Type: Law Bulletins
Date: 03/31/2020

CARES Act Summary for Employers: Updated Guidance from the SBA Regarding Terms of PPP Loans

Last week, after quickly passing the U.S. Senate and House, President Donald J. Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) into law, providing significant relief to both employers and individuals relating to the outbreak of COVID-19.  Employers should carefully review the applicable provisions of the CARES Act (available here and summarized here) to understand the support and programs available to employers of various types and sizes. The CARES Act also provides relief to individuals through direct monetary payments as well as expanded and increased unemployment compensation coverage. Finally, the CARES Act provides clarification as to certain provisions of the previously enacted Families First Coronavirus Response Act (FFCRA, available here and summarized here). 

On March 31, 2020, the Small Business Administration (SBA) issued additional guidance regarding the terms of payroll protection program (PPP) loans; that information has been updated below. The SBA expects to have the PPP program up and running on Friday, April 3, 2020. Treasury Secretary Mnuchin has indicated that beginning on Friday, “Businesses can go to a participating SBA 7(a) lender, bank or credit union, apply for a loan, and be approved on the same day. The loans will be forgiven as long as the funds are used to keep employees on the payroll and for certain other expenses.”

Taft has assembled an SBA Task Force on the new SBA loan programs created under the CARES Act. If you have questions or concerns regarding COVID-19 and its impact on your business, please contact any member of our SBA Task Force or your Taft lawyer. Additional guidance is being issued by the SBA and it will be updated when available. 

Payroll Protection Loans to Small Businesses

The CARES Act provides nearly $350 billion to small businesses for cash-flow assistance for eight weeks through federally guaranteed loans, which can be used for payroll support, employee salaries, rent, utilities, and interest payments on (i) mortgage payments or (ii) other debt obligations existing on Feb. 15, 2020. Loans will be available immediately through existing SBA-certified lenders, including banks, credit unions and other financial institutions.

  • Who is Eligible? Small businesses (those with 500 or fewer employees) are eligible for loans. In addition, certain employers with more than 500 employees with a North American Industry Classification System (NAICS) Code of 72 (food and hospitality industry) are eligible, so long as they have no more than 500 employees per physical location. The business had to be in existence on Feb. 15, 2020, and must be responsible for employees or independent contractor wages. There are also specific provisions governing franchises, as well as limited waiver of SBA affiliation rules. In addition, the act also provides for loans to certain other business concerns, including nonprofits and veterans organizations, self-employed individuals, sole proprietors and independent contractors. 
  • How Much is Available? The amount of the loan cannot exceed the lesser of 250% (or 2.5 times) the average monthly payroll costs during the trailing 12 months, or $10 million. “Payroll costs” include wages; tips; vacation, parental, family and sick leave pay; allowances for dismissal or separation; payment required to maintain group health care benefits; payment of retirement benefits; and state and local tax payments assessed on employee compensation. However, “payroll costs” excludes compensation of any individual employee in excess of $100,000/year, taxes withheld or paid by the borrower for income tax or FICA and qualified wages for emergency paid sick leave and emergency paid family leave under the FFCRA. 
  • How Can We Use the Funds? Loans can be used to help cover payroll costs and other expenses (including rent, utilities and interest on mortgages incurred prior to the coverage period). 
  • What are the Terms of the Loans? The SBA issued additional guidance on March 31, 2020 regarding the terms of all PPP loans. Loans under the program are fully guaranteed by the federal government through Dec. 31, 2020, and all SBA fees are waived. To the extent not forgiven, loans have a 2-year maturity, and interest on all loans under the program at a rate of 1%. Personal guarantees are waived, and there is no recourse against an owner, director or officer of the borrower. There is no credit elsewhere test, collateral is not required and loan payments are deferred for 6 months. Borrowers must sign a certification stating these funds are necessary due to the economic conditions and that the funds will be used in accordance with the allowable uses under the CARES Act.
  • What Are the Requirements for Loan Forgiveness Under the CARES Act? Loans may be forgiven in an amount equal to the “qualifying costs” spent during the eight week period after the origination date of the loan. “Qualifying costs” include payroll costs, mortgage interest (not principal), rent and utilities in place before Feb. 15, 2020.  However, the forgiveness amount shall be reduced in certain circumstances; the reduction can be avoided if the employer rehires all employees laid off since Feb. 15, 2020, or returns previously reduced wages (reduction of 25% or more) back to their original amounts by June 30, 2020.  Forgiven amounts are not taxable as income to the borrower. 

Detailed information regarding SBA loans and the CARES Act is available using the links below. 

Federal Loans to Specific Industries

The Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy provision of the CARES Act authorizes the Secretary of Treasury to make loans, loan guarantees and investments in support of eligible businesses, which include air carriers and any other U.S. businesses that have not otherwise received loans or loan guarantees under the Act. The Act provides for direct lending to (1) passenger air carriers and related businesses, (2) cargo air carriers and (3) businesses critical to maintaining national security. These loans are subject to certain obligations and restrictions on the borrowers.

Federal Reserve Lending Program

Additionally, the Secretary will make at least $454 billion available to make loans and loan guarantees to, and investments in, programs or facilities established by the Federal Reserve to provide liquidity to the financial system that supports lending to other eligible businesses, states or municipalities. The Secretary will set the terms and rates of the loans, which will be based upon the risk and current average yield of treasuries of comparable maturity.

