The part of the Act known as the Keeping Americans Paid and Employed Act provides a comprehensive set of rules through which small business employers and employers of not more than 500 employees can maintain those employees on the payroll without incurring expense or significant expense. There is no requirement of ongoing operations. In a nutshell, and somewhat oversimplified, an eligible employer may obtain a loan to meet ongoing payroll obligations and, at the end of the day, for those funds so spent the “loan” will be forgiven. As with most such government arrangements, there are a number of conditions for obtaining such a loan, using the funds, and ultimately either obtaining a total or partial forgiveness. Moreover, as discussed further below, there are alternatives to the Paycheck Protection Loans which may ultimately be more suitable to the particular employer’s situation, such as tax credits to help offset a work slowdown.
Loan Eligibility
In general, any business concern, nonprofit organization, veteran’s organization, or Tribal business concern is eligible to receive a covered loan if it is either a “small business” [1] or employs not more than 500 employees. For purposes of determining whether a business is eligible, this article focuses on the expanded coverage offered by the Act rather than the traditional small business rules and regulations. The determination of whether a business concern, non-profit organization, veterans’ organization, or Tribal business concern employs not more than 500 employees, begins with the term ‘employee’ which includes individuals employed on a full-time, part-time, or other basis. Individuals employed on a part-time or other basis. Part-time and temporary employees are counted the same as full-time employees. Individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals are also eligible to receive a covered loan.
Loan Amounts
Subject to certain exceptions, the maximum PPP loan amount is 2.5 times the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, not to exceed $10,000,000. Alternatives for determining the amount are provided for certain circumstances, including, but not limited to, where an eligible recipient was not in business during the period beginning on February 15, 2019 and ending on June 30, 2019. Moreover, in the case of a seasonal employer (as determined by the Administrator) the average total monthly payments for payroll are determined from the 12-week period beginning February 15, 2019, or at the election of the employer, March 1, 2019, and ending June 30, 2019.
“Payroll costs” are the sum of payments of any compensation with respect to employees that is a:
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; and
payment of State or local tax assessed on the compensation of employees.
Although the Act also includes within “payroll costs” the sum of payments of any compensation to or income of a sole proprietor or independent contractor, the Interim Final Rule is clear that amounts paid to independent contractors are not considered for either payroll costs or forgiveness.
Payroll Costs also do not include the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period, taxes withheld or paid by the borrower for income tax or FICA and paid sick leave or paid family medical leave under the Families First Coronavirus Response Act. In addition, any compensation of an employee whose principal place of residence is outside of the United States is not a Payroll Cost.
Allowable Uses of Loans
During the covered period, an eligible recipient may use the loan proceeds to pay payroll costs, 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, 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.
Obtaining a Paycheck Protection Loan
In order to obtain a Paycheck Protection Loan, the Act requires that an eligible recipient must make a “good faith certification” of the following:
that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.
In addition to those matters required to be certified under the Act, the Updated Borrower Application includes numerous other matters to certify, including certification that no false statements or documents are being used to obtain the loan, the tax returns provided are identical to those submitted to the IRS and that:
That the Applicant is eligible to receive a loan under the rules in effect at the time the application is submitted that have been issued by the SBA implementing the Paycheck Protection Program.
That the Applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.
All SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the Paycheck Protection Program Rule.
To the extent feasible, the borrower will purchase only American-made equipment and products.
Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan will be provided to the lender.
Loan Forgiveness and Repayment
This is undoubtedly not only the goal of most employers but the Act as well in that the Act seeks to keep employees retained and paid, rather than being laid off or furloughed. The recipient is eligible for forgiveness of the PPP loan in an amount equal to the sum of certain costs incurred and payments made during the eight weeks following the date of the origination of the covered loan. A “covered loan” is a loan made under the Keeping Americans Paid and Employed Act during the period beginning on February 15, 2020, and ending on June 30, 2020. The “costs incurred and payments made” which are subject to forgiveness are: (1) Payroll costs; (2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); (3) Any payment on any covered rent obligation; and (4) Any covered utility payment.[2] Although such “costs incurred and payments made” are subject to forgiveness, whether the entire amount so spent is forgiven depends on whether the employer laid off and/or furloughed employees. Forgiven amounts are not taxable as income to the borrower.
In general, the amount of loan forgiveness is reduced, but not increased, by multiplying the amount subject to forgiveness by the quotient obtained by dividing the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period by either the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019 or the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020. The time period utilized is at the election of the borrower. A caveat to this approach is that in the case of an eligible recipient that is seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient is for the period beginning on February 15, 2019 and ending on June 30, 2019.
The amount of the Loan forgiven is also reduced by the total reduction in salary or wages during the 8 weeks following origination of the Loan of any employee earning less than $100,000 on an annualized basis that exceeds 25% of the total salary or wages of the employee during the preceding full quarter in which the employee was employed prior to the date of the Loan.
