Title 1: Keeping American Workers Paid and Employed Act
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “Act”) into law, which is intended to mitigate some of the economic effects that will occur as a result of a large percentage of the American workforce being unable to work and, consequently, earn an income as a result of the COVID-19 pandemic. This Act introduced an estimated $2 plus trillion into the economy and operates, mechanically, through the issuance of stimulus payments to individual citizens, the appropriation of additional funding for public health programs, and relaxed and broadened lending programs (including loan forgiveness) that are tailored to small businesses.
Rather than inundate you with a comprehensive summary of the entire 800-plus page Act, we felt that publishing a series of articles addressing specific provisions applicable to businesses and individuals would make this complex material easier to digest. This article focuses on Title 1 of the Act, titled “Keeping American Workers Paid and Employed Act.”
As always, we encourage you to contact our office if you have any questions about this publication or if you need any legal services or advice on solutions to issues that may impact your business, your customers, or your employees. We can also offer guidance on submitting and prosecuting applications for the various programs that are discussed in these updates. If you are interested in learning more about these programs, do not hesitate to contact our office.
Paycheck Protection Program.
Title 1 of the Act amends the Small Business Act of July 20, 1953 by creating an expansive new business loan program (the “Paycheck Protection Program”) that is intended to cover certain employer expenses that arise from February 15, 2020 through June 30, 2020 (the “Covered Period”). This is an incredibly attractive program for businesses with less than 500 employees as it does not require personal guarantees or the use of collateral. More importantly, if utilized correctly, a generous portion of loans issued under the Paycheck Protection Act can be forgiven without the resulting tax liability generally associated with discharging debt.
The following is a general overview of key provisions concerning the Paycheck Protection Program.
- Establishes a $349 billion loan program that is administered by the Small Business Administration (the “SBA”). Loans issued under this program are intended to cover operational costs like payroll, rent/mortgage payments, utility payments, health benefits, retirement benefits, insurance premiums, taxes, interest on debt accrued before the Covered Period, and the like.
- The loan excludes individual employee compensation in excess of $100,000 per year and sick and family leave wages that are provided under the Families First Coronavirus Response Act.
- Eligible businesses include:
- businesses who employ less than 500 employees (including part-time and full-time employees); or
- if applicable, the size standard in number of employees established by the SBA for the specific industry that the business operates within (a table of industry specific size standards can be accessed here).
- Please note, there are special eligibility rules for certain industries (such as hospitality and dining) that should be reviewed on a case by case basis.
- Sole proprietors, independent contractors, and eligible self-employed individuals are eligible for loans provided the applicant can provide sufficient documentation “as is necessary to establish such individual as eligible, including payroll tax filings reported to the IRS, Forms 1099–MISC, and income and expenses from the sole proprietorship.”
- Temporarily raises the maximum loan amount from $5 million to $10 million for loans issued during the covered period, subject to caps. The maximum value of a loan that can be made to an eligible company is equal to the lesser of:
- $10 million; or
- the sum of 2.5 times the average monthly payroll cost for one-year preceding the date of the loan. The maximum loan for seasonal businesses is equal to the average expenses, beginning on February 15, 2019, or from March 1, 2019 to June 30, 2019.
- Temporarily guarantees 100% of the loans, regardless of size.
- Traditionally, loans up to $150,000 were 85% guaranteed by the SBA and loans greater than $150,000 were 75% guaranteed.
- Lenders are not permitted to require collateral or personal guarantees as a condition of issuing a loan, there are no SBA fees associated with the loan (roughly 2-3.75% savings), and there are no prepayment penalties.
- Shareholders, members, partners, and owners are not personally liable on the loan unless the particular individual uses the loan for an improper purpose.
- Loan terms are still negotiated between borrowers and lenders and are a product of the prime rate, plus the LIBOR rate; however, rates may not exceed 4%.
- Increases the loan limit for the SBA’s express loan program to $1,000,000.
- Businesses that received financing under the Disaster Loan Program that was established by the first coronavirus response package may refinance those loans using the Paycheck Protection Program. Any loans that are refinanced using the Paycheck Protection Program will reduce the maximum loan that may be available.
- The application process is straightforward and only requires a good-faith certification of the following:
- the loan is needed to continue operations during the pandemic;
- funds will be used to retain workers and other eligible purposes;
- there are no other applications for the same type of loan pending; and
- the applicant has not received any other loans under the program.
- Offers Loan Forgiveness and Payment Deferral.
- Businesses that were operating on February 15, 2020 and have a pending or approved loan application will be presumed to qualify for a complete payment deferment (including principal, interest, and fees) for six months to one year.
- The loan will be forgiven (and excluded from gross income) in an amount equal to the following costs:
- interest payments and mortgages;
- rent; and
- The amount that can be forgiven is reduced if the employer makes any employee reductions; however, the employer can mitigate this reduction by rehiring employees.
- Employers with tipped employees (as defined in the FLSA) may receive forgiveness for additional wages paid to those employees.
- Within 90 days of forgiveness, the SBA must remit payment, plus interest, to the lender.
- This discharge of indebtedness is a tax-free event (normally would qualify as gross income).
- Any loan balances that remain after forgiveness are still guaranteed by the SBA.
SBA Disaster Loan Program.
Title 1 acts to expand the SBA Disaster Loan Program for loans issued between January 31, 2020 and December 31, 2020 through the following:
- Expands the definition of eligible entities to include:
- businesses with less than 500 employees;
- sole proprietorships and independent contracts (with and without employees);
- cooperatives and ESOPs with less than 500 employees; and
- tribal business concerns.
- Waives certain requirements, such as:
- personal guarantees for loans of $200,000 or less;
- a requirement that the business be in operation for 1 year; and
- a requirement that the business exhaust all other credit opportunities.
- Permits business to request an emergency advance of up to $10,000 which does not need to be repaid, even if the application is later denied. The advance is to be issued within three days of an application and can be used for things such as:
- providing sick leave;
- maintaining payroll;
- meeting increased supply chain costs;
- making rent or mortgage payments;
- repaying debts that cannot be repaid due to a loss of revenue.
- Expands coverage to all states and subdivisions by deeming COVID-19 as having caused sufficient economic damage nationwide.
In addition to these expansions, the law directs the SBA to issue regulations to carry out the provisions of Title 1 within 15 days of enactment of the law. The typical notice requirements for rulemaking have been waived, which will allow for accelerated rulemaking procedures. We will address those regulations in a supplemental newsletter.