What insurance businesses need to know about the CARES Act
The CARES Act establishes several new avenues for businesses to combat the financial repercussions of the COVID-19 crisis.
The recently passed Coronavirus Aid, Relief and Economic Stimulus Act (CARES Act) establishes several new avenues for businesses to combat the financial repercussions of the COVID-19 crisis. Among other things, it creates unique loan programs for small and midsize businesses and extends unusual tax benefits as an incentive for businesses to keep employees on the payroll.
This legislation, however, was drafted in an unusually short period of time. As such, information regarding the administration of its provisions is sparse and constantly evolving.
The Paycheck Protection Program
The most significant provision of the CARES Act provides “paycheck protection” loans, administered by the Small Business Administration (SBA), to cover payroll costs and other expenses for an eight-week period for employers with fewer than 500 employees, including 501(c)(3) nonprofits.
Eligibility
The SBA’s usual eligibility guidelines, which include both the SBA size standards analysis and “affiliation rules,” must be analyzed to determine whether a business qualifies as “small.” Under these rules, the employee count for two separate but affiliated entities may be combined if one controls or has the power to control the other, or if a third party may exert control over both.
For the purposes of the “paycheck protection” loans, however, these “affiliation rules” are waived for NAICS Code 72 businesses (typically businesses in the hospitality industry) that employ no more than 500 employees per physical location; businesses operating as a franchise that is assigned a franchise identifier code by the SBA (often used with auto dealerships); or businesses that receive financial assistance from a small venture investment company licensed under the SBA.
To determine an entity’s size, an employer may use their average employment numbers from the previous 12-month period. Seasonal businesses may use their average employment numbers from Feb. 5, 2019, or March 1, 2019, and June 30, 2019. New businesses may use their average employment numbers from Jan. 1, 2020, through Feb. 29, 2020. Both full-time and part-time employees must be included in the calculation.
Lenders will determine eligibility for the loans based on whether the business was operational as of Feb. 15, had employees on payroll, and paid wages and payroll taxes.
Permitted uses
The loans may be used for payroll costs, rent, utilities and other debts incurred by the business. Notably, payroll costs include:
- Salary, wages and commissions
- Cash tips or equivalents
- Payments for vacation, family, medical or sick leave
- Group health care benefits
- State and local taxes on employee compensation
Notably, independent contractors and sole proprietors may be eligible for their own loans. As such, compensation paid to these individuals should not be included in an employer’s payroll costs.
Payments made pursuant to the recently passed Families First Coronavirus Response Act (FFCRA), however, are not covered (under the FFCRA, these payments are reimbursed through tax credits). Loan proceeds also cannot be used to compensate an employee in excess of $100,000. At least 75% of the loan proceeds must be used on payroll costs in order for the business to receive loan forgiveness.
Loan forgiveness
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 for wages above $100,000 per employee), interest on secured debt obligations, and rent and utilities in place prior to February 2020.
The amount of forgiveness loans will be reduced if the employer:
- Reduces its workforce during the eight-week period compared to either the average number of employees during Feb. 15 through June 30, 2019, or Jan. 1 through Feb. 29, 2020; or
- Reduces the salary or wages paid to an employee by more than 25% during the eight-week period (compared to the most recent full quarter).
No reduction of forgiveness will occur if the employer rehires all employees laid off (going back to Feb. 15, 2020), or increases their previously reduced wages, by no later than June 30, 2020. These provisions are designed to provide an incentive to employers to not lay off workers (or rehire them) and instead utilize the loan amounts to pay payroll and other expenses.
Loan amount, interest rate, term and other considerations
The maximum loan an employer may receive is the lesser of:
- The employer’s average monthly payroll costs during the prior year times 2.5; or
- $10 million
For example, if the employer had an average monthly payroll of $500,000 over the prior year, it would be eligible for a loan of $1.25 million ($500,000 average monthly payroll times 2.5).
These loans will feature an interest rate of 1% and two-year terms. Further, the first six months of payments are deferred.
Faith-based organizations
In addition to these conditions, borrower’s must certify that they will comply with the terms of various federal laws during the duration of the loan. If your organization was not previously required to comply with these laws, counsel should determine how they may impact your operations.
Application process
The SBA, for purposes of this program, has greatly expanded the number of “SBA Certified Lenders.” Loans are currently available through current SBA lenders or any participating federally insured depository institution, federally insured credit union, and Farm Credit System institution. The deadline to apply is June 30, 2020. Lenders are doing their best to keep up with the rapidly changing requirements and the deluge of applications.
Midsize business loans
The CARES Act also paves the way for financial assistance to midsize businesses (those with 500 to 10,000 employees). To qualify for these loans, the business must certify, among other things, that:
- The funds will be used to retain 90% of the business’ workforce, at full compensation and benefits, until Sept. 30, 2020;
- It intends to restore at least 90% of its workforce that existed as of Feb. 1, 2020, to include restoring all compensation and benefits for those employees as of the same date. This restoration must be accomplished no later than four months after Health and Human Services declares an end to the public health emergency related to COVID-19;
- It will not pay dividends with respect to the common stock of the eligible business, or repurchase equity security that is listed on a national securities exchange of the business or any parent company of the business while the loan is outstanding, except to the extent required by a contractual obligation in effect prior to the CARES Act’s enactment;
- It will not outsource jobs for the term of the loan (which cannot exceed five years) and for two years after repaying the loan;
- It will not “abrogate” an existing collective bargaining agreement for the term of the loan and for two years after completing repayment of the loan; and
- It will remain “neutral in any union organizing effort for the term of the loan.”
While these certifications may seem innocuous, they may have a substantial impact on employers. The requirement that an employer not “abrogate” a collective bargaining agreement, or that it must remain “neutral” during a union organizing effort significantly curtails an employer’s ability to take part in otherwise lawful actions that relate to labor relations.
As such, midsize employers should give careful consideration as to whether their short-term financial situation requires financial assistance through the CARES Act.
Employee retention tax credit
The CARES Act also extends a new “employee retention tax credit” wherein a tax credit is extended for 50% of the first $10,000 of qualified wages paid to an employee during the COVID-19 crisis. This credit is only available to employers whose:
- Operations were fully or partially suspended due to a COVID-19-related “shut-down order,” or
- Gross receipts declined by more than 50% when compared to the same quarter in the previous year.
Importantly, employers who have received “paycheck protection” loans are not eligible for this credit. Moreover, employers with more than 100 full-time employees may only include wages paid to an employee if the business is closed or otherwise stopped due to COVID-19. Employers with 100 or fewer employees may claim the credit regardless of whether the employer is open for business or subject to a shut-down order.
Payroll tax ‘holiday’
Lastly, the CARES Act provides a payroll tax “holiday” to further assist employers during these trying times. During this “holiday” (which extends from March 27 through Dec. 31), employers may defer their payment of Social Security taxes. Should an employer elect to defer these payments, they must be repaid over the next two years — with half due by Dec. 31, 2021, and the remaining half by Dec. 31, 2022.
As recent events have demonstrated, our legislators are busy working on measures that require an extensive study by employers. It is important to stay apprised of these developments and work with your counsel to ensure that you understand what these new laws may require of your business.
This article was drafted based on information current through April 7.
Rick Grimaldi is a partner at Fisher Phillips and former deputy general counsel to Gov. Tom Ridge and chief counsel of the Pennsylvania Department of Labor and Industry. He can be reached at rgrimaldi@fisherphillips.com. Luke McDaniels is an associate at the firm representing employers in a broad range of labor and employment matters in state and federal courts and agencies. He can be reached at lmcdaniels@fisherphillips.com.
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