To the extent not forgiven, the PPP Loans will have the following terms:
2-year maturity period[3]
% interest[4]
No personal guarantees required
No recourse against owners, directors or officers of the borrower
Lenders are required to treat every borrower as having been impacted by the COVID-19 and to defer the loan repayment for no less than 6 months and no longer than 1 year if the borrower requests deferral.
Loans for Mid-Size Businesses Not Eligible for Paycheck Protection Loans
Mid-size businesses, which are not eligible for Paycheck Protection Loans, those with 500 to 10,000 employees, may be eligible for direct loans under the Emergency Relief and Taxpayer Protections of the Act. For a business to receive this type of loan under the Act, it must make a “good-faith certification” that it will comply with certain requirements listed in the Act. This certification will likely occur on a form provided as part of the application for the loan and the failure to comply with the certification could result in rescission of the loan.
There are several conditions the future compliance with which must be certified before receiving such a loan. Among other things, the business must certify that:
the uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient;
the funds it receives will be used to retain at least 90 percent of the recipient’s workforce, at full compensation and benefits, until September 30, 2020;
the recipient intends to restore not less than 90 percent of the workforce of the recipient that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than 4 months after the termination date of the public health emergency declared by the Secretary of Health and Human Services on January 31, 15 2020, under section 319 of the Public Health Services Act (42 U.S.C. 247d) in response to COVID–19;
the recipient is an entity or business that is domiciled in the United States with significant operations and employees located in the United States;
the recipient is not a debtor in a bankruptcy proceeding;
the recipient is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States;
the recipient will not pay dividends with respect to the common stock of the eligible business, or repurchase an equity security that is listed on a national securities exchange of the recipient or any parent company of the recipient while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
the recipient will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan;
the recipient will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan; and
that the recipient will remain neutral in any union organizing effort for the term of the loan.
SBA Economic Injury Disaster Loan (EILD)
In response to the pandemic, small business owners are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital loans of up to $2 million that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. Funds will be made available within three days of a successful application. Repayment terms may be as much as 30 years.
The Disaster Loan advance does not have to be repaid even if the loan application is subsequently denied, however, if the loan applicant that receives an advance transfers into, or is approved for, the Paycheck Protection PPP Loan, the advance amount is reduced from the loan forgiveness amount for a loan for payroll costs made under that program.
The Economic Injury Disaster Loans for small businesses have a fixed interest rate of 3.75 percent and for non-profit businesses a fixed interest rate of 2.75 percent. There is no payment for the first 12 months.
The Disaster Loan advance may be used to address any allowable purpose for a loan made under section 18 7(b)(2) of the Small Business Act, including:
providing paid sick leave to employees unable to work due to the direct effect of the COVID–19;
maintaining payroll to retain employees during business disruptions or substantial slowdowns;
meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
making rent or mortgage payments; and
repaying obligations that cannot be met due to revenue losses.
Tax Credits for Retaining Employees Despite Work Slowdown
The tax credit is available to employers who do not receive a Paycheck Protection Program Loan and whose operations were fully or partially suspended due to a COVID-19 related shut-down order, or whose gross receipts declined by more than 50% when compared to the same quarter in the previous year. Where the basis for receipt of the tax credit is a 50% decline in gross receipts, the employer remains eligible until gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.
The employee retention tax credit generally provides eligible employers with a refundable payroll tax credit (it is treated as an overpayment) for 50% of the qualified wages paid by employers between March 13, 2020, and December 31, 2020, for the first $10,000 of compensation, including health benefits, paid to an eligible employee. For employers with more than 100 full-time employees, “qualified wages” may include the employer’s contribution to the employee’s health insurance costs but excludes any amounts that the employer already received a tax credit for under the Families First Coronavirus Response Act (FFCRA). Moreover, “qualified wages” are wages paid to employees when they are not providing services due to the fully or partially suspended operations. For employers with 100 or fewer employees, all employees’ wages qualify for the credit, whether the employer is open for business or subject to the shutdown order.
Deferral of Payment of Payroll Tax
In an effort to provide employers more available cash, the Act provides that employers may defer payment of their portion of the Social Security taxes. Deferred payroll taxes are required to be paid over the next two years with half of the amount owed to be paid not later than December 31, 2021, and the remaining half by not later than December 31, 2022.
Changes to Leave Provisions of the Family First Coronavirus Relief Act (“FFCRA”)
There are several changes made in the Act to the FFCRA. While most of these are not relevant to the discussion here, the Act revises the EFMLA to address leave entitlement under that provision for rehired employees. The Act provides that for purposes of the EFMLA, the term “employed for at least 30 calendar days” 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.
The Act also revises the EFMLA by enabling employers to obtain an “advance” refunding of tax credits according to forms and instructions provided by the Secretary. The employer may anticipate the refunding of tax credits by withholding employment tax deposits and the Secretary of the Treasury shall waive any penalty for any failure to make a deposit.
