Yesterday, April 2, the Small Business Administration issued an interim final rule providing additional guidance on implementing its Paycheck Protection Program. While questions still remain, here is the new information that lenders need to know:

1. Lenders who are already SBA 7(a) lenders may begin accepting and processing applications today.  Other lenders can become eligible upon meeting certain conditions.
2. A new form of borrower application was released yesterday and the lender application form for loan guaranty was released this morning.
3. Interest rates are fixed at 1% with a 2 year term; 75% of the loan amount must be used for payroll costs.
4. Underwriting examples are provided in the guidance, but the examples leave some uncertainty regarding calculations and requirements.   The four primary criteria set forth in the guidance state that lenders shall:
   • Confirm receipt of borrower certifications contained in Paycheck Protection Program Application form issued by the Administration;
   • Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;
   • Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application; and
   • Follow applicable BSA requirements:
     • Federally insured depository institutions and federally insured credit unions should continue to follow their existing BSA protocols when making PPP loans to either new or existing customers who are eligible borrowers under the PPP. For existing customers, PPP loans will not require re-verification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance.
5. Each lender’s underwriting obligation under the PPP is limited to the items above and reviewing the “Paycheck Protection Application Form.” Borrowers must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
6. Lenders may rely on borrower documentation for loan forgiveness.
7. Clarification on SBA’s “affiliation” rules was not provided, but additional guidance may be issued.

While there are still many open questions with respect to this latest guidance, we are actively monitoring any updates and will continue to provide additional information to you as it becomes available. If you have any questions do not hesitate to contact our team, we are happy to talk through the guidance available to date, what it means for your financial institution and discuss best practices in light of current uncertainty. We are also available to prepare loan documents for a flat fee that you could utilize for the PPP loans.

Late Thursday, April 2, the Small Business Administration (“SBA”) released a highly anticipated Interim Final Rule and a new form of borrower application for the Paycheck Protection Program which was established as part of the CARES Act.  Small businesses and banks were hopeful that the SBA would provide additional guidance on how to interpret several vague, confusing, or even contradictory provisions in the CARES Act. Although the Interim Final Rule provided clarification on a few points, which we summarize below, many important issues remain unsettled. Further, the most notable change made by the Interim Final Rule – that businesses will not be permitted to borrow funds based on payments to independent contractors – will require many borrowers to recalculate their average payroll costs prior to submitting their loan applications.

We previously prepared a summary of the Paycheck Protection Program.  That summary has now been updated to reflect the guidance provided by the Interim Final Rule.

To help small businesses navigate this confusing situation, here are our key takeaways from the Interim Final Rule.

When can I apply?

Applications may be submitted beginning April 3, 2020 for small businesses and sole proprietorships.  Beginning April 10, 2020, independent contractors and self-employed individuals may submit applications. As noted above, the SBA also released a new form of application. Borrowers who already completed and submitted the “old” application (the one that the SBA released earlier this week), should expect that they will need to complete this new application.

When can I expect to receive funds?

You should not expect your lender to fund the loan on April 3, or otherwise on the same day that you submit your application.  Policies and procedures will vary from bank to bank. We anticipate that many banks will submit your application to the SBA as soon as possible. Due to anticipated volume, the systems for submitting applications to the SBA may become overburdened. Once the application has been “accepted” by the SBA (meaning that the SBA has agreed to reserve funds for the loan; not that the loan application has been “approved”), the bank will still need to complete its underwriting process and prepare actual loan documents for you to sign. Our expectation is that banks will only fund the loans once they have completed their underwriting process and received fully executed loan documents from the borrower. This could take several days, if not weeks. It likely depends on the bank, the borrower, and how quickly the borrower can respond to the bank’s requests for information. As a borrower, your best course of action is to submit an application that is as complete and correct as possible to ensure that your loan may be processed efficiently.

What do I need to know about the Application?

• The “new” form of application may be signed by a legally authorized representative of the borrower, rather than by each 20% owner of the business, as in the previous application.
• The Interim Final Rule provides that banks must comply with the Bank Secrecy Act for these loans.  This means that a borrower will most likely need to provide the information and documentation typically required upon opening a new account, unless you have a preexisting relationship with the bank.  If you are working with a new bank, have the information typically required to open an account handy.

