Stimulus Relief: Loans Available to Help Employers Make Payroll

The recently enacted stimulus legislation, including the CARES Act, frees up hundreds of billions of dollars that will help relieve the huge economic costs visited on employers by the COVID-19 pandemic. Among other things, the recent legislation allows small-business employers to apply for and obtain loans under a new Paycheck Protection Program ("PPP"). We highlight PPP provisions of interest to employers below. Note that the legislation includes a tremendous degree of detail, too extensive to cover here. Please feel free to contact us to discuss how specific PPP details might apply to your company.

Paycheck Protection Program

PPP loans enable eligible employers to cover several types of expenses, including qualifying payroll costs (see sidebar). The PPP provides loans of up to $10 million to small businesses, including certain nonprofits, to cover up to 2½ months of payroll costs through June 30, 2020.

Employers are eligible if they have 500 or fewer employees (counting full-time and part-time workers). Loans are also available to sole proprietors, independent contractors, and other self-employed individuals. A special provision applies to entities providing accommodation and food services in multiple locations. Those entities qualify for loans if they have no more than 500 employees at any given physical location.

A borrower’s maximum loan amount is determined by a formula considering payroll costs. Beyond those costs, loans may also be used for certain rent, utilities, interest payments on mortgage obligations (but not principal), and interest payments on prior debt obligations.

Eligible employers can obtain PPP loans through private lenders without personal guarantees, pledging of collateral, or lender and prepayment fees. PPP loans are fully guaranteed by the Small Business Administration (“SBA”) under Section 7(a) of the Small Business Act. These loans may subsequently be refinanced and will have a maximum interest rate of 4%. Lenders are required to grant borrowers payment deferment relief for at least six months, but not longer than one year. If the loan is subsequently sold to an investor who refuses to grant the deferment, the SBA will purchase the loan so the borrower may receive the deferment.

Loan Forgiveness

The CARES Act allows for a portion of PPP loans to be forgiven on a tax-free basis. This measure is designed to provide cash flow assistance to employers who maintain their payroll.

An employer may be eligible for loan forgiveness in the amount it expends on payroll costs, mortgage interest payments, rent, and utility payments made during the first eight weeks of the loan. Eligible loan recipients with tipped employees may receive forgiveness for any tipped wages paid to those employees. The amount forgiven may not exceed the principal amount of the loan.

However, any significant reduction in employee pay, or a reduction in workforce, will decrease the amount of loan forgiveness available. The following rules determine reductions in loan forgiveness relating to pay cuts:

  • The reduction in loan forgiveness is a dollar for dollar reduction; if an employee’s salary is reduced by $15,000, the SBA will not forgive at least $15,000 of the original loan.
  • However, forgiveness will not be decreased for salary reductions for high earning employees--specifically, those who received more than $100,000 (at an annualized rate) during any pay period in 2019.
  • This reduction also does not apply unless the employee’s total salary or wages during the 8-week period beginning on the date of the loan origination (“8-Week Covered Period”) decreases by 25% or more when compared to the employee’s total salary or wages for the most recent full quarter before the 8-Week Covered Period.

Reductions in loan forgiveness relating to workforce reductions are more complicated to calculate. This calculation compares:

(1) the average number of full-time equivalent employees (“FTEs”) retained during the 8-Week Covered Period to either:

(2) (a) the average number of FTEs per month from February 15, 2019 to June 30, 2019; or (b) the average number of FTEs from January 1, 2020 to February 29, 2020.

The borrower may elect whichever time period (2(a) or 2(b)) is more beneficial. This reduction in loan forgiveness is proportional. For example, if a borrower previously employed 50 FTEs, but subsequently reduced to 40 FTEs during the 8-Week Covered Period, at least 20% of the original loan would not be subject to forgiveness.

As to an employee who was laid off or received a pay cut between February 15 and April 26, 2020 due to the pandemic, a borrower may avoid being penalized for the salary reduction or workforce reduction relating to that employee if it rehires him or reinstates his pay.  The borrower must do so by June 30, 2020, to qualify for this exemption.

To seek forgiveness, a borrower must submit an application to its lender. The application must include documentation verifying the number of employees, employees’ pay rates/salaries, and payments on permitted mortgage, lease, and utility obligations. If a borrower fails to submit proper documentation, the borrower will not receive forgiveness. Any forgiveness of a PPP loan will not be considered taxable income.

How to Apply for a Loan

Paycheck protection loans are available through private lenders. At the time of this alert, the SBA has not published specific guidelines on the application procedure, but those are anticipated soon. In the meantime, the U.S. Chamber of Commerce notes that pursuant to the CARES Act, lenders will want a good faith certification that the uncertainty of the current economic situation makes the loan necessary to continue operations, that the loan will be used to retain workforce and maintain payroll, (or to make mortgage, lease and utility payments), and that borrower does not have an application pending or received a loan duplicative of the purpose and amount applied for now. However, there is an opportunity to fold an emergency loan into a new loan made between January 31, 2020 and the date this loan program becomes available. To get a start on the process, since these loans are guaranteed by the SBA, one would need to apply to a financial institution already approved to issue section 7(a) small business loans. The Treasury Department intends to issue new regulations allowing most FDIC-insured banks to make SBA loans, but those regulations have not been promulgated.

This summary is provided as an informational tool. It is not intended to be and should not be considered legal advice, and receipt of this information does not establish an attorney-client relationship.