Navigating the Legal, Economic and Business Challenges of the - - PowerPoint PPT Presentation

Navigating the Legal, Economic and Business Challenges of the Coronavirus Pandemic WEBINAR 3

Nelson Mullins Riley & Scarborough LLP

CARES Act Stimulus Package:

SBA Loan Programs, Mid-Sized Business Relief and Employer Pay Provisions

Nelson Mullins Riley & Scarborough LLP COVID-19 Taskforce

Ann Murray

Partner Atlanta, GA (404) 322-6603 ann.murray@nelsonmullins.com

Contact Information

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Jonathan H. Talcott

Partner Washington, D.C. (202) 689-2806 jon.talcott@nelsonmullins.com

Bret A. Cohen

Partner Boston, MA (617) 217-4617 bret.cohen@nelsonmullins.com

• E. Peter Strand

Partner Washington, D.C. (202) 689-2983 peter.strand@nelsonmullins.com

Suhail Seth

Partner Atlanta, GA (404) 322-6149 suhail.seth@nelsonmullins.com

Agenda

I. Summary of SBA Relief Programs (Jon Talcott) II. Paycheck Protection Program (Peter Strand, Jon Talcott, Suhail Seth) III. Emergency Economic Injury Disaster Loans (Peter Strand, Jon Talcott) IV. Title IV (Suhail Seth, Jon Talcott) V. Employer Pay Provisions of CARES Act (Ann Murray)

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• I. Summary of SBA Relief Programs in

the Stimulus Package

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Summary

Three SBA Relief Programs in the Stimulus Package: 1. Paycheck Protection Program—

• $349 billion for eligible businesses (generally under 500 employees) to be provided under SBA’s 7(a) loan program.

Loans are 100% government guaranteed, up to $10 million based on businesses’ payroll, 2 year term at 0.5%. Loan forgiveness available.

2. Emergency Economic Injury Disaster Loans (EIDLs)—

• $10 billion additional funding for EIDLs under the SBA’s Section 7(b)(2) emergency lending program. CARES Act also

waives certain EIDL requirements, such as personal guarantee and collateral requirements, and relaxes and fast- tracks the application process.

3. Relief for certain existing SBA loans—

• The CARES Act permits the SBA to pay the principal, interest and fees on these loans for six months beginning with

the next payment due date. Loans already on deferment will receive six months of payment after the deferral period. SBA will also encourage lenders to provide deferments and will allow lenders, for up to one year, to extend the maturity of SBA loans in deferment beyond current limits.

Title IV Assistance for Mid-Sized Businesses (500 to 10,000 employees)

$454 billion reserved for direct lending by Treasury. Of this, a portion will go to a Mid-Sized Business Lending Program.

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• II. Paycheck Protection Program

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Paycheck Protection Program

• $349 billion
• Generally available to companies with 500 or fewer employees
• Important to consider affiliation rules
• Loans approximately equal to lesser of 10 weeks’ payroll or $10 million
• Loan forgiveness available for up to entire principal amount, subject to

reduction for workforce and wage/salary reductions

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Paycheck Protection Program

• Who is eligible?
• How much can you borrow?
• How much loan forgiveness is available?
• What are the permitted uses?
• Other details
• How do you apply?

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PPP – Who is eligible?

• Are you a business located in the U.S. and which operates primarily within the U.S. or makes a

significant contribution to the U.S. economy through payment of taxes or use of American products, material or labor?

• Application requires all 20% or greater owners that are individuals to be either U.S. Citizens or have Lawful Permanent

Resident status.

• Application disqualifies certain bad actors, felons, and if you have defaulted on an SBA or federal government loan or

guarantee that caused a loss to the government.

• Are you below the size thresholds for eligibility?
• 500 or fewer employees (or such larger amount of employees if set forth in the SBA size standards)

▪ You must include affiliated companies’ employees in this calculation ▪ For hotels and restaurants, it is 500 or fewer employees per physical location.

