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By D. Zachary Wiseman, Gavin M. Reese, and Aaron C. Hinton

A SUMMARY OF “PAYCHECK PROTECTION” LOANS

To stimulate the national economy in the wake of the COVID-19 pandemic crisis, the CARES Act provides an unprecedented $2 trillion of economic relief to businesses and individual citizens across the country.  For employers, the most significant provision of the new law establishes what has come to be known as the “Paycheck Protection Program” (hereinafter, the “program”)—which is designed to provide loans to employers in order to help cover payroll and other business-related expenses during the COVID-19 crisis.  Perhaps most importantly, subject to certain conditions, these loan amounts are forgivable.  The purpose of this article is to provide a basic overview of the new program and address the likely questions of employers seeking to participate.

WHO IS ELIGIBLE TO RECEIVE LOANS UNDER THE PROGRAM?

In general, businesses with 500 employees or fewer are eligible to receive loans under the new program from February 15, 2020 to June 30, 2020 (the “covered period”).  This includes nonprofit organizations, veterans’ organizations, or Tribal businesses.  Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Congress’s last COVID-19 bill, the Families First Coronavirus Response Act (Families First Act)) are also eligible loan recipients, subject to some documentation requirements.

WHAT IS THE MAXIMUM LOAN AMOUNT, AND HOW CAN THE LOAN BE USED?

Loan Amounts.  The loan amounts are based on a formula and capped at $10 million.  The maximum loan amount for eligible businesses is the lesser of the following:

  • 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made; OR
  • $10 million.

Permissible Uses.  Eligible businesses may generally use the loans for the following: (1) payroll costs[1]; (2) group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (3) salaries, commissions, or similar compensations; (4) payments of interest on mortgage obligations; (5) rent/lease agreement payments; (6) utilities; and (7) interest on any other debt obligations incurred before the covered period.

CAN THE LOANS BE FORGIVEN OR DEFERRED?  IF SO, UNDER WHAT CIRCUMSTANCES?

Yes, subject to certain conditions, the federal government will forgive loans issued under the new program in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period: 1) Payroll costs; 2) Interest payments on mortgages; 3) Rent; and 4) Utility payments.

Reductions Penalties.  Forgiveness amounts will be reduced for employers that make cuts to the workforce or reduce wages during the covered period.  The formula for a reduction in workforce is outlined in the statute but omitted here for brevity.  For reductions in wages, the forgiveness amount will be offset by any reduction in total salary or wages of any employee during the covered period that is in excess of 25% of the employee’s salary/wages during the employee’s most recent full quarter of employment before the covered period.[2]

Avoiding Reduction Penalties.  An employer can avoid the forgiveness reduction penalties if it rehires employees that were previously laid off (after February 15, 2020) or makes up for any wage reductions by June 30, 2020.

Regarding loan amounts not subject to forgiveness, the CARES Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year.

WHO PROVIDES THE LOANS AND WHAT ARE THE TERMS?

Lenders authorized to make loans under the Small Business Act (SBA) are automatically approved to make and approve loans under this new program.  Notable terms and conditions include the following:

  • No collateral or personal guarantee is required for a loan.
  • The interest rate on loans under the program is not to exceed four percent.
  • There will be no prepayment penalty for any payments made.
  • A loan made under the SBA’s Disaster Loan Program on or after January 31, 2020, may be refinanced as part of a covered loan under this new program.

The deadline to apply for a loan under the new program is June 30, 2020.  If you have questions about this process or other challenges raised by the COVID-19 pandemic, Ray Quinney & Nebeker has developed a team of attorneys to assist you.


[1] Importantly, “payroll costs” do NOT include sick and family leave wages for which credit is allowed under the Families First Act; individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; and compensation to employees whose principal place of residence is outside of the US.

[2] “Employee” is limited, for purposes of this subparagraph only, to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.