The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”) was signed into law by President Trump on March 27, 2020. The Act provides relief for businesses and non-profits financially affected by COVID-19, including incentives for employers to keep employees on their payroll. Non-profits are included in the Act’s target groups by: 1) expanding eligibility for non-profits to apply for Small Business Administration (“SBA”) loans; 2) providing opportunities for larger non-profits to apply for loans; 3) expanding unemployment benefits to employees; and 4) providing tax incentives for employers to retain employees during the pandemic.
In general, the Act provides five principal means of financial assistance from the federal government for businesses and non-profits to stay operational and keep employees on the payroll:
1. Paycheck Protection Program (“PPP”) Loans: “Small businesses” and certain non-profits (501(c)(3) and 501(c)(19) organizations only) with up to 500 employees can receive a Small Business Administration loan on relaxed terms and with the potential for full-forgiveness of the loan. Sole proprietors, independent contractors, and self-employed individuals are also eligible for PPP loans. The loan amount requested can be up to 2 ½ months (eight weeks) of payroll costs, and is capped at $10 million per employer. “Payroll costs” include: salary, wage, commission or similar compensation; payment for vacation, parental, family, medical, or sick leave; payments for group healthcare benefits; and payment of state or local taxes assessed on the compensation of employees. Importantly, “payroll costs” do not include: the amount of compensation given to any employee over $100,000 annually (prorated for the covered period), or qualified sick and family paid leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Relief Act (“FFCRA”). In addition to other uses normally permitted for SBA loans, the funds can be used for the following permitted uses: interest on mortgage obligations, rent, utilities, and interest on other debts. The interest rate on the loan cannot exceed 4%, and businesses and non-profits can obtain a loan from any private lender approved by the SBA. Collateral and personal guarantees are not required. The maximum loan term is 10 years, and loans do not have to be repaid for at least six months, but repayment can be deferred up to one year, depending on the terms of the loan. All loan fees are waived and there are no early-payment penalties. The goal is to issue a determination on each loan application within 2-3 weeks and to make a disbursement within five days of receiving executed loan closing documents.
Importantly, certain amounts of the loan, up to 100%, can be completely forgiven, but only the amounts used for the permitted uses explained above for the 8-week period after receiving the loan. The loan forgiveness amount is reduced proportionately if the organization does not, during the eight-week period, restore its staffing numbers and pay levels to what they were (or to within 25% of what they were for pay levels) during a prior measurement period. This is the incentive for employers to keep employees on the payroll. The amount of the loan forgiven is not reduced by layoffs or pay reductions between February 15, 2020 and April 26, 2020 (30 days after the Act’s effective date) if the employees are brought back to work or pay levels restored no later than June 30, 2020. Bringing employees back or restoring pay levels sooner is likely more helpful to increase the amount of your payroll costs during the eight weeks after receipt of the loan money, as those are the costs that determine the maximum amount of the loan that may be forgiven.
Loan forgiveness is not automatic. Businesses must submit an application to the lender including appropriate documentation of the qualifying expenditures made during the covered period (i.e., the eight weeks following receipt of the loan). The lender is required to issue a decision on loan forgiveness within 60 days of the application submission. The amounts forgiven under the PPP are excluded from the borrower’s gross income for tax purposes.
An employer who obtains a PPP loan is not eligible for the payroll tax credit described below, and an employer who obtains a PPP loan and has it forgiven is not eligible for the deferral of payroll tax option described below. However, an employer can receive both a PPP loan and an economic disaster relief loan described below under certain circumstances, such as if the disaster relief loan is made before the PPP loan is available.
2. Economic Injury Disaster Loans: The Act expands eligibility of SBA Economic Injury Disaster Loans (“EIDLs”) to all “private non-profit organizations” (in addition to “small businesses”) with fewer than 500 employees, including sole proprietors or independent contractors, until December 31, 2020. The Act expands the definition of a “disaster” to include the COVID-19 pandemic. EIDLs are intended to pay for expenses that could have been met had the COVID-19 pandemic not occurred, including payroll and other operating expenses. Since “non-profit organization” is not defined under this section, it is unclear whether non-profits, other than 501(c)(3) and 501(c)(19), are eligible for EIDLs. The maximum loan amount is $2 million per employer, and the loan term can be up to 30 years with the interest rate for small businesses capped at 3.75% and the interest rate for non-profits capped at 2.75%. Principal and interest may be deferred for up to four years. EIDLs are not eligible for loan forgiveness and must be repaid. Organizations can apply for EIDLs at a local SBA District Office or online at https://disasterloan.sba.gov/ela/.
