CARES Act
Employee Benefits Relief
Increased Distributions and Loans from Plans/Elimination of RMD
Last updated 3.27.2020
The CARES Act increases available plan distributions and the amount of loans available from plans to participants. The Act also waives required minimum distribution requirements for 2020.
Coronavirus-Related Distributions
Plan sponsors may now offer participants the option to take coronavirus-related distributions (CV distributions) of up to $100,000 from their accounts in qualified retirement plans, 403(b) plans, and governmental 457(b) plans.
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CV distributions will be available to participants who become ill (or whose spouses or dependents become ill) from COVID-19 or who experience adverse financial consequences from being furloughed, laid off, or quarantined; losing childcare; losing work hours; or other impacts identified by the U.S. Department of Treasury. Participants will be able to self-certify their eligibility for a distribution.
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CV distributions are available effective immediately and may be taken up until December 30, 2020.
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CV distributions are not subject to the 10% early withdrawal penalty for distributions to made participants under age 59.5. While the distributions otherwise remain taxable (unless repaid, as discussed below), participants may include the income from the distribution ratably over a 3-year period.
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Participants are permitted to repay CV distributions within 3 years of the distribution. If the distribution is repaid within the 3-year period, it will be treated as a rollover.
Changes to Plan Loan Rules
The Internal Revenue Code was amended to increase the maximum plan loan amount available to participants from $50,000 to $100,000 (or 100% of a participant’s vested account if less than $100,000) for loans taken within the 180-day period following the enactment of the CARES Act. Additionally, effective for both existing loans made prior to the CARES Act and new loans taken prior to December 31, 2020, loan repayment dates are permitted to be delayed for 1 year if a participant with a loan becomes ill (or the participant’s spouse or dependents become ill) from COVID-19 or experiences adverse financial consequences as a result of being furloughed, laid off, or quarantined; losing childcare; losing work hours; or other impacts identified by the U.S. Department of Treasury in connection with COVID-19.
Waiver of Required Minimum Distributions
The CARES Act eliminates required minimum distributions (RMDs) for 2020. Participants who are required to take RMDs from their retirement plans (generally those over age 72) are not required to take RMDs for 2020 or 2019 RMDs that were to be made by April 1, 2020. The RMD waiver applies to all qualified defined contributions plans, 403(b) plans, governmental 457(b) plans, and individual retirement accounts (IRAs). Further, the year 2020 will be disregarded for purposes of determining the 5-year period for the required depletion of inherited retirement plan accounts and IRAs. Finally, distributions of amounts that would have otherwise been subject to RMDs in 2020 may be rolled over.
BENJAMIN GIBBONS
T.
208.383.3981
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FFCRA Clarification
Emergency FMLA/Sick Leave/Payroll Tax Credits
Last updated 3.27.2020
The proposed language in the CARES Act includes important revisions and/or clarifications to the Families First Coronavirus Response Act (“FFCRA”) passed by Congress on March 18, 2020.
Modification of the Emergency FMLA Expansion Act
The CARES Act clarifies that an employer’s liability under the Emergency FMLA Expansion Act is limited to $200 per day and $10,000 in the aggregate for each employee. The CARES Act also expands the definition of “eligible employees” in the Emergency FMLA Expansion Act to include rehired employees if all the following conditions apply:
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the employee was laid off no earlier than March 1, 2020
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had worked for the employer no less than 30 of the last 60 calendar days prior to the employee's layoff, and,
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was rehired by the employer.
Modification of the Emergency Paid Sick Leave Act
Similarly, the CARES Act clarifies that an employer’s liability under the Emergency Paid Sick Leave Act is limited to $511 per day and $5,110 in the aggregate for each employee for their own care, and $200 per day and $2,000 in the aggregate for each employee for the care of others or because the employee is experiencing any other substantially similar condition as described in the Act.
Modification of Emergency Employer Payroll Tax Credits Mechanism
To address some of the cash flow concerns arising under FFCRA, the CARES Act provides a mechanism for employers to receive an advance of the payroll tax credits (including any refundable credits). It also provides penalty relief to employers who do not make a deposit of payroll taxes if anticipation of the payroll tax credits being available.
