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CARES Act Payroll Protection Program Guidance Released

April 2, 2020 - By: William R. Rodgers
On March 27, 2020, the President signed The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. One of the central features of the CARES Act is the Paycheck Protection Program (“PPP”). Under PPP, the class of borrowers eligible to receive Small Business Administration (“SBA”) backed loans is significantly expanded and includes most employers with 500 or fewer employees, sole proprietors, independent contractors, self-employed individuals, “gig economy” workers and certain non-profit organizations. Applications for small businesses and sole proprietors may be submitted to SBA approved lenders starting Friday April 3.

PPP is designed to help fund an eligible borrower’s “covered” payroll costs, specifically: salaries, wages and commissions (up to $100,000 per worker); employee group health care costs; vacation, sick and family leave payments, severance pay, and retirement contributions. Loans may also be used to pay other “Eligible Costs” including rents, utilities, and mortgage interest payments.

Under SBA guidelines published on April 2, it appears that, while the the loan will be fully forgiven if the funds are used only for payroll costs, interest on mortgages, rent, and utilities, at least 75% of the forgiven amount must have been used for payroll. This 75% rule was not in the CARES Act and may have been added by Treasury due to the likelihood of oversubscription.

To review the Program Overview from the SBA, click here:
PPP credit terms are very generous. Loans under the PPP:
  • Can be as big as the lesser of $10,000,000, or 2.5 times the borrower’s average total monthly “covered” payroll costs over the prior 12-months;
  • Carry interest at a 0.50% fixed rate;
  • Are repayable over two years (NOTE: The CARES Act authorized repayment of up to 10 years, but the Treasury appears as of April 1 to have selected a 2-year term);
  • Do not require any personal guarantee; and
  • Will be fully guaranteed by the SBA.

The Act is crafted to provide rapid relief to borrowers in the interest of stabilizing the economy and employment levels. In furtherance of that goal, the SBA has been directed to rapidly expand its list of approved lenders; to facilitate swift closings; to allow PPP borrowers to defer its repayment obligations for between 6 months and 1 year at the borrower’s request; and to waive its typical SBA and lender fees. Underwriting requirements have also been significantly eased for PPP loans. Besides meeting the SBA’s eligibility criteria, described above, a borrower must certify in good faith that:
  • The loan is necessary due to the uncertainty of current business conditions caused by the coronavirus pandemic;
  • The borrower will use the proceeds to retain workers, to fund payroll costs and other permitted payments, outlined above; and
  • The borrower does not have an application pending, nor has it received, duplicative funding from other pandemic response programs.
One of the most attractive features of this program is that PPP loan may not need to be fully repaid by the borrower. Under the loan forgiveness provisions of this legislation, a borrower’s loan balance will be reduced by the aggregate amount spent by the borrower during the eight weeks immediately following the PPP loan on: 1.) “covered” payroll costs, as defined above, 2.) interest paid on its pre-existing ordinary course mortgage debt, 3.) rent, and 4.) utility bills. The SBA guidance states that at least 75% of the forgiven amount must have been used for payroll. With careful attention to the PPP forgiveness requirements, the entire PPP loan could be forgiven.

Since the CARES Act is intended to subsidize employment continuation and stability, the amount of loan forgiveness will be reduced if the employer makes any lasting employee cuts or lowers the salaries or wages of its employees.
  • In the case of employee cuts, the amount forgiven will be proportionately reduced according to a formula that multiplies the loan amount by a fraction which has the average number of full time equivalent (“FTE”) employees during the 8 week, post-loan measuring period, as the numerator, and the pre-loan average number of FTE employees during one of two permissible measuring periods, as the denominator (either (x) February 15, 2020 to June 30, 2020 or (y) January 1, 2020 to February 29, 2020). The borrower is entitled to choose whichever measuring period suits it best as the denominator.
  • In the case of salary or wage reductions, the amount forgiven will be reduced, on a dollar for dollar basis, by the total amount that salary or wage cuts imposed by the borrower on employees earning less than $100,000 (on an annual basis) exceed 25% of the total salary or wages paid to such employees during the three full months preceding the PPP loan.

To further help promote the CARES Act’s goals a borrower is entitled to relief from a reduction in the forgiveness amount if, by June 30, 2020, the borrower has rehired laid-off employees and/or has restored previously lowered wages and salaries.

The SBA has issued the form for interested borrowers to apply for PPP loans. That application can be downloaded here. Employers can file applications starting on April 3rd, and independent contractors and self-employed individuals can apply starting on April 10th. Applications will be treated on a first come basis. We encourage all of those interested in seeking PPP loans to swiftly submit a completed application and the required supporting documents as soon as possible. Many commentators have observed that because this program is so attractive, its funding will quickly be exhausted.

This website presents general information and is not intended to provide legal advice and it should not be considered or relied upon as such. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as lawyer advertising.