Unemployment Insurance Provisions
The Act includes the “Relief for Workers Affected by Coronavirus Act” which provides for expansion of unemployment benefits to those whose employment has been adversely affected as a result of the impact of COVID-19. The subject period runs from January 27, 2020, to December 31, 2020. Covered individuals are provided with unemployment benefit assistance when they are not entitled to any other unemployment compensation or waiting period credit. The unemployment benefit provided by the Act is an additional $600 per week until July 31, 2020, on top of the amount determined under state law. In addition, the Act extends the period for unemployment benefits to 39 weeks. Any state waiting period is waived for purposes of the additional benefit provided for in these provisions.
Expanded Coverage and Eligibility
A ‘‘covered individual’’ is an individual who is not eligible for regular compensation or extended benefits under State or Federal law or pandemic emergency unemployment compensation, including an individual who has exhausted all rights to regular unemployment or extended benefits under State or Federal law or pandemic emergency unemployment compensation; and provides self-certification that the individual is otherwise able to work and available for work within the meaning of applicable State law, except the individual is unemployed, partially unemployed, or unable or unavailable to work because:
the individual has been diagnosed with COVID–19 or is experiencing symptoms of COVID–19 and seeking a medical diagnosis;
a member of the individual’s household has been diagnosed with COVID–19;
the individual is providing care for a family member or a member of the individual’s household who has been diagnosed with COVID–19;
a child or other person in the household 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 or facility care 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 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 concerns related to COVID–19;
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 has become the breadwinner or major support for a household because the head of the household has died as a direct result of COVID–19;
the individual has to quit his or her job as a direct result of COVID–19;
the individual’s place of employment is closed as a direct result of the COVID–19 public health emergency; or
the individual meets any additional criteria established by the Secretary for unemployment assistance under this section; or
is self-employed, is seeking part-time employment, does not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits under State or Federal law or pandemic emergency unemployment compensation and meets conditions for receipt of unemployment applicable to covered individuals generally listed above.
The Act also extends unemployment coverage to persons who are self-employed, who are seeking part-time employment, who do not have a sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits if they meet a qualifying condition. The Act excludes 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.
Unemployment Assistance to States
While there is little of concern to employers with regard to assistance to States, the provisions do include a matter of importance that the employer should communicate to employees being laid off or suffering reduced hours during the pandemic. The Act incentivizes states to provide the enhanced unemployment compensation without a waiting period that the State may currently impose so that unemployed individuals can start getting benefits immediately upon separation.
Direct Payments and other Assistance to Individuals
The Act provides for direct assistance payments to individuals. For most taxpayers filing individually with an adjusted gross income of $75,000 or less or $112,500 as head of household, the Act provides, generally, for a tax credit of $1,200 plus $500 for each child of the taxpayer. For joint taxpayers, the Act provides, generally, for a $2,400 tax credit when the adjusted gross income is not more than $150,000. The amount of the tax credit rebate is reduced when the adjusted gross income exceeds the cap at a rate of 5% per dollar of qualified income. As an example, the tax credit for a taxpayer filing single, without children, will be reduced to zero if the adjusted gross income is $99,000. Taxpayers who do not file under their SSN, usually filers using an Individual Tax Identification Number, are generally excepted.
In addition to the tax credit rebates, an individual may also access funds, up to $100,000, from a qualified retirement account without incurring an early withdrawal penalty when it is necessary to access those funds for COVID-19 related purposes. The income attributable to the distribution is subject to tax ratably spread over three years. The taxpayer may recontribute the funds within three years and in doing so is not subject to the cap on contributions. The Act also provides for special treatment of loans from specified retirement plans obtained for COVID-19 relief.
On a related note, given recent guidance with regard to eligibility for receive paid sick leave or expanded family and medical leave under FFCRA, which is effective April 1, 2020, unemployment insurance may be the only available assistance for an individual furloughed before the operative date of FFCRA. That guidance directs that if an employer furloughs an employee because it does not have enough work or business, the employee is not entitled to then take paid sick leave or expanded family and medical leave.
Health Care Provisions The Act continues the requirement that health insurers and group health plans cover certain COVID-19 diagnostic testing however, it omits previous language requiring that the testing be performed at a qualifying clinical lab. It also provides specific guidance on pricing and requires the federal government to require health insurers and group health plans to cover any “qualifying coronavirus preventive service.
The Act also does not disqualify high deductible health plans for failure to have a deductible for remote health care services such as telehealth. A safe harbor is provided for telehealth services provided in plan years beginning on or before December 31, 2021.
[1]Although the Act says “small business concern,” which, depending upon the industry may be defined under the Small Business Act by numbers of employees or amount of annual receipts, the Interim Final Rule appears to limit application of the PPP to small business concerns based the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.
[2] The Interim Final Rule however, provides that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.
[3] The Act provides for a maximum payback of 10 years however, the Interim Final Rule provides for a 2-year payback time.
[4] The interest rate is specified as a maximum interest rate of 4% however, the Interim Final Rule provides for an interest rate of 1.0 %.