TYSON HORROCKS
T. 801.799.5923
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Healthcare
Health Provisions/Medicare & Medicare Extenders/OTC Drugs
Last updated 3.27.2020
The CARES Act adopts several measures to help stabilize the healthcare system, address health care issues directly and indirectly related to the current pandemic and ensure future preparedness. It also allocates $100 billion of direct funding to help hospitals keep their doors open. Many of the provisions are only tangentially related to the current pandemic, such as re-appropriations for a variety of health programs.
Subtitle A – Health Provisions
The CARES Act requires health plans and health insurance issuers to cover qualifying coronavirus preventative services and diagnostic tests. The Act requires the Department of Health and Human Services (HHS) and private sector manufacturers to reduce the possibility of future supply shortages for drugs, ingredients, and certain devices critical to public health during a public health emergency. Under a similar objective, the Act amends and loosens certain restrictions on telehealth services, and establishes and reauthorizes certain programs to address current and future concerns.
To address immediate needs, the Act appropriates approximately $140 billion in funding to the HHS, with $100 billion of that total amount specifically designated to “eligible health care providers” for health care expenses in their efforts to prevent, prepare for, and respond to the coronavirus, and lost revenue directly attributable to the coronavirus.
Subtitle E – Health and Human Services Extenders
The Medicare and Medicaid programs have been amended to increase the timing and funding of certain activities, including funding for state health insurance programs, aging services, benefits and outreach enrollment programs, spousal impoverishment protections programs, community mental health services demonstration programs, sexual risk avoidance education programs, and personal responsibility education programs.
Subtitle F – Over-The-Counter Drugs
The Act amends the FD&C Act to include regulation of certain nonprescription drugs that are marketed without an approved drug application. Amendments under this section provide the FDA flexibility through administrative means to make quick and efficient changes in lieu of the normal notice and comment rulemaking processes. The Act also provides certain market-share incentives to pharmaceutical companies that research and manufacture innovative drugs.
KARINA SARGSIAN
T.
801.799.5741
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KIM STANGER
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208.383.3913
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Relief for Small Businesses
SBA Clarifies Treatment of Foreign Affiliates for 500-Employee Calculation
Last update 5.20.20
The Paycheck Protection Program (PPP) requires borrowers to certify that “[t]he applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor; or (2) employs no more than the greater of 500 employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the applicant’s industry. There has been confusion among some borrowers as to whether employees of foreign affiliates should be included in the 500-employee calculation.
On May 18, 2020, the SBA issued an Interim Final Rule clarifying the treatment of foreign affiliates for a borrower’s 500-employee calculation:
Question: Are employees of foreign affiliates included for purposes of determining whether a PPP borrower has more than 500 employees?
Answer: Yes. The CARES Act specifies that an entity is eligible for a PPP loan only if it is (1) a small business concern, or (2) a business concern, nonprofit organization described in section 501(c)(3) of the Internal Revenue Code, veterans organization described in section 501(c)(19) of the Internal Revenue Code, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act that employs not more than the greater of 500 employees, or, if applicable, SBA’s employee-based size standard for the industry in which the entity operates.
SBA’s affiliation regulations provide that to determine a concern’s size, employees of the concern “and all of its domestic and foreign affiliates” are included. 13 C.F.R. 121.301(f). Therefore, to calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except in those limited circumstances where the affiliation rules expressly do not apply to the entity. (Emphasis added) Any entity that, together with its domestic and foreign affiliates, does not meet the 500-employee or other applicable PPP size standard is therefore ineligible for a PPP loan.
However, as an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020),
SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States. (Emphasis added) Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations.
This Interim Final Rule makes clear that, to calculate the number of employees for purposes of determining a borrower’s eligibility for the PPP, the borrower must include all employees of BOTH its domestic and its foreign affiliates.
As a result, borrowers who applied for a PPP loan prior to May 5, 2020 and based their employee headcount eligibility only on employees employed by their domestic affiliates, not their foreign affiliates, this new guidance provides assurance that the borrower will not be found to have made an inaccurate certification of eligibility solely on that basis.
Finally, this Interim Final Rule reminds borrowers that PPP loan proceeds may only be used for U.S. workers and operations.
THOMAS BALMAT
T.