What has changed in these rules that impact my calculation of the amount I may borrow?

• The maximum loan amount (2.5 times average monthly payroll costs) for a business must now be calculated based on employee payroll costs only, excluding compensation to independent contractors.  Independent contractors must apply for these loans on their own behalf.
• A borrower must submit documentation necessary to establish eligibility based on payroll costs, which may include payroll processor records, payroll tax filings, or other supporting documentation such as bank records.
• The Interim Final Rule contradicts the application with respect to the time period for measuring average payroll costs (the application says 2019 and the Interim Final Rule refers to the last 12 months).  We anticipate that banks will request the information identified in the application.  Contact your lender to ensure that you are providing them with the information they require.
• The SBA clarified that federal employment taxes, FICA and income tax withholdings may not be included in payroll costs.  As stated in the CARES Act, only state and local taxes may be included.
• A borrower may refinance an Economic Injury Disaster Loan (EIDL), but only if the loan was made between January 31, 2020 and April 3, 2020, less the amount of an advance under an EIDL COVID-19 Loan. Presumably, this means that EIDL loans that have been approved (but not yet funded) as of April 3, 2020 are not eligible for refinancing, but you should confirm with your lender.

What are the changes that will affect how I may use funds and obtain forgiveness?

• As indicated in the fact sheet released by the Treasury Department on March 31, the rule provide that 75% of the forgiveness amount must be payroll costs (i.e. employee compensation).  Your rent, mortgage interest and utilities expenses may together only constitute 25% of the forgiven amount in the aggregate.
• Eligible uses of proceeds and forgiveness are also limited to compensation paid employees, but may not include compensation paid to independent contractors.
• The final interest rate for the program has been set at 1.0%, as opposed to the 0.5% rate initially suggested by the Treasury Department.
• Accrued interest on the loan amount may also be forgiven. Accordingly, a borrower may be able to obtain full forgiveness of this loan without ever making a payment.

Do any of the changes in the Interim Final Rule Affect My Eligibility for a Loan? 

• Despite much attention to the affiliation rules, there was no clarification on whether the SBA would further relax the affiliation rules under the PPP program, although the SBA intends to promptly issue further guidance on this issue. This means that, for the time being, the affiliation rule still apply when determining whether your business is eligible for the PPP loan program.
• The Interim Final Rule uses different language to describe eligible borrowers, and it’s not clear whether there are any changes to the eligibility standards set forth in the CARES Act. If you are unsure of your eligibility, consult your lender, or an attorney or accountant who is familiar with this program.

On March 26, the Minnesota legislature returned from its extended break to pass H.F. 4531, legislation addressing the most pressing needs. The requirement for any provision to be included in the bill was to have agreement from each of the four caucus leaders, ensuring that each had broad bi-partisan support.

Despite the bi-partisan support, many have criticized the approach for the lack of public input in the process. While appropriating more than $330 million, there were no hearings to discuss the legislation, and neither an overview of the legislation nor the bill text was released to the public until minutes before debate began on the floor of the House of Representatives.

COVID-19 Minnesota fund

By far, the largest expenditure was the newly created COVID-19 Minnesota fund. Described by some as a COVID-19 slush fund, the $200 million appropriated to this new account is available for the commissioner of management and budget to disperse “to state agencies as necessary to (1) protect Minnesotans from the COVID-19 outbreak, and (2) maintain state government operations throughout the duration of the peacetime emergency.”

Also established is the Legislative COVID-19 Response Commission, comprised of 10 legislators, to review individual expenditures from the fund that exceed $1 million. If a majority of commission members from the House and a majority of commission members from the Senate object to a proposal within 24 hours, the expenditure may not be made. There is no similar mechanism to stop expenditures that do not exceed $1 million.

All expenditures must be reported to the commission on the 15^th and the last day of each month.

Human Services

Of the remaining $130 million appropriated, more than half is allocated to help struggling families and individuals.