• Also available for traditional “small businesses” under the existing SBA size standards.

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PPP – Affiliate Issues

• Calculation of number of employees should include all affiliates (companies controlled by any person or

entity controlling the recipient)

• Private Equity or Venture Capital controlled companies must count all affiliates
• Definition of “Affiliate” and “Control” is a ‘totality of the circumstances’ test, and the SBA generally takes

an expansive view of what constitutes control.

• Hotels and restaurants, certain franchises designated by the SBA, and companies that receive SBIC

funding are exempt from affiliation rules and do not need to aggregate employees.

• Affiliate determination is done on an entity by entity (or investor by investor) basis.
• Affiliation determined by control (i.e., when one entity controls another, or two or more entities

are controlled by a third party).

• Power to control 50% or more of voting stock or negative covenants in investor rights agreements,

such as blocking rights, may determine “affiliate” status among related investors and entities.

• On March 31, 2020, Speaker Nancy Pelosi requested that the U.S. Treasury and SBA provide additional

guidance and requested that startups be considered for some of the same relief as other small businesses.

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PPP – Accommodation and Food Services

• North American Industry Classification System (NAICS) code beginning with 72: The following is a list
• f industries with a NAICS code beginning with 72: Hotels and Motels; Casino Hotels; Bed-and-Breakfast

Inns; All Other Traveler Accommodation; RV Parks and Campgrounds; Recreational and Vacation Camps; Rooming and Boarding Houses, Dormitories, and Workers’ Camps; Food Service Contractors; Caterers; Mobile Food Services; Drinking Places (Alcoholic Beverages).

• Eligibility: if the business has more than one physical location (with 500 or fewer employees per

location) and is assigned a NAICS code beginning with 72.

• Waiver of Affiliation Rules.
• Example: Assume a corporation owns three hotels (NAICS Code 72) through three separate limited

liability companies, and that each such subsidiary has fewer than 500 employees. Ordinarily, the corporation would not qualify as a “small business” because it is too large when you consider the total number of its affiliates’ employees, i.e., the employees of the three subsidiaries it controls. However, if the affiliation rules are waived, each such subsidiary may apply for a covered loan under the PPP.

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PPP – How much can you borrow?

• Lesser of $10 million or ~10 weeks of

payroll costs

• 2.5x average total monthly payments
• f payroll costs during 1-year period

prior to date loan is made*

• You can also borrow the amount of any

7(b)(2) disaster loans borrowed since January 31, 2020 that are eligible for refinancing (subject to $10 million maximum)

* 12-week period ending June 30, 2019 for seasonal employers

“Payroll Costs”:

• Salary, wage, commission or similar compensation;
• Payment of cash tips or equivalent;
• Payment of vacation, parental, family, medical or sick leave;
• Allowance for dismissal or separation;
• Payment required for the provision of group health care

benefits, including insurance premiums;

• Payment of retirement benefits; and
• Payment of state and local tax assessed on the compensation
• f employees.

Special Rules:

• Only count salary up to $100,000 (any excess is disregarded).
• Do not count any compensation of an employee whose

principal place of residence is outside of the U.S.

• Exclude qualified sick or FMLA leave wages for which a credit

is allowed under Families First Coronavirus Response Act.

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PPP – Loan Forgiveness

• Loan forgiveness is available for up to entire principal amount, subject to reduction based on workforce

and wage/salary reductions

• Treasury guidance says that at least 75% of loan funds must be used towards payroll costs,

although this requirement is not in the CARES Act.