303.295.8357
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SBA Extends Safe Harbor Period to Repay Paycheck Protection Program Loans Without Certification Risk
Last updated 5.6.2020
As we have previously observed, on April 23, 2020, the U.S. Small Business Administration (SBA) issued guidance—and a warning—to Paycheck Protection Program (PPP) loan applicants and borrowers related to the certification of need required by the CARES Act in what has been known as FAQ 31:
31.Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. (Emphasis added.)
Within days, the SBA issued further guidance in FAQ 37 that “businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations” may not qualify for a PPP loan and may need to repay the loan by the expiration of the “safe harbor” period on May 7, 2020 or may need to refuse an approved loan which has not yet been disbursed.
Late on May 5—only two days before the deadline—the SBA extended the safe harbor period until May 14, and promised additional guidance:
43. Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?
Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
In light of the extended safe harbor period and the promised additional guidance, applicants and borrowers may wish to consider deferring any final decision to repay, or not accept, a PPP loan until the SBA’s position becomes clear in the coming days.
TIM CRISP
T.
505.954.7285
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Paycheck Protection Program Loan Forgiveness Requirements
Last updated 5.4.2020
Now that many small businesses (and independent contractors) have applied for and received loan proceeds under the Paycheck Protection Program (PPP), loan recipients need to ensure that proceeds are used for allowable purposes specified in the CARES Act and comply with guidelines that maximize the potential for loan forgiveness.
The Treasury Department and the Small Business Administration (SBA) have stated that additional loan forgiveness guidance will be announced. Because the rules and instructions for forgiveness are likely to evolve in the coming weeks, the information below should be used as tentative guidance for planning to optimize your loan forgiveness.
Basics of PPP loans
PPP loans are a forgivable loan for small businesses designed to incentivize businesses to retain their workers. The loan is administered and guaranteed by the SBA). Loan proceeds must be used to cover payroll costs, mortgage interest, rent, and utility costs over the 8-week period after the loan is made.
Allocate your loan proceeds appropriately over the 8-week period
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At least 75% of loan proceeds must be used for payroll costs and the remaining 25% of loan proceeds can be used for other allowable uses (i.e., mortgage interest, rent, utility costs).
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Remember, payrolls costs consist of compensation to employees (whose principal place of residence is in the U.S.) in the form of
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salary, wages, commissions, or similar compensation;
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cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
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payment for vacation, parental, family, medical, or sick leave;
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allowance for separation or dismissal;
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payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees;
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payment of state and local taxes assessed on compensation of employees; and
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for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Maintain your full-time employees
If the average number of full-time employees per month during the 8-week period is lower than the average monthly full-time employees during February 15, 2019 to June 30, 2019, or the average number of full-time employees per month during the period from January 1, 2020 to February 29, 2020, then the loan forgiveness amount will be reduced by the ratio of full-time employees during the 8-week period to the number of full-time employees during the 2019 or 2020 comparison periods.
Note: You can choose either time period to calculate the average, but you will be better served by using the period with fewer full-time employees.
Maintain salaries and wages paid to specific employees
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Loan forgiveness will also be reduced if the reduction of wages paid to any employee during the 8-week period is in excess of 25% of the wages paid during the most recent full quarter during which the employee was employed before the 8-week period.
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Employees who during any single pay period in 2019 received wages at an annualized rate in excess of $100,000 can be excluded from this reduction calculation.
Avoid a reduction in loan forgiveness.
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The reductions described above can be avoided by:
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eliminating the full-time employee reduction by no later than June 30, 2020; or
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eliminating the wage reduction for the specified employee by no later than June 30, 2020.
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The SBA has further specified in FAQ #40 that a business’s loan forgiveness amount will not be reduced if the business laid off a full-time employee and offered to rehire the same employee (for the same salary/wages and same number of hours), but the employee declined the offer for rehire.
THOMAS BALMAT
T. 303.295.8357
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PPP Loan Eligibility and Repayment Considerations
Last updated 5.4.2020
On April 23, 2020, the SBA by way of
FAQ #31, provided meaningful direction concerning the PPP loan certification as to "necessity." The SBA clarified that PPP "borrowers must make this certification in good faith, taking into account their
current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations
in a manner that is not significantly detrimental to the business" (emphasis added). FAQ #31 goes on to state that "it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification [as to necessity] in good faith." Businesses have until May 7, 2020 to return the loan proceeds without penalty.
