The CARES Act Paycheck Protection Plan for Small and Medium Sized Business

The most significant provision of the CARES Act (which still has to be passed by the House)for employers provides for “paycheck protection” loans administered by the Small Business Administration (SBA) to help employers continue to cover payroll costs and other expenses during the COVID-19 pandemic. The covered period for loans is February 15, 2020 through June 30, 2020.

Eligibility

These loans are available for businesses with up to 500 employees. Businesses in the hospitality industry (those in the Accommodation and Food Services sector with a NAICS Code of 72) are eligible for a loan as long as they employ not more than 500 employees “per physical location.”
In addition, the SBA generally has eligibility guidelines (“affiliation rules”) to determine whether a business qualifies as “small.” Under the CARES Act, these “affiliation rules” are waived for (1) NAICS Code 72 businesses that employ not more than 500 employees; (2) franchises; or (3) businesses that receive financial assistance from a small venture investment company licensed under the SBA.

Lenders will determine eligibility for the loans based on whether the business was operational as of February 15, 2020, had employees on payroll, and paid wages and payroll taxes.

Loans Fund Usages

The loans may be used for payroll costs, healthcare, rent, utilities, and other debts incurred by the business. Importantly, the definition of “payroll” costs excludes leave payments made pursuant to the new Families First Coronavirus Response Act (FFCRA). Reimbursement for those leave payments is made through the tax credit process enacted as part of that legislation.

Loan Amounts

Loan amounts will be available based on a formula. The amounts available will be the lesser of:

Average monthly payroll costs during the prior year x 2.5; or

$10 million

Loan Forgiveness

The federal government will forgive the loans in an amount equal to the amount of qualifying costs spent during an eight-week period after the origination of the loan. These qualifying costs include payroll costs (except of wages above $100,000 per employee), interest on secured debt obligations, and rent and utilities in place prior to February 2020.

The amount of the forgiveness for the loans will be reduced if the employer:

Reduces its workforce during the eight-week period compared to prior periods; or

Reduces the salary or wages paid to an employee by more than 25% during the 8-week period (compared to the most recent quarter).

In addition, any reduction in the amount of loan forgiveness will be completely avoided if the employer re-hires all employees laid off (going back to February 15, 2020), or increases their previously reduced wages, no later than June 20, 2020. These provisions are designed to provide an incentive to employers to not lay off workers (and to rehire them) and instead utilize the loan amounts to pay payroll and other expenses.

The Process

Paycheck protection loans are fully guaranteed by the federal government through December 31, 2020 (previously guaranteed at 85%). The standard fees under section 7 of the Small Business Act are waived and there is no requirement that the loans be personally guaranteed by the borrower. Loans will be available immediately through SBA-certified lenders, which include banks, credit unions, and other financial institutions. The SBA will also be required to streamline the process to include additional lenders into the program and to ensure that funds are dispersed to qualified businesses as soon as possible. The deadline to apply for paycheck protection loans is June 30, 2020.

We will report new information as it becomes available.