To participate in the programs or facilities established by the Federal Reserve, a private eligible business must be created or organized in the U.S. or under U.S. laws and have significant operations and a majority of its employees in the U.S.  The company must also agree to:

  • Forego buying back its stock or the stock of any parent company during the term of the loan and for 12 months after it is no longer outstanding, except to the extent required by an existing contract.
  • Refrain from paying dividends or other capital distributions with respect to its common stock during the term of the loan and for 12 months after it is no longer outstanding.
  • Comply with limits on executive compensation and severance payments.

The secretary can waive the above three requirements upon a determination that waiver is necessary to protect the interests of the federal government.

Assistance for Mid-Sized Businesses

Within this general business loan program, the CARES Act also encourages the secretary to implement a program or facility to make loans available, to the extent practicable, to eligible businesses (including non-profits) with between 500 and 10,000 employees. Such loans will be subject to an annualized interest rate no higher than 2% and no principal or interest payments would be due for at least the first six months of the loans. To apply for a loan under this program, an eligible business must make a good faith certification that contains an agreement to comply with the prohibition on stock buybacks and payment of dividends referenced above. The certification must also provide that:

  • The uncertainty of economic conditions make the loan request necessary to support ongoing operations.
  • The funds will be used to retain at least 90% of its workforce, at full compensation and benefits, until Sept. 30, 2020.
  • It intends to restore no less than 90% of the workforce that existed as of Feb. 1, 2020, and to restore all compensation and benefits to the workers no later than four months after the termination of the public health emergency.
  • It was created in or organized under the laws of the U.S., is domiciled in the U.S. and has significant operations and a majority of its employees in the U.S.
  • It is not in bankruptcy.
  • It will not outsource or offshore jobs for the term of the loan and for two years after it is paid.
  • It will not abrogate existing collective bargaining agreements for the term of the loan and for two years after it is paid, and it will remain neutral in any union organizing effort during the term of the loan.

Separately, the CARES Act also provides that the Federal Reserve may establish a Main Street Lending Program or similar program or facility to support lending to small and mid-sized businesses on terms consistent with the Federal Reserve Act.

Deferral of Payroll Taxes

The CARES Act allows employers to defer payment of the employer portion of Social Security payroll taxes on employee wages. The deferral period runs from March 27, 2020 through Dec. 31, 2020.  The employer’s deferred tax payments must be made to the Treasury Department in two installments, with 50% due by Dec. 31, 2021 and the remaining 50% due by Dec. 31, 2022.

  • Note: Employers cannot defer payroll taxes under this section if the employer also receives a Small Business Act loan that is forgiven under the CARES Act.

Refundable Employee Tax Credit

Employers are eligible to receive a refundable employment tax credit if (1) their business has been suspended by government order relating to COVID-19; or (2) their business has experienced a significant decline in gross receipts (at least 50%) relative to the same quarter of the previous year.

  • Note: This credit is unavailable to any employer that receives a Small Business Act loan that is forgiven under the CARES Act.

The amount of the tax credit equals 50% of qualified wages paid to each eligible employee and is capped at $10,000 per employee.  What counts as “qualified wages” depends on the size of the employer.

  • If the employer has 100 or fewer full-time employees, then all wages paid during the applicable period will qualify for the tax credit, regardless of whether the employee is actually providing services to the employer.
  • If the employer has more than 100 full-time employees, then “qualified wages” includes only wages paid to employees who are not providing services to the employer for reasons relating to COVID-19 (e.g., the employee is staying home to care for a sick family member).

Unemployment Insurance

Because Unemployment Insurance (UI) is a joint state-federal program which is administered by states in accordance with federal guidelines, in order to take advantage of the unemployment benefits offered under the CARES Act, states will have to enter into specific agreements with the DOL. 

The CARES Act, Title II, Subtitle A (the Relief for Workers Affected by Coronavirus Act) applies from Jan. 27, 2020 through Dec. 31, 2020 and provides the following key provisions with respect to UI benefits:

  • A temporary Pandemic Unemployment Assistance Program (PUA) which provides payment to workers who are not traditionally eligible for UI such as self-employed or independent contractors (including “gig-workers”). In order to qualify the individual must self-certify that they are unable to work (either fully or partially) as a direct result of the Coronavirus health emergency.
  • Federal Pandemic Unemployment Compensation payments which provide an additional $600 per week payment to each recipient of UI or PUA. This additional payment is available for up to 4 months.
  • An additional 13 weeks of UI benefits through Dec. 31, 2020, expanding benefits from 26 weeks (in most states) up to a maximum of 39 weeks.
  • Full funding of “short-time compensation” (sometimes called work sharing) programs through Dec. 31, 2020, for employers who reduce employee hours instead of laying off workers. Employees under these programs would receive a prorated UI benefit.
  • Funding to pay the cost of the first week of UI benefits for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits. This provision is also in effect through Dec. 31, 2020.
  • Grants and start-up costs for states to develop short time compensation programs. 
  • The Secretary of Labor shall establish a process for making assistance available for employees who were laid off or otherwise unable to work due to the Coronavirus health emergency after Jan. 27, 2020 but before the enactment of the CARES Act.

FFCRA Paid Sick Leave and COVID-19 EFMLA

Finally, the CARES Act makes certain changes to the FFCRA (the provisions of the FFCRA are summarized here). Many of those changes are clarifying or technical in nature. Substantively, the CARES Act adds new language to clarify that the FFCRA provides leave entitlement for rehired employees. Specifically, the CARES Act provides that for the purposes of the EFMLA, the term “employed for at least 30 days” includes employees who were laid off on or after March 1, 2020, had worked for the employer for not less than 30 of the last 60 calendar days prior to their layoff and were rehired.


Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

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