• $30 million: Child care assistance through the state’s Child Care Aware emergency grants. This money is available for programs that prioritize spaces for children of essential workers, not for individual families.
• $6.2 million: Veterans and their surviving spouses impacted by COVID-19. Funds can be used for “emergency financial relief, hospitalization assistance, medical care or treatment, or any other COVID-19-related assistance as determined by the commissioner.”
• $9 million: Food assistance through food shelf programs. Funds will be provided to Hunger Solutions, which will in turn allocate funds to “food banks, food shelves, and transportation organizations” to assist in distribution.
• $5.53 million: Housing assistance. These funds provide a temporary 15% increase for the county housing assistance program under Minnesota Statutes, section 256I.05.
• $26.5 million: Emergency services. $15.2 million is available for shelter for homeless individuals; $5 million is for “hygiene, sanitation, and cleaning supplies” for sheltered individuals; and $6.3 million is for staffing for this population.

Help for small businesses and farmers

Recognizing the need to provide immediate help to vulnerable businesses, the legislature funded programs for small business loans, as well as made policy changes to help farmers and others.

• $30 million: Small business emergency loan program. This funding is made available for an emergency small business loan program established through Executive Order 20-15, with the intent of more quickly providing help to small businesses than is possible through federal SBA loans.
• $10 million: Small business loan guarantee program. In addition to providing funding for this program, the legislature reduced the maximum size of the business from 500 to 250 employees in order to be eligible for this program.

In addition to the loan programs above, certain local governments are authorized to issue loans to “retail stores, service providers, and hospitality businesses,” potentially making available millions of additional dollars to provide relief for struggling local businesses.

For farmers, the legislature expanded when farmers could access the disaster recovery loan program. Previously, funds through this program were only available when damage was due to “high winds, hail, tornado, or flood, or the weight of snow, sleet, or ice.” Additionally, the program now covers “the loss of revenue when the revenue loss is due to an infectious human disease for which the governor has declared a peacetime emergency.”

Tribal governments

$11 million was made available to tribal governments across the state “for activities that mitigate the immediate health and economic impacts of COVID-19.” Each of the state’s 11 tribal nations may access $1 million. If any nation does not seek the funds, the remaining money is to be distributed equally among the participating tribes.

Driver and vehicle services

In order to increase the turnaround time for issuing drivers’ licenses and identification cards, $2.4 million was allocated for temporary staffing. Additionally, residency documentation requirements for REAL ID applications were eased and expiration dates for drivers’ licenses and identification cards were extended until after the peacetime emergency expires.

Additional policy changes

• Elimination of the 30-day maximum prescription for opioids;
• Reduction of application fees for licensure, registration and renewal for medical gas manufacturers and wholesalers;
• Establishment of emergency powers to the Commissioner of Commerce and the Office of Higher Education during the peacetime emergency;
• Temporarily waiving the requirements regarding emergency purchasing and equal pay certificates for certain state contracts;
• Codification of changes to unemployment insurance during the pandemic; and
• Delay of submission of fingerprints for background checks for essential workers during the peacetime emergency.

This Alert was authored by Andrea Rau, Government Relations Manager.

Andrea L.
Rau

P  /  612.604.6526
E  /  [email protected]

Additional resources

Governor Walz Executive Orders

HF 4531

Minnesota Department of Economic Development (DEED) Guide for MN Small Businesses Who Need Help

List of Minnesota Department of Human Services (DHS) Waivers

It is difficult to overstate the destruction and disruption caused in recent weeks by the COVID-19 outbreak.  Federal and state governments have attempted to mitigate the social and economic damage by passing massive stimulus packages and issuing “shelter in place” orders. Despite these efforts, the spread of COVID-19 continues. Faced with ongoing losses and uncertainty over when the crisis will pass, many commercial insurance policyholders are examining their policies to determine whether they are covered for COVID‑related losses.

In this overview of potentially relevant insurance coverages, the following topics are addressed:

• Coverage-types that may insure against COVID-related losses;
• Potential obstacles to coverage;
• Best practices to follow in preparation for a potential claim.

Policies that May Provide Coverage for COVID-related Expenses

Policyholders should have all of their policies carefully reviewed to evaluate for potential coverage.  The following are common sources of possible coverage for losses, but this is by no means an exclusive list.

Business Interruption

Business Interruption insurance is primarily intended to protect policyholders against interruptions of, and disruptions to their business operations, and it is typically purchased as part of a commercial property insurance policy. Payouts are made for lost business income or extra expenses incurred, depending on the language of the policy. Importantly, coverage is typically triggered when the policyholder experiences “direct loss of or damage to” an insured property by a covered cause of loss. As discussed below, it is an open question whether the “physical loss” generally necessary to trigger coverage is caused by COVID-19 or the SARS-CoV2 virus.

