has been expanded to 39 weeks as compared to the usual 26 weeks typical of most states, including California.
Individuals will have to provide self-certification that the individual is otherwise able to work and available to work and is unemployed, partially unemployed, or unable to work for one of the following reasons:
- The individual is diagnosed with COVID-19 or experiencing COVID-19 symptoms and seeking medical diagnosis;
- A member of the individual’s household was diagnosed with COVID-19;
- The individual is caring for a member of their family or household who was diagnosed with COVID-19;
- A child or person for which the individual has primary caregiving responsibility is unable to attend school or another facility that is closed as a direct result of the COVID-19 public health emergency and such school/facility is required for the individual to work;
- The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of COVID-19 public health emergency;
- The individual is unable to reach the place of employment because a health care provider advised to self-quarantine due to COVID-19 related concerns;
- The individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of the COVID-19 public health emergency;
- The individual became the breadwinner or major support because the head of household died from COVID-19;
- The individual quit as a direct result of COVID-19;
- The individual’s place of employment is closed as a direct result of COVID-19 public health emergency; or
- The individual meets additional criteria which will be established by the Secretary of Labor.
These unemployment provisions of the Act do not apply to those who would otherwise be a covered individual if they have the ability to telework with pay or if they receive paid sick leave or other paid leave benefits.
Don't forget . . .
You must conspicuously post information regarding The Families First Coronavirus Response Act so employees are aware of the emergency FMLA and paid sick leave available from covered employers. The English and Spanish versions of the posters can be found at: https://www.dol.gov/agencies/whd/pandemic
|ERICA M. SOROSKY
|ERIN K. OYAMA