Notably, small businesses and non-profits can ask for a grant of up to $10,000 out of the requested loan amount, which the SBA must pay within three days after it receives the EIDL application. The grant funds can be used for any permitted use, including but not limited to: providing sick leave to employees unable to work due to the direct effects of COVID-19, maintaining payroll to retain employees during business disruptions or substantial slowdowns, meeting increased costs to obtain materials due to interrupted supply chains, making rent or mortgage payments, or repaying other obligations that cannot be met. Significantly, the grant of up to $10,000 does not have to be repaid, even if the EIDL application is ultimately denied.
3. Unemployment Compensation Provisions for Self-Insured Non-Profits: Generally, non-profits and government entities have the option of paying unemployment insurance tax or self-insuring. If a non-profit self-insures, it is required to repay its state unemployment insurance trust fund for the amount of unemployment benefits actually received by its laid-off employees. The Act provides that these self-insured non-profit employers may be reimbursed for half of their costs of unemployment benefits provided to laid-off employees between March 13, 2020 and December 31, 2020. For example, if the state gives a self-insured non-profit employee $2,000 in unemployment benefits, the federal government will reimburse the non-profit for half of the amount, i.e., $1,000.
The Act provides an additional payment of $600 per week from the federal government, on top of what state programs pay, to each employee who is receiving unemployment compensation benefits for up to four months until July 31, 2020. The additional $600 is fully funded by the federal government such that self-insuring non-profits do not have to reimburse the state or federal government. Once an employee has exhausted all rights to unemployment compensation benefits, the Act provides up to an additional 13 weeks of state unemployment benefits. A self-insured non-profit would be reimbursed by the federal government for half the amount it pays to the state for unemployment compensation benefits paid to an employee during these additional 13 weeks.
4. Payroll Tax Credit and Deferral: The Act provides certain employers, including all types of non-profit organizations, with an employee retention payroll tax credit. Importantly, a business that has obtained a PPP loan described above is not eligible to receive this payroll tax credit. The payroll tax credit is equal to 50% of “qualified wages” paid by employers to employees from March 13, 2020 through December 31, 2020 (the “Relevant Time Period”). The credit is provided for the first $10,000 of compensation, including health benefits, paid to an employee during the Relevant Time Period, so that the maximum credit provided per employee is $5,000 (50% of the qualified wages). The amount of the credit is applied against the employer’s share of social security taxes it would normally owe to the federal government for that quarter. Any amounts of qualified wages an employer pays to its employees in excess of the amount it would owe in social security taxes is treated as an overpayment and refunded by the federal government. The definition of “qualified wages” depends on the average number of full-time employees employed during 2019. If the employer averaged more than 100 full-time employees in 2019, qualified wages are those paid to an employee when he or she is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. If the employer averaged 100 or fewer full-time employees in 2019, qualified wages are those paid to any employee during any period of economic hardship described in (1) and (2) above.
In addition, the Act permits payment of an employer’s share of social security payroll taxes from March 27, 2020 through December 31, 2020 to be delayed, with half of the amount due on or before December 31, 2021, and the other half due on or before December 31, 2022. This applies to any employer, including non-profits; however, it does not apply if the organization has obtained a loan and had such loan forgiven under the PPP program described above.
5. Industry Stabilization Loans: The Act creates a $500 billion Industry Stabilization Fund (the “Fund”), $454 billion of which is allocated for loans to non-profit organizations and “mid-size businesses” with 500 to 10,000 employees. The Treasury Department and the Federal Reserve are providing financing to banks and other lenders making these loans. The business must certify it will use the funds to retain at least 90% of its current workforce at full compensation and benefits until September 30, 2020, and that within four months after the COVID-19 emergency ends, it intends to restore at least 90% of the workforce it had as of February 1, 2020. These loans may be beneficial to large non-profits, such as universities and hospitals or other medical facilities. The interest rate on these loans is capped at 2%, and no principal or interest is due for at least six months after the loan is disbursed. Again, the term “non-profit organization” is not defined in this section, so it is unclear whether non-profits other than 501(c)(3) are eligible. These types of loans are not eligible for forgiveness and must be repaid.
In summary, the Act provides opportunities for businesses and non-profits to maintain operations and keep employees on the payroll, but the challenge is to weigh the options and determine which one is best for each employer, including making the difficult decision on whether and when to lay off employees. It is recommended each employer consult with financial and legal professionals to determine the best course of action.