Today, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law by President Trump. The CARES Act provides unprecedented financial support for businesses and allows small and medium sized businesses to receive federal loans – in some cases forgivable – to cover payroll and other expenses. It also expands unemployment benefits for workers impacted by the outbreak, while extending unemployment eligibility to many who are otherwise not regularly entitled to receive such benefits. What do small and medium sized employers need to know?
The most significant provision of the CARES Act for small employers establishes new “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 crisis. The covered period for loans is February 15, 2020 through June 30, 2020.
Generally, these loans are available for businesses with not more than 500 employees. However, businesses in the hospitality industry (those with a NAICS Code of 72) are eligible for a loan as long as they employ not more than 500 employees “per physical location.” For example, a restaurant franchisee with 3,000 employees (but no more than 500 employees at any one location) could qualify for the loans.
In addition, the SBA generally has eligibility guidelines (“affiliation rules”) to determine whether a business qualifies as “small.” Under these provisions of 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.
Doing business with a Professional Employer Organization such as TriNet, will not affect an employer’s small status for purposes of obtaining a loan. Under SBA regulations, a small business is not affiliated with the PEO solely based on the agreement with the PEO.
Eligibility for the loans will be determined based on whether the business was operational as of February 15, 2020, had employees on payroll, and paid wages and payroll taxes. For nonprofits, it is important to note that volunteers who do not receive any sort of in-kind compensation, are not considered employees under the law.
The loans can be used for payroll costs, healthcare, rent, utilities, and other debts incurred by the business. Notably, 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 set out in the FFCRA. These new “paycheck protection” loans are available for other payroll expenses and other costs.
Loan amounts will be available based on a formula. The amounts available will be the lesser of:
For example, if the employer had an average monthly payroll of $900,000 over the prior year, it would be eligible for a loan of $2.25 million ($900,000 average monthly payroll times 2.5).
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:
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 increased 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 (or to rehire workers already laid off) and instead utilize the loan amounts to pay payroll and other expenses.
Paycheck protection loans are fully guaranteed by the federal government through December 31, 2020. 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.
TriNet has put together a dedicated team who will be available to provide additional support and resources for TriNet clients regarding the paycheck protection loans.
While not eligible for paycheck protection loans, mid-size businesses – those with 500 to 10,000 employees – are also eligible for direct loans under the CARES Act. For a business to receive this type of loan under the Act, it must make a “good-faith certification” that it will comply with certain requirements listed in the CARES Act. This certification will likely occur on a form provided as part of the application for the loan and the failure to comply with the certifications could result in rescission of the loan. Among other things, the business must certify that:
The CARES Act also provides a new employee retention tax credit. This tax credit is not available to employers that receive the small business “paycheck protection” loans.
The employee retention tax credit provides a refundable payroll tax credit for 50% of the wages paid by employers during the COVID-19 crisis and applies to wages paid between March 13, 2020 and the end of the year. This tax credit is available to employers whose:
The tax credit is provided for the first $10,000 of compensation (including health benefits) paid to an eligible employee and is based on qualified wages paid to the employee. Qualified wages may include the employer’s contribution to the employees’ health insurance costs but will exclude any amounts that the employer already received a tax credit for under the FFCRA. Further, for employers with more than 100 employees, “qualified wages” are wages paid to employees when they are not providing services due to the reasons specified above. For employers with 100 or fewer employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.
In addition to everything already mentioned, in order to assist employers with immediate cash-flow issues, the CARES Act provides that employers may defer payment of their portion of Social Security taxes they would otherwise be obligated to pay. Any deferred payroll taxes would be required to be paid over the next two years – with half of the owed amount being required to be paid by December 31, 2021, and the remaining half by December 31, 2022. This payroll tax “holiday” may provide additional assistance to employers during this period of crisis.
The CARES Act also makes several changes to the recently enacted FFCRA. Most employers all already familiar with the provisions of that law, which establishes new paid leave requirements as part of new Emergency Paid Sick Leave and Emergency Paid Family and Medical Leave requirements. The DOL recently announced that those new leave requirements will go into effect on April 1, 2020. Most of the changes to the FFCRA are technical and clarifying in nature.
However, the CARES Act adds new language to the EFMLA to address leave entitlement under that provision for “rehired employees.” This change means that for purposes of the EFMLA, “employed for at least 30 calendar days” includes an employee who was laid off on or after March 1, 2020 and had worked for the employer for not less than 30 of the last 60 calendar days prior to their layoff. These employees would be eligible for EFMLA without having to “restart the clock” on the 30-day requirement.
The CARES Act also facilitates the ability to obtain an “advance” refunding of tax credits by allowing employers to withhold employment tax deposits and not being penalized for doing so. The IRS recently announced that it would be issuing guidance on this point to help employers manage cash-flow challenges associated with the new leave requirements.
The CARES Act also expands unemployment assistance by creating a Pandemic Unemployment Assistance program through December 31, 2020. For weeks of unemployment, partial unemployment, or inability to work caused by COVID-19 between January 27 and December 31, the Act provides covered individuals with unemployment benefit assistance when they are not entitled to any other unemployment compensation or waiting period credit. For this, the weekly benefit amount is generally the amount that would otherwise have been determined under the relevant state law plus an additional $600 for up to 39 weeks (which is longer than the typical 26 weeks in most states).
Covered individuals under this provision generally include those who provide self-certification the individual is otherwise able to work and available to work and is unemployed, partially unemployed, or unable to work because:
The Act also expands unemployment to also cover those who traditionally are not eligible to receive such benefits. Specifically those who are self-employed (like independent contractors), who are seeking part-time employment, do not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits are covered if they meet a qualifying reason above. However those who would otherwise be covered are excluded if they have the ability to telework with pay or if they receive paid sick leave or other paid leave benefits.
The federal government will be offering various grants and funding to states to help cover this additional unemployment assistance. The Act also incentivizes states to provide this unemployment compensation without any waiting period.
In addition, the Act provides flexibility to the requirement that individuals seeking unemployment must actively be seeking work, if the individual is unable to search for work due to COVID-19, whether due to illness, quarantine or restriction with mobility.
Follow TriNet’s COVID-19 Business Resiliency and Preparedness Center for critical and up-to-date information and the impact of changing regulations on small and medium size businesses. We will continue to monitor the COVID-19 situation and provide updates as necessary.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
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