Not mentioned is how private companies or family run businesses should assess their access to capital and resulting eligibility for PPP loans. So, how should private businesses respond to FAQ #31?
First, a business should confirm that the loan proceeds can and will be used for the allowable uses. There is general agreement that protection of jobs is a key principle of the PPP loan program. Directing the proceeds towards payroll costs as a way to maintain employee headcount and salaries/wages should be the driving force for obtaining the loan.
Second, a business should determine whether it has alternative sources of funding. FAQ #31 makes clear that public companies with access to capital markets probably don’t qualify for a PPP loan. For private companies, the “alternative funding” analysis is less clear and requires assessing the following:
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the current financial stability of the business including cash on hand, revenue projections, and the potential for payroll shortfall over the next several months;
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the timing to obtain alternative funding compared to immediate cash needs and the potential in the interim for employee and/or salary cutbacks;
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the repayment terms or dilutive effect of alternative sources of funding and how this might affect the business going forward; and
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whether the industry sector or the geographic location of the business is likely to rebound sooner or much later than others.
The above information should be collected and readily available should the business need to support its application decision.
Third, the business should assess its sensitivity to public scrutiny. Is the client base of the business largely consumers, private companies, or government contracts? How would a government audit impact the business going forward? Secretary Mnuchin announced that the SBA will conduct audits of all loans over $2 million before loan forgiveness is confirmed. Random audits of smaller loan amounts should also be expected.
Finally, the business should determine whether to return the PPP loan proceeds by May 7. The SBA has created an amnesty period whereby any business that repays the loan in full by May 7, 2020, will be deemed to have made its "necessity" certification in good faith. Since PPP loans are being administered by individual lenders, the bank or credit union responsible for the loan should have a process in place for returning the proceeds.
THOMAS BALMAT
T. 303.295.8357
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Tax Consequences of PPP Loan Forgiveness
Last updated 5.1.2020
The CARES Act expressly provides that the amount of any PPP loan forgiveness is excluded from the PPP recipient’s gross income. However, the CARES Act had been silent on the issue of tax deductions for the expenses associated with the loan forgiveness. In
Notice 2020-32, issued April 30, 2020, the IRS addressed the tax deductibility of certain expenses. Specifically, small businesses whose PPP loans are forgiven may not deduct the payroll costs, rents, and other expenses that resulted in the loan forgiveness.
This tax treatment is designed to prevent a double tax benefit because the amount of the loan forgiveness is not taxable to the PPP recipient. As a result, the PPP program is a wash for tax purposes. However, it also diminishes the potential value of the PPP program. Given that the program is designed to maximize liquidity for small businesses, it is likely that Congress will step in to expressly permit the tax deductions. Senator Grassley, the Chair of the Senate Finance Committee, has stated that the Notice is contrary to legislative intent and Representative Neal, the House Ways and Means Committee Chairman, has indicated that the next round of relief legislation will address the issue.
Additional Funding for Paycheck Protection Program and Economic Injury Disaster Relief Loans
Last updated 4.27.2020
On Friday, April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act (the “PPP & HCE Act”), which includes provisions for $310 billion of additional funding to replenish the Paycheck Protection Program first introduced under the CARES Act and $60 billion in additional funding for emergency disaster loans and grants.
Under the PPP & HCE Act, $60 billion of the additional $310 billion to replenish the Paycheck Protection Program is required to be set aside for loans by smaller financial institutions. Specifically, $30 billion of this funding is set aside for loans made by federal and state-chartered banks and credit unions with consolidated assets between $10 billion and $50 billion, and $30 billion is set aside for loans made by community financial institutions, insured depository institutions and credit unions with consolidated assets under $10 billion. This $60 billion specifically set aside for small and mid-sized financial institutions should allow these lenders to better participate in the Paycheck Protection Program, which in turn should help small businesses most likely to rely on their relationships with local lenders.
The PPP & HCE Act also includes $60 billion for the SBA’s economic injury disaster loans (“EIDL”) program. Of this amount, $10 billion is for emergency grants of up to $10,000, and $50 billion is to fund loans under the EIDL. The PPP & HCE Act creates new eligibility under the EIDL for agricultural enterprises (as defined in section 18(b) of the Small Business Act (15 U.S.C. 647(b)) with not more than 500 employees.