• Loan forgiveness amount:
• Amounts incurred or paid during first 8 weeks of loan for:

▪ Payroll costs ▪ Interest on mortgage obligations (but not principal or prepayment amounts) ▪ Rent ▪ Utilities (electricity, gas, water, transportation, telephone or internet access)

• Will be reduced proportionately to any reduction in workforce, plus reduced by any decrease in

salary/wages in excess of 25% for any employees earning less than $100,000

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PPP – Loan Forgiveness – Reduction

• Reduce the amount of forgiveness by both:
• Reduction in workforce:

▪ Divide: The average number of full-time equivalent employees per month employed during the covered period; ▪ By, at your election:

• The average number of full time equivalent employees per month employed from February 15, 2019 to June 30,

2019; or

• The average number of full time equivalent employees per month employed from January 1, 2020 to February

29, 2020.

• “Full-time equivalent” employee definition is unclear, but in the past the SBA has defined it as:
• Each employee who averages 30 hours per week counts as 1 FTE; plus
• All other employees’ hours are combined (up to 120 each), then divided by 120
• Reduction in salary/wages:

▪ The amount that total salary or wages for any employee that has decreased in excess of 25% during the covered period as compared to the most recent full quarter during which the employee was employed before the covered period.

• Do not count any reduction of any employee that in any pay period in 2019 received wages or salary at an

annualized rate of pay more than $100,000.

• Cure provision available (see next page)

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PPP – Loan Forgiveness – Cure Provision

• Cure Provision:
• For all reduction in workforce or compensation between February 15,

2020 and April 26, 2020, you do not count such reduction against the loan forgiveness if by June 30, 2020 such reduction has been reversed.

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PPP – Permitted Uses

• Permitted uses of loan funds:
• Payroll costs;
• Costs related to the continuation of group health care benefits during period of paid sick,

medical or family leave, including insurance premiums;

• Salaries, commissions or similar compensations;
• Payment of interest on any existing mortgage obligations;
• Existing rent obligations;
• Utilities;
• Interest on existing debt obligations; and
• Refinancing amounts under an eligible SBA Section 7(b)(2) Disaster Loan made since January

31, 2020.

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PPP – Other details

• Interest equals 0.5%
• Two year term, with no prepayment penalty
• Administration fees are waived
• No need to demonstrate you cannot obtain credit elsewhere
• No collateral or personal guarantee required
• Deferment available for 6 months to a year based on guidance to be issued within 30 days by SBA
• Loans are nonrecourse as long as used for permitted purposes
• Debt forgiveness does not count as income for tax purposes

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PPP – Next Steps

• Eligible lenders will start accepting applications for small businesses and sole proprietorships
• n April 3, 2020 and April 10, 2020 for independent contractors and self-employed individuals
• Begin examining application
• Identify eligible lenders:
• All current 7(a) lenders
• All insured depository institutions
• Other lenders to be determined by Treasury
• Technical corrections to legislation not likely before April 30
• In the meantime, consider whether a Section 7(b)(2) emergency EIDL is appropriate.

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• III. Emergency Economic Injury

Disaster Loans (EIDLs)

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Emergency Economic Injury Disaster Loans

• SBA Section 7(b)(2) Emergency Economic Injury Disaster Loans (EIDLs)
• CARES Act set aside an additional $10 billion for EIDLs
• 30 year loans up to $2 million; interest rates not to exceed 4%
• Now available to small business concerns, private nonprofit organizations,

small agricultural cooperatives, and businesses with not more than 500 employees, and sole proprietors or independent contractors

• Have you suffered, or are likely to suffer, substantial economic injury as a

result of COVID-19?

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EIDLs (cont.)

• $10,000 advance available; must be paid within 3 days after SBA receives application
• Must be used for allowable purpose, including payroll, paid sick leave, cost of materials, rent or mortgage, or
• ther obligations that cannot be met.
• Applicant must certify they are an eligible entity
• Need not be paid back, even if subsequently denied an EIDL
• Automatic deferment through 2020
• Relaxed application and requirements
• Need not be in business for 1 year (only operational as of January 31, 2020)
• No personal guarantees for loans less than $200,000
• May grant loan based on credit score alone; no tax returns necessary
• According to SBA officials, for loans of less than $500,000, SBA will rely on certification that applicant is a small

business concern

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EIDLs (cont.)