A subset of this policy type, Contingent Business Interruption insurance covers losses arising from damage to a business’s customers or suppliers, such as input shortages and transportation delays. This type of policy is triggered by damage to facilities of those third-parties, rather than the policyholder’s. And depending on the situation facing a policyholder, this type of policy may offer another means to recoup losses stemming from COVID-19 or the SARS-CoV2 virus.

Civil Authority

Civil Authority Insurance, another potential source of coverage, protects policyholders from losses that occur when a “civil authority” prohibits access to the policyholder’s property. Given the many “shelter in place,” “stay at home,” and similar orders currently in force across the country, this type of coverage is likely to be implicated. The wording of Civil Authority Insurance does vary, for example, as to whether there is a “physical loss” requirement and which type of civil order is necessary to trigger the policy, making it important for policyholders to review the specific language of their policy carefully.

All-Risk Insurance

As its name implies, All-Risk Insurance offers some of the broadest coverage available to policyholders. This type of insurance automatically covers any risk that the policy does not explicitly exclude. Accordingly, policyholders considering making a claim should review their policy for any of the potentially applicable exclusions discussed below, or other language that could limit their coverage. Another caveat – like the other policies discussed here, many All-Risk policies are only triggered by “physical loss or damage,” so policyholders should again consider whether that initial threshold is met.

Potential Obstacles to Coverage

“Direct Physical Loss or Damage” Requirement

As mentioned above, many of the policies that may extend insurance to COVID-related losses are triggered by “physical loss or damage.” This requirement leads to the question of whether COVID-19 or the SARS-CoV2 virus, even where its presence can be shown, causes physical damages or loss to property. Although COVID-19 has wrought enormous economic destruction, this is due largely to people’s reaction to infection and the risk of contracting the disease themselves, rather than to the virus damaging properties in the way a fire or hurricane would. Courts have interpreted the term “physical loss or damage” in somewhat analogous circumstances, such as those related to bacterial outbreaks and other forms of invisible contamination. Dealing with varying factual situations, courts have reached different conclusions as to whether there is coverage for losses caused by these types of conditions, which does little to definitively settle questions of policy interpretation. In light of this unsettled case law and likelihood of there being material differences in the operative policy language, the determination of whether a policy provides coverage will depend on the particular circumstances faced by each policyholder and the language in the policy itself.

Exclusions for Pollution or Contamination

Some policies contain exclusions for losses caused by pollution or contamination. Again, the issue of whether these exclusions will preclude recovery for COVID-related losses hinges on the precise language of the policy at is issue, and, like the “physical loss” requirement, this question has not been decisively settled. The presence of bacteria, for example, has not been uniformly categorized by courts as either coming within, or falling outside of exclusions for contamination. In light of the fact that “decontaminating” a property where COVID-19 is present may be as simple as wiping down affected surfaces with soap and water, it is unclear that courts will treat the existence of COVID-19 on a premises as rising to the level “contamination” or “pollution” necessary to trigger these exclusions. Any determinations of whether these exclusions apply will depend in large part upon the particulars of the coverage language at issue, state-specific court rulings, and the unique factual circumstances faced by the policyholder.

Exclusions for Viruses, Pathogenic Organisms, and disease

In the wake of the SARS outbreak in 2003, insurers began limiting their coverage of losses related to the spread of diseases, and by 2006 an exclusion for “Loss Due To Virus Or Bacteria” became standard in ISO policies. Unsurprisingly, policies that have this, or a similar, exclusions may not cover losses due to COVID-19. Despite coverage being potentially precluded, policyholders should still carefully determine an exclusion’s scope. Insurers use differing language within exclusions for diseases; some apply only to certain enumerated diseases, others exclude losses caused by bacteria, viruses, pathogenic organisms, or some combination of all three. A determination that COVID-19 is encompassed should rest upon specific policy language, not simply the exclusion’s title. Again, policyholders are best served by reviewing their policies to determine whether some version of this particular exclusion is in their policy and whether it applies to their losses.

Recommendations for Policyholders

Policyholders thinking of filing a claim with their insurer for losses related to COVID-19 should consider taking a number of steps as a matter of best practice.