The PPP & HCE Act does not alter the application requirements for either the Paycheck Protection Program or the EIDL. The SBA is expected to resume accepting applications for these loans from participating lenders on Monday, April 27. As before, these loans and the funding being made available will be on a first-come, first served basis, meaning the time to apply is limited.
Shifting Sands: SBA Issues New Guidance on Paycheck Protection Program Loans
Last updated 4.24.2020
Many businesses have followed with interest the news of public companies like Shake Shack and Ruth’s Chris Steak House taking out multi-million-dollar Paycheck Protection Program (PPP) loans guaranteed by the U.S. Small Business Administration (SBA), and Shake Shack’s later promise to promptly return the loan proceeds. In the aftermath of this news, smaller, privately held businesses may now be in a much more untenable position as PPP borrowers.
On April 23, 2020—a week after the first tranche of $349 billion in PPP loans were fully allocated—the SBA issued additional guidance on a vague certification required by the CARES Act to be made by borrowers:
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
For borrowers with good current liquidity and who are owned or controlled by large public companies, such as Shake Shack and Ruth’s Chris Steak House, this provides meaningful direction: they are not eligible, but will face no consequences for false claims if the loans are repaid by May 7.
However, the SBA’s guidance is much less clear for many other companies, such as privately held companies who have not yet suffered significant losses of liquidity, and portfolio companies of private equity sponsors and venture capital funds. In fact, the latest guidance may make these borrowers significantly more uneasy about continuing as borrowers under the program or accepting their allocations.
The SBA is now requiring applicants and borrowers, after the fact, to reconsider whether the certification in their application is correct; and for the first time explicitly requires them to take into account not only their current business activities, but other sources of liquidity from revenues and lines of credit. Risk averse companies may now view the PPP loans as loans of last resort. The CARES Act suspended the previous requirement for Section 7(a) loans that credit cannot be obtained elsewhere. By effectively requiring businesses to demonstrate they are unable to obtain needed liquidity elsewhere, the Guidance creates the perverse effect of weakening that intended relief. This Guidance will likely lead many companies whose condition and prospects have worsened (but are not yet dire) to reluctantly consider repaying the loans in the next two weeks, frustrating the goals set by Congress, and possibly putting more jobs and paychecks at risk.
These businesses may not be in Shake Shacks’ position, but their brightened short-term prospects (and those of their current, laid off and furloughed employees) may now have been inadvertently shaken.
TIM CRISP
T.
505.954.7285
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Paycheck Protection Program Affiliate Rules
Last updated 4.9.2020
On the heels of the Paycheck Protection Program (PPP)
Interim Final Rule issued on April 2, 2020, the Treasury Department and the Small Business Administration (SBA) released additional PPP guidelines in the form of
FAQs on April 6, 2020.
The additional guidance helps clarify key provisions of the CARES Act surrounding eligibility requirements for a PPP loan and the applicable SBA affiliation rules.
Three Methods of Eligibility
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500 or fewer employees, including employees of affiliates.
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Meeting the SBA size standard corresponding to a business’s primary industry. A size standard is stated in number of employees or average annual receipts (depending on the business’s industry) and represents the largest size that a business (including subsidiaries and affiliates) may be to remain classified as a small business for the PPP loan.
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Meeting both tests in the SBA’s “Alternative Size Standard” as of March 27, 2020.
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Maximum tangible net worth of the business is not more than $15 million; and
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Average net income after federal income taxes (excluding carry-over losses) for the two fiscal years before the date of the application is not more than $5 million.
SBA Affiliation Rules
To determine a business’s eligibility for a PPP loan using the employee headcount or average annual revenue tests, a business must count both its average annual receipts or employees (as the case may be) and those of all of its domestic and foreign affiliates. Generally, affiliation exists when one business controls or has the power to control another business or when a third-party business controls or has the power to control both businesses. Control arises through ownership, management, or other relationships between the businesses. Some examples of affiliation include:
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Affiliation through ownership. A business is an affiliate of an entity that owns or has the power to control more than 50 percent of the concern’s voting equity. In general, options and warrants exercisable for, and debt instruments convertible into, voting equity will be counted as though they were exercised or converted. Control can occur through outright ownership or the right to vote the equity, such as through a voting trust. Affiliation can also arise from negative controls, including where a minority shareholder or LLC member has the ability to prevent a quorum or block action by the board of directors, shareholders, managers or members. If a minority shareholder or member gives up those rights, the minority shareholder/member would not be an affiliate.