• Applications made directly with the SBA at this link.
• A company that gets an EIDL after January 31, 2020 may be eligible to borrow

additional funds under the Paycheck Protection Program to refinance the EIDL (subject to the $10 million cap). Check with your lender.

• 7(a) loans and 7(b)(2) loans may not be used for duplicative purposes.

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SBA Relief for Existing Loans

• Existing 7(a) loan (but not PPP loan), Section 504 loan or microloan
• SBA may pay the principal, interest and fees on these loans for six months

beginning with next payment date.

• Loans already on deferment will receive six months of payment after the deferral

period

• SBA will encourage lenders to provide deferments and will allow lenders, for up to
• ne year, to extend the maturity of SBA loans in deferment beyond current limits.

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• IV. Title IV

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Title IV

• Title IV sets aside $500 billion for direct lending and other loan and guarantee

programs by the Treasury

• $25 billion for passenger airlines and related industries
• $4 billion for cargo air carriers
• $17 billion for businesses “critical to maintaining national security”
• $454 billion for lending “to provide liquidity to financial system that supports

lending to eligible business, States or municipalities” ▪ This will include Assistance for Mid-Sized Businesses (500-10,000 employees)

• Subject to considerable restrictions
• Exact lending and programs are to be determined

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Title IV – Assistance to Mid-Sized Businesses

• CARES Act directs Treasury and Federal Reserve to create lending program for Mid-Sized

Businesses (500-10,000 employees)

• Although the program has not been announced, the CARES Act does set forth certain terms

and criteria:

• Interest rates less than 2%
• No principal or interest due for at least 6 months
• Loan forgiveness is prohibited
• Until one year after the date the loan is no longer outstanding, any officer or employee

with 2019 total compensation of over $425,000 cannot receive increased compensation for any 12-month period or receive severance pay or other termination benefits of more than twice his or her 2019 total compensation. Any officer or employee whose 2019 total compensation was more than $3,000,000 cannot receive compensation greater than $3,000,000 plus 50% of the amount by which his or her 2019 total compensation exceeded $3,000,000

• Applicants must also make significant certifications (see next slide)

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Title IV – Assistance to Mid-Sized Businesses (cont.)

• Applicants must certify
• Economic conditions make loan necessary to support ongoing operations
• Will retain 90% of workforce at full compensation until September 30, 2020
• Intends to restore at least 90% of workforce as of February 1, 2020 within 4

months of end of emergency

• Domiciled in US with significant US operations
• Not in bankruptcy
• Majority of employees in US
• No dividends or stock repurchases while loan is outstanding
• No offshoring or outsourcing jobs for 2 years after loan is outstanding
• May not abrogate collective bargaining agreement for 2 years after loan
• Neutral in union organizing for term of loan

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• V. Employer Pay Provisions of CARES ACT

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EMPLOYER PAY PROVISIONS OF CARES ACT

Delay in Payment of Social Security (2302) Employers and self-employed individuals can defer payment of the employer share (6.2%) of Social Security Tax (not the Medicare tax portion) they otherwise are responsible for paying in 2020, effective for payments due after March 27, 2020.

• 50% of the deferred payroll taxes are due on December 31, 2021, and
• 50% of the deferred payroll taxes are due on December 31, 2022.

NOTE – Does NOT apply if PPP loan forgiven

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EMPLOYER PAY PROVISIONS OF CARES ACT

Retention Payroll Tax Credit for Employers Subject to Closure

• The CARES Act provides a refundable payroll tax credit for each calendar quarter of 50% of “qualified wages” paid by an

employer which was carrying on a trade or business during 2020 and whose

• operations were fully or partially suspended due to a COVID-19 shut-down order from an appropriate governmental

authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes), or

• gross receipts declined by more than 50% when compared to the same quarter in the prior year. This gross receipts

reason begins with the first calendar quarter beginning on or after January 1, 2020 to which the percentage reduction applies and is eliminated at the end of the calendar quarter in which gross receipts are greater than 80% of gross receipts for the same calendar quarter for the prior year. The gross receipts reason does not apply to tax- exempt entities.

