Paycheck Protection Program
More disconcerting from a retirement perspective is the number of employers that are already shuttering their doors and furloughing workers. These workers will not be getting paychecks, making deferrals to savings plans, and consequently not earning employer matches.
A cornerstone of the CARES Act is designed to keep employees connected to their employers—keep them paid even if a business is temporarily closed.
The Paycheck Protection Program will back $349 billion in loans to businesses with 500 or fewer employees through the Small Business Administration. Loans will be issued through lenders approved by the SBA, and funds will be available by Friday, April 3.
“The question is how do we all help companies stay in business,” said Stevenson. “Our job is to give plan advisers good counsel they can bring to sponsors. Advisers can’t just focus on the retirement provisions of the CARES Act—they have to understand all of the options available to their employer clients. Assuming we execute this well as a country, this bill should provide a lot of relief to employers, and a lot to participants.”
The below is a snapshot of what is involved in the Paycheck Protection Program, based on a reading of the bill and its synopsis, information posted by the Treasury Department, and analysis by Bijal Vira and Nirav Bhatt, corporate finance attorneys with Shepard Mullin.
1. Funding for up to eight weeks of payroll
The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. (Source: Treasury Department)
2. $349 billion in total federally backed loans
The CARES Act has authorized commitments to the SBA 7(a) loan program, as modified by the CARES Act, in the amount of $349 billion. The Paycheck Protection Program covers the period beginning February 15, 2020 and ending on June 30, 2020 (the Covered Period). (Analysis: Sheppard Mullin)
3. Loans forgiven if they are used to keep employees paid
Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. (Source: Treasury Department)
4. Firms with 500 or fewer employees, and self-employed can apply
Small businesses with 500 or fewer employees—including non-profits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors—are eligible. Businesses with more than 500 employees are eligible in certain industries.
- Starting April 3, 2020, small businesses and sole proprietorships can apply.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply. There is encouragement to apply as quickly as you can because there is a funding cap.
5. Relaxed loan vetting
For eligibility purposes, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, to determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor. (Source: Legislative synopsis)
6. Calculating the loan value
During the Covered Period, the maximum loan amount permitted for an eligible Covered Entity is the lesser of $10,000,000 and an amount calculated based on a payroll formula that essentially equals 2.5 x the average total monthly payroll cost incurred in the one-year period before the loan is made.
The interest rates for loans borrowed by a Covered Entity under the program may not exceed four percent (4%).
Any Paycheck Protection Loan that has a remaining principal balance after any applicable loan forgiveness (as covered in detail below) must have a maturity date no later than 10 years from the date on which the borrower applied for loan forgiveness.
The SBA will direct lenders to defer all payments (principal, interest and fees) otherwise due under a Paycheck Protection Loan for a minimum of 6 months and a maximum of 12 months. (Analysis: Sheppard Mullin)
7. Loan forgiveness tied to keeping employees on books
During the 8-week period beginning on the date a Paycheck Protection Loan is funded (the Forgiveness Period), a borrower will be eligible for forgiveness and cancellation of indebtedness for up to the full principal amount of such loan. The amount eligible for forgiveness (the Total Eligible Forgiveness Amount) is equal to the total costs incurred and payments made during the Forgiveness Period for (1) payroll, (2) mortgage interest, (3) rent and (4) utilities.
The loan forgiveness amount available to a borrower is subject to reduction if the borrower terminates employees or reduces employee salary and wages during the Forgiveness Period. There is, however, relief from the forgiveness reduction if the borrower rehires employees or makes up for wage reductions by June 30, 2020. (Analysis: Sheppard Mullin)
8. The loan application
A copy of the loan application has been made available through the Treasury Department.
9. How to find an approved lender
The SBA can direct employers to an approved lender here.