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Affiliation based on management. Affiliation arises where the CEO, President, senior officers, partners, or managing members of the business also control the management of one or more other concerns. It also arises where an individual or business controls the board of the borrower and the board of another business.
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Affiliation based on identity of interest. Two or more individuals or businesses with an identity of interest may be affiliates. Individuals or businesses with substantially identical business or economic interests may be affiliates. Examples include close relatives who operate businesses in similar industries in the same area, common investments, and economic dependence. The SBA has previously held such identity of interest often exists between a business owner and their spouse, children, parents and in-laws.
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Other affiliation rules apply, including exceptions to affiliation coverage.
If your company is a parent or a subsidiary of another company, or if its management controls other entities, then your company likely has affiliates. This means that in addition to counting the number of employees or annual receipts in your business, you also need to count the employees or annual receipts of each affiliate. PPP eligibility and affiliation rules can be complex.
Paycheck Protection Program: Critical Changes
Last updated 4.7.2020
On April 2, 2020, the Treasury Department and Small Business Administration (SBA) unveiled an interim final rule for the Paycheck Protection Program (PPP) and a
revised application form.
The terms of the loans have changed to 1% per annum (from 0.5%) and the amortization of the loans changed to two years (from up to 10 years in the CARES Act). Additionally, payments to independent contractors are not permitted within “payroll costs” for purposes of loan sizing, permitted use of loan proceeds, and measurement of loan forgiveness.
Most importantly, in the revised application, the SBA is now requiring applicants to certify under penalties of perjury that they qualify for the loans, and have fewer than 501 employees after application of the SBA’s existing affiliation rules, unless otherwise exempted from the requirement or subject to a different requirement.
Below is the exact language each applicant is required to certify when applying:
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The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (the Paycheck Protection Program Rule).
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The Applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.
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I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
These updates significantly change the risk calculus for some businesses who have affiliated businesses through ownership, management, or negative control rights. The rules also make clear that funds will be disbursed on a first come, first served basis until the appropriated funds are depleted.
Businesses should factor in this guidance in determining whether and when to apply for the programs. Also, as demonstrated over the past week, the guidance is somewhat fluid. Businesses should monitor developments as they move forward.
THOMAS BALMAT
T.
303.295.8357
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Paycheck Protection Program Loan
Last updated 4.9.2020
The Paycheck Protection Program loan is a forgivable loan for small businesses designed to incentivize businesses to retain their workers. The loan is administered by the Small Business Administration (SBA) and guaranteed by the SBA.
Loan Forgiveness Criteria
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Loan proceeds must be used to cover payroll costs, mortgage interest, rent, and utility costs over the 8-week period after the loan is made.
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Loan forgiveness is be reduced if you decrease the number of full-time employees.
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Employee salary and wages must be maintained. Loan forgiveness will also be reduced if salaries and wages are decreased by more than 25% for any employee that made less than $100,000 annualized in 2019.
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By June 30, 2020 the full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020 must be restored.
Maximum Loan Amount
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The lesser of $10 million or 2.5 times the average monthly payroll in the 12 months preceding the loan. For seasonal employers, the 12-week period beginning February 15, 2019, or from March 1, 2019 to June 30, 2019. For new employers, January 1, 2020 to February 29, 2020.
Eligibility
Any business concern, nonprofit organization, veterans organization or Tribal business that employ less than 500 employees (including employees of affiliates), or the size standard set by the SBA, as well as sole proprietorships, independent contractors and eligible self-employed individuals. For purposes of determining the number of employees, the term “employee” includes those employed on a full-time, part-time, or other basis. Also applies to accommodation and food services businesses with 500 or fewer employees per physical location. All businesses must have been operational on February 15, 2020.
Covered Loan Period
February 15, 2020 to June 30, 2020.
