Navigating the CARES Act and COVID-19 Relief
COVID-19 Business Survival Webinar Recap
The CARES Act, which was passed on March 27, 2020 is a landmark piece of legislation with more than $2.2 trillion of financial relief to individuals and companies affected by COVID-19. Much of the law is still being analyzed and lending institutions and government agencies are scrambling to implement it, with no shortage of headaches involved. One of the hallmarks of the CARES Act are the Paycheck Protection Program (PPP) loan provisions: $500 billion in loans and other assistance to companies, state, and municipalities.
Adams Brown hosted a webinar on April 2, 2020 to help clients understand key elements of COVID-19 financial relief options. An informative discussion about the CARES Act was moderated and key topics included the application process, another type of loan (EIDL loans), and differences between the two programs.
The CARES Act and Its Effect on Employment and Retirement
There are many parts of the CARES Act and aid programs designed to support employers financially. The chief provisions that employers need to know about employment are:
- Health insurance plans cannot impose any deductibles or costs on individuals for COVID-19 testing.
- Telemedicine is available at no cost with high deductible plans.
- HSA and FSA funds can be used for over-the-counter drugs.
Businesses should get in touch with their carrier and benefits broker to ensure that the coverage has the changes in place, so businesses are in compliance.
Businesses should be careful about reduced work hours and furloughs as these decisions could influence benefits. If employees are furloughed or reduced, businesses need to get in touch with the carrier to make sure that the employee is still eligible for benefits. Recall that some carriers are waiving the hours requirement for employees affected by COVID 19. It requires a one-page modification to the plan document.
Another change is regarding rehires and FMLA. If an employee was laid off on or after March 1st and had worked for at least 30 days in the previous 60 days, and businesses want to rehire them, the employer can use their rights under extended FMLA absence. This replaces the old rule.
The CARES Act has an impact on retirement plans, too. There are several areas where retirement plans may have changed. First, the 10% penalty for early withdrawal of funds for anyone under 59 ½ is waived right now, up to $100,000 for the next 180 days. Plus, employees can recontribute that withdrawal amount without any regard to annual caps the IRS usually puts in place, within the next three years. Also, what would normally be income in early withdrawal is still subject to taxation over a three-year period.
Loan Provisions of CARES Act
There are two different programs to support businesses in keeping employees on payroll, and these programs should be considered in conjunction with each other. Employers need to decide which one is most beneficial as they can’t utilize both. There is the Paycheck Protection Program (PPP) and Employee Retention Tax Credit.
The PPP is a forgivable loan through the Small Business Administration (SBA), where in the forgivable portion of the loan covers eight weeks of payroll expenses. The Retention credit is a tax credit available to some organizations that are required to shut down or experience significant declines in revenue. The refundable credit is accounted for in quarterly tax filings. This is not to be confused with the paid sick leave or expanded FMLA leave provisions laid out in the Families First Coronavirus Response Act; they’re separate.
When deciding whether the PPP loan or the retention credit will provide the most benefit, business owners should first ask whether they’re eligible for the retention credit. These questions will help you decide if you qualify for the retention credit and make the decision on which one to apply for easier.
- Have you been shut down by government regulations? This includes stay at home orders.
- Has your organization seen a 50% decline in gross receipts in Q1 2020 compared to Q1 2019?
Regulations for PPP
There are two main questions business owners have about PPP loans: How much can I borrow? and How much gets forgiven?
Different banks are using different information, but with similar calculations. In calculating two and a half months of payroll expenses, take into consideration salaries, wages, commissions, tips, and other similar compensation. Include vacation and other types of paid leave and any sort of allowance for dismissal or separation of service, and payments for group health care benefits, including insurance premiums. Also include all the retirement benefit payments, as well as other inclusions such as compensation or income of a sole proprietor or independent contractor. For employees, owners, and independent contractors, the annual calculation is limited to $100,000.
Then, deduct other costs. Some exclusions include the FICA tax, railroad retirement tax, federal income tax withholdings, and any credits received for qualified sick leave and family leave under the FFCRA. Use 2019 payroll estimation to calculate what can be borrowed. Some banks are also requesting payroll information, so be prepared.
The loan amount that is forgiven depends on a variety of items. Eight weeks after the loan is disbursed, the first 80 percent of the loan balance is forgiven, minus reductions in allowable expenses such as the exclusions mentioned above.
The other 20 percent of the PPP loan can cover payment of interest on loans, mortgages, utilities, and rent expenses from a leasing arrangement prior to February 15, 2020.
The PPP loan term will not exceed 10 years and four percent interest. Additional guidance will be released in the coming days and weeks.
Businesses should be talking with an SBA-qualified lender about these types of loans. Keep in touch with the lender as the money will probably go fast.
The application process includes typical information requested by lenders such as payroll information, tax records, 1099s, and other generally accepted loan documents (bylaws, bank statements, etc.).
On the other hand, the employee retention tax credit is calculated on a quarter by quarter basis. This means a business may qualify in one quarter but not another. The maximum benefit to an employer is $5,000 per employee and is based on having a minimum of $10,000 in payroll and benefits for the employee. There are other limitations on the size of the employer, and employers with 100 or fewer full-time or full-time equivalent workers will benefit the most from the employee retention tax credit.
A quick and general analysis of the two programs must include first deciding whether the $5,000 minimum threshold under the Employee Retention Tax Credit can be met or exceeded. If the PPP loan can offer more than that amount, then most of the time we will recommend applying for PPP funds.
Another type of funding is available in any federally declared disaster zone are Economic Injury Disaster Loans, or EIDLs. This is an existing program within SBA and funds are meant to restore solvency to businesses affected by disaster. EIDLs are not meant to replace lost revenue or restore businesses wholly, but instead to keep things operational. Businesses, non-profits, ESOPs, and self-employed individuals can apply for EIDLs.
The basic terms of EIDLs are a funds advance of up to $2 million on a 30-year term loan. The current interest rates are 3.75% and 2.75% for non-profits. These are direct loans from the SBA, not a local lender like PPP loans. The expenses cover virtually all working capital and general operating expenses, with just a few exclusions of retirement of existing debt and capital purchases.
On EIDLs, the personal guarantee is waived for up to $200,000. The first year of payments is deferred but interest accrues. Available collateral may be required for loans over $25,000. EIDLs are designed to be broader than PPP loans.
The application process is completely online and there is an added change of an expedited $10,000 disbursement. This disbursement is entirely forgivable, even if a business doesn’t qualify for additional disbursements. Emergency payments are designed to be pushed out to businesses that need it the most. It’s an emergency plus loan that’s then folded into the PPP loan and borrowers must ask for the expedited disbursement.
Businesses can apply for both EIDLs and PPP loans, and if they can apply for both, they should.
Major differences between the two loan programs:
- EIDL: covers more expenses
- PPP: limited to payroll and related benefits
- EIDL: longer repayment terms
- No double dipping. Bridge loans available
Bridge loans are available with EIDLs up to $25,000 and can be disbursed within 45 days. These are grandfathered provisions from the existing program. It’s slightly expedited compared to EIDL disbursement.
As businesses navigate the different programs, what’s the best step? The best way forward is to prepare cash forecasts and projections and what/if analysis for economic impact. If businesses start looking at that now and the prospective or projected business conditions under two or three different scenarios, they’ll be better prepared for the extent of the need under these provisions.
Adams Brown will continue to offer webinars to answer questions on financial and tax relief provisions contained in the CARES Act. As business conditions change and final guidance is issued from the government, we will keep you updated. Stay tuned for more webinars and always reach out with any questions.
For more information, visit our COVID-19 Resource Center.