The CARES Act: Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed by the U.S. Senate and House of Representatives and signed into law by President Trump on Friday, March 27, 2020 provides relief to small businesses and American workers. The CARES Act includes the Paycheck Protection Loan Program, providing $349 billion of funding to small businesses and nonprofit organizations to cover up to 8 weeks of payroll and related costs, with such loan to be entirely forgiven if an employer maintains all of its employees and salaries during the period of time commencing February 15, 2020 through June 30, 2020.   
What businesses qualify for the Paycheck Protection Program?
Businesses which do not employ more than 500 employees or which meet the applicable size standard for the industry as provided by SBA's existing regulations, are eligible to apply. Sole proprietors, independent contractors, and other self-employed individuals are also eligible. The ability to obtain credit elsewhere is not a factor. No personal guarantees or collateral are required.
What is the maximum amount that can be borrowed?
The maximum amount of a loan is the LESSER of (i) the sum of the average monthly payroll costs for the one-year period ending on the date the loan was made (special rules apply to seasonal employers) multiplied by 2.5 and any other disaster loan that has been refinanced into the CARES Act paycheck protection loan; or (ii) $10 million.
Permissible uses of a Paycheck Protection Loan:
Loan proceeds may be used for payroll costs, employee salaries, commissions, costs related to group health care benefits (including sick, medical or family leave and insurance premiums), interest payments on mortgage obligations or other debt obligations incurred prior to February 15, 2020, rent and utilities. 
How are “payroll costs” determined under the Act.
Payrolls costs are the sum of:
  •  Wages, commissions, salary or similar compensation to an employee or independent contractor;
  • Payment of cash tip or equivalent;
  • Payment for vacation, parental, family, medical or sick leave;
  • Allowance of dismissal or separation;
  • Payment for group health care benefits (including premiums);
  • Payment of retirement benefit; and
  • Payment of state or local tax assessed on the compensation of an employee.
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;
  • Payroll taxes;
  • Compensation of an employee whose principal place of residence is outside the U.S.; and
  • Qualified sick leave or family medical leave for which a credit is allowed under the Families First Coronavirus Response Act passed last week.
The impact of layoffs, salary reductions or furloughs on a Paycheck Protection Loan.
Layoffs, salary reductions and furloughs do not impact the ability to apply or receive a loan, or the how loan proceeds may be used.  However, these will impact the amount of the loan which may be forgiven.
Loan forgiveness.
The forgiven amount of the loan will be an amount equal to the amount actually paid for payroll costs (calculations are based on the number of full-time employees (FTEs), interest payments on mortgages (not other debt obligations), rent and utilities during the covered period (defined as the 8-week period beginning on the date of the origination of the loan).
The forgiven amount is subject to reduction if there is (i) a workforce reduction or (ii) a reduction in salary or wages. 
  • The amount of the reduction attributable to a workforce reduction will be equal to the initial forgiven amount multiplied by the quotient of average FTEs during the eight-week period divided by the average FTEs for the period from February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, as determined by the loan recipient.
  • The amount of the reduction attributable to a salary or wage reduction will be the amount of any salary or wage decrease in excess of 25% of the total salary or wages during the most recent full quarter such employee was employed before the eight-week period. Only employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100,000 are included in this calculation.
Employers who rehire any employees who have been laid off or reinstate compensation reductions due to COVID-19 to at least 75% of an employee’s prior year compensation by June 30, 2020, will not be penalized.
Any remaining balance after reduction for loan forgiveness shall have maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness and bear an interest rate not to exceed 4%.

Frantz Ward has established a Coronavirus Response Team to assist clients in navigating the multitude of issues presented by the current crisis. For assistance in addressing these issues or in developing other strategies to protect your business, please contact Frantz Ward Partners Brian Kelly or Christopher Koehler and they will engage the appropriate members of the response team.

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