Use of Loan Proceeds
Loan proceeds may be used to pay for payroll costs, costs related to the continuation of group health care benefits, mortgage payments, rent, utilities, and interest on any other debt obligations that were incurred before February 15, 2020.
Payroll costs include:
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Salary, wages, commissions, or tips (capped at $100,000 on annualized basis for each employee)
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Benefits costs including, vacation, parental, family, medical, or sick leave; group health care, including insurance premiums; retirement benefit payments, and separation or dismissal allowances
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State and local taxes assessed on compensation
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Excludes payments to independent contractors and qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act. FFCRA tax credit information can be found
here.
Certification
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When applying, the applicant must certify:
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The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the SBA and at the time the loan is funded.
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The Applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.
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That the information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects.
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To an understanding that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
Loan Particulars (for that portion of the loan not forgiven)
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Payment of principal, interest, and fees deferred for 6 months - 1 year.
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Loan is amortized over 2 years at a 1.00% fixed rate.
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No prepayment penalty, personal guaranty or collateral required.
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Unless the loan proceeds are used for a non-authorized purpose, the SBA has no recourse to the shareholders, members or partners of the business for nonpayment of the loan.
Applying for a PPP Loan
Eligible businesses can apply for the PPP loan at any lending institution that is approved to participate in the program through the existing U.S. Small Business Administration SBA 7(a) lending program. Applicants are eligible to apply for the loan until June 30, 2020.
SBA Express Loan
An SBA Express Loan is a financing option that was available to small and medium size business owners prior to enactment of the CARES Act. The CARES Act simply revises the loan terms so that through December 31, 2020, the maximum amount that may be borrowed is increased from $350,000 to $1,000,000.
Economic Injury Disaster Loan
The Economic Injury Disaster Loan (EIDL) expands the existing EIDL loan program under the SBA.
Maximum Loan Amount
Capped at $2 million.
Eligibility
“Small business concerns” who are currently eligible under original EIDL program, any business, cooperative, Employee Stock Ownership Plan (ESOP) or tribal business concern with fewer than 500 employees, private nonprofit organizations, small agricultural cooperatives, and individuals who operate as a sole proprietorship or an independent contractor with or without employees.
Covered Loan Period
January 31, 2020 to December 31, 2020
Use of Loan Proceeds
Loan proceeds can be used to provide sick leave to employees unable to work due to COVID-19, payroll, increased material costs due to interrupted supply chains, rent or mortgage payments, repaying obligations that cannot be met due to revenue losses.
Emergency Advance
Borrowers who need an immediate influx of funds may request an emergency advance up to $10,000 within three days after the SBA receives the application. If the application is denied, the borrower is not required to repay the $10,000 advance.
Loan Particulars
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No personal guarantee required on advances and loans of not more than $200,000.
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No requirement that the applicant be in business for the one-year period before the disaster, so long as the business was in operation on January 31, 2020.
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No requirement that the applicant be unable to obtain credit elsewhere.
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Applicants may be approved based solely on credit score, and no tax return required.
Applying for EIDL Loan
Apply here.
Frequently Asked Questions
May businesses borrow under both loan programs?
Yes. Borrowers may apply for an EIDL loan in addition to a loan under the Paycheck Protection Program, provided the loans are not used for the same purpose.
What if I have an existing SBA loan? Will it be impacted by the CARES Act?
Yes. For any SBA-guaranteed Section 7(a) loans (other than PPP Loans) in regular servicing status made before the CARES Act was enacted, or during the six-month period after enactment, the SBA will pay all scheduled principal, interest and fees due during such period. Your payments will resume after the six- month period ends, but you will not be responsible to the lender or the SBA for the principal, interest or fees scheduled to be paid during the subsidy period and paid by the SBA.
I own a large or medium-sized business such that I don’t qualify for the stimulus loans described above. Does the CARES Act provide assistance for me?
As the owner of a large business (a business with greater than 10,000 employees) or a medium-sized business (501-10,000 employees), your business could qualify for Economic Stabilization and Assistance Loans or loan guarantees. These are loans or loan guarantees made or facilitated, or debt securities purchased by the Department of the Treasury to support passenger and cargo air carriers as well as other United States businesses that have not otherwise received adequate economic relief through loans and loan guarantees under the CARES Act.