It can feel daunting to make sense of the recently passed economic stimulus package referred to as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), especially if your business and livelihood are on the line. The resources that the Act offers span industries, but there are specific things you need to do to receive aid.

Read on as our task force dives into what questions our clients are asking, what moves businesses need to make, and how to access some of the relief that the CARES Act provides.

Employee Benefit Plans

Q: If an employer chooses to implement the new retirement plan hardship withdrawal and plan loan provisions allowed under the CARES Act, will they need to amend the plan document?
Wally Miller: The plan will ultimately need to be amended to memorialize the implementation of the new provisions. However, the new law does not require that the amendment be adopted prior to the last day of the plan year beginning on or after January 1, 2022 (i.e., by December 31, 2022, in the case of a calendar year plan). Ideally, the IRS will provide a model amendment that employers may utilize.

Q: What are the tax implications of continuing to provide health insurance coverage to laid-off employees for a limited period?
Wally Miller: Post-termination coverage is not taxable. Under the IRS rules, coverage provided to former employees remains eligible for tax-free treatment.

If the laid-off employee does not return to work before the end of the extended coverage, or during the period gives notice of an intent not to return to work, then a COBRA event will occur. Typically, an employer will choose to treat the end of the continued coverage period as the date of the COBRA qualifying event, rather than the date of layoff (which would be the normal qualifying event date). This would be the date that the 18 month COBRA continuation coverage would commence, as well as when the period for providing the COBRA election notice will begin.

Bankruptcy

Q: What do clients need to know about the bankruptcy provisions in Section 1113 of Title 1 of the CARES Act?
Larry Ream: Section 1113 affects certain aspects of bankruptcy for both companies and individuals who elect to utilize the protections and benefits of bankruptcy.

For companies, the CARES Act temporarily increases, for a period of one year, the debt limit a company can have and still qualify as a small business debtor under the recently enacted Small Business Reorganization Act (the “SBRA”). The SBRA, which became effective in February 2020, is intended to provide qualifying companies with a faster, more flexible, and more cost efficient reorganization process. The CARES Act increases the qualifying debt limit from $2,725,625 to $7,500,000, allowing many more small businesses to seek the benefits and protections of an SBRA reorganization. The increased debt limit applies only to cases filed after the enactment of the CARES Act, so current Chapter 11 cases will not be able to utilize the higher debt limit to otherwise access the SBRA provisions.

Regarding Chapter 7 and Chapter 13 bankruptcy, the CARES Act also excludes payments made to people pursuant to the Act from the Chapter 7 means-test calculation and from the disposable income calculation of Chapter 13. It also permits a Chapter 13 debtor who has already confirmed a plan to request modifications for hardships related to the COVID-19 emergency. Both of these changes also contain a one-year sunset clause.

Paycheck Protection Plan Loans

Q: How are banks processing Paycheck Protection Plan (“PPP”) loans?
Carmen Calzacorta and Tom Tongue: Some banks are processing existing customers only. Some lenders are requiring extra documentation (and uploading), such as organizational documents and authorizing resolutions. Check with your bank and know the requirements and limitations before you submit. Amendments may be difficult.

Other things to consider:

• Corporate governance: resolutions and secretary certificates may be needed.
• Banks are also focusing on payroll costs and documentation both for FY 2019 and a calculation for January/February 2020.

Q: What are the banks recommending for PPP loans?
Carmen Calzacorta: Banks are recommending:

• Borrowers stick with their current banks to apply for a loan (otherwise the borrower will have to start over with a lot of information); and
• Apply early. Each bank has its own requirements. Clients interested in a loan should reach out to their bank, get on its mailing list, and review and gather the list of required information.

Q: If I am seeking tax credits under the Families First Coronavirus Response Act (“FFCRA”) for emergency sick leave and extended leave, am I ineligible for a PPP loan?
Elizabeth Schleuning: No, you may seek tax credits under the FFCRA and still apply for a PPP loan. You just cannot apply the payments you make under the FFCRA to employees for emergency sick leave or extended FMLA leave toward PPP loan forgiveness if you are seeking a tax credit for the same funds. That would be “double-dipping.”

Q: How do PPP loans apply to LLCs with members?
Mark Long: Generally, the amounts paid out as distributions by the LLC to the members (or by the partnership to the partners) are not includable in the calculation of payroll costs and the resulting maximum loan amount. The only includable payroll costs for the LLC (or partnership) are those paid to or for the benefit of the non-member (or non-partner) employees or to members (or partners) who are also employees to the extent of the W-2 income paid to them.

Dan Eller: Even if the LLC had individual members (not PC members), there has been a big debate about whether the LLC could include the “guaranteed payments” paid to the LLC members (or, separately, whether those amounts might be counted because they would be subject to the self-employment taxation regime). The current view is that the LLC cannot, but there is some hope for further action in that area. In your case with PC members, I do not see how you could include the distributions because those are not wages or “payroll costs.”

Q: How do the programs relate to foreign nationals/sponsored employees? Does the SBA’s updated loan application ask if the borrower is 20% or more foreign owner?
Charmin Shiely: There is no prohibition on foreign ownership. However, employees must be in the United States.

At Schwabe, our CARES Act task force is closely monitoring all information so we can best advise our clients on what action to take.