• “Qualified wages” means
• If more than an average of 100 full-time employees (each employee who is employed on average at least 30 hours of

service per week) were employed by the employer during 2019, the wages paid when the employee is not providing services due to a shut down

• If an average of 100 or fewer such full-time employees, all employee wages due to a shut down or decline in gross

receipts.

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EMPLOYER PAY PROVISIONS OF CARES ACT

Retention Payroll Tax Credit for Employers Subject to Closure

• The credit is capped at the first $10,000 of compensation per employee, including health plan expenses. “Health

plan expenses” means amount paid or incurred by the employer to provide and maintain a group health plan, to the extent such amount are excluded from the gross income of the employee under Code Section 106(a).

• If the credit exceeds the employer portion of Social Security taxes (i.e., 6.2%) for a calendar quarter, reduced by

any tax credits taken under the EFMLA and EPSL provisions under the FFCRA, the amount of the credit is refundable.

• The credit is for wages paid or incurred from March 13, 2020 through December 31, 2020.
• Does NOT apply if receive PPP loan
• Employers cannot use the credit for wages for which they receive a credit under the work opportunity tax credit or

a FFCRA paid leave credit

• The employee retention credit does not apply to federal, state or local government employers.

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EMPLOYER PAY PROVISIONS OF CARES ACT

Tax-Qualified Retirement Plans

• Adds COVID-19 in-service withdrawals.
• Relaxes plan loan rules.
• Eliminates required minimum distributions for 2020 for defined contribution plans.
• Defined benefit plan employer contributions due in 2020 delayed to January 1, 2020 (then due

with interest) (not PBGC premiums).

• For Code Section 436 restriction determination, allows use of 12/31/19 AFTAP.

See our Alert at: https://www.nelsonmullins.com/idea_exchange/alerts/Comp-and-Benefits- Brief/all/cares-act-impact-on-tax-qualified-retirement-plans

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EMPLOYER PAY PROVISIONS OF CARES ACT

Group Health Plans

• Group health plans to cover testing costs, with no cost sharing (including tests without an EUA by the FDA).
• Price of testing is rate specified in contract between provider and insurer, or, if no contract, a cash price

posted by the provider.

• Free coverage, with no cost-sharing, of any vaccine within 15 days for COVID-19 that has in effect a rating of

“A” or “B” by US Preventive Services Task Force or a recommendation from the Advisory Committee on Immunization Practices (ACIP).

• HHS to issue guidance on what is allowed to be shared of patient record (HIPAA concerns).
• HDHP with HSA allowed to cover telehealth services prior to deductible.
• Participants can use FSA and HSA Accounts to purchase over-the-counter medications (return to pre-2011

OTC coverages) with the addition of menstrual care products as covered OTC medical expenses. See our Alert at: https://www.nelsonmullins.com/idea_exchange/alerts/Comp-and-Benefits-Brief/all/cares-act- group-health-plans-and-a-little-deja-vu-to-2011

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EMPLOYER PAY PROVISIONS OF CARES ACT

Student Loan Subsidies

• An employer can provide a tax-free student loan repayment benefit to employees of

up to $5,250 per calendar year.

• Note that this would disallow the employee from taking any personal tax credit for

interest paid on the student loan for such year.

• This provision is effective for payments made after March 27, 2020 through December

31, 2020.

• If the employer pays any other education assistance benefits to an employee, the total

aggregate payments cannot exceed $5,250 for the year.

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Thank you for attending.

Please send any questions for the panel to Amanda.Miller@NelsonMullins.com

• r contact your Nelson Mullins attorney.

Visit www.nelsonmullins.com/coronavirus-resources for updates and additional resources.

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