• Review the policy
  • Determine what notice conditions are required to comply with the terms of the policy.
• Document any losses related to COVID-19. These could include:
  • Lost business income;
  • Increased employee-sick leave or overtime;
  • Expenses of decontaminating facilities;
  • Price hikes for product inputs;
  • Increased transportation costs;
  • Consultant fees; etc.
• Retain information that will lend context to COVID-related claims, such as:
  • Which employees test positive for or been exposed to COVID-19
  • Were any changes made to corporate policies because of the risk of disease or governmental orders;
  • How has pandemic affected customer and supplier relationships;
  • Have business projections or future plans been changed due to COVID-19.
• Finally, make commercially reasonable efforts to mitigate the damage caused by COVID-19; these efforts should be documented as well.

Conclusion

While COVID-19 raises novel issues, many principles remain fixed. The language of the policy at issue, in conjunction with the facts, will be determinative of whether policyholders may recoup or minimize their losses from COVID-19. Business Interruption, Civil Authority, and All-Risk insurance policies are the most likely to provide coverage, although obstacles like exclusions for viruses and the requirement of “physical loss” may impede recovery. In these unsettled times, it is important to recall that as the COVID-19  spreads and it becomes necessary for policyholders to assess whether they are insured, immediate steps can be taken to preserve possible claims and maximize potential recovery.

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) authorizes $349 billion in forgivable Section 7(a) Small Business Administration (“SBA”) loans under the Paycheck Protection Program, to be issued by qualified SBA lenders, as described further in our client alert. Prior to the passage of the CARES Act, Disaster Declarations also made available separate small business loans through the SBA Economic Injury Disaster Loan Program (“EIDL”). To be eligible for an SBA loan under either of these programs, an applicant must be considered “small” and fit within applicable employee or revenue thresholds. However, the SBA reviews not only the applicant but also the applicant’s affiliates to fit within the applicable threshold altogether, including affiliated entities that are non-profit and foreign. Therefore, businesses that are affiliated with other entities may no longer be eligible for an SBA loan under either program due to the aggregated employee count or revenue. Also, EIDL applicants must abide by additional size guidelines thereunder.

Overall, the SBA affiliation rules are broader than typical affiliation rules. In general, SBA affiliation exists when one business controls or has the power to control another business, or is based on common control; for example, private equity or VC-backed companies may be ineligible for SBA loans because of the affiliation rules, even though the portfolio companies are generally unrelated. Control may arise through ownership, management, or other relationships or interactions between the parties. Furthermore, control may be affirmative or negative, such as a minority owner who has the ability to prevent a quorum or block action. However, the SBA determines affiliation by reviewing the “totality of the circumstances” on a case-by-case basis even where no single factor alone is sufficient to constitute affiliation; therefore, it is important to consider all the facts for each entity. A complete affiliation analysis is important because the SBA loan application process requires the applicant to certify, under penalty of perjury, that the applicant is in fact eligible for the program, including under the affiliation rules.

Standards for which affiliation may exist for a Section 7(a) loan under 13 CFR § 121.301(f):

• Majority Ownership – Control exists by ownership of more than 50% of the voting equity.
  • Convertible notes, options, warrants, etc. are generally deemed exercised.
• Minority Ownership – Control is defined in the negative, through the right to “block action” by the board of directors or shareholders due to rights in articles of incorporation or agreements among shareholders.
  • VC and PE investors may be considered affiliates under this test.

• Management –
  • A CEO or president serves in the same capacity for multiple companies.
  • A single individual or entity controls the board of directors of multiple entities.
  • Control may exist through a management agreement.
• Substantially Identical Business or Economic Interests –
  • Close relatives, if the relatives have substantially identical business interests (e.g. same or similar industry in same geographic area)
  • Common investments, with shared resources, equipment, locations, employees, or financial support
  • Economic dependence, in which a concern derives more than 85% of receipts over prior 3 years from another concern, with exceptions
• Newly Organized Concern – Concern is in business for less than two years and is an affiliate of another entity if the newly organized concern was formed by the officers, directors, 20% owners, or other managers of a prior concern with direct monetary benefits flowing from the new concern to the original concern.

Exceptions to affiliation coverage:

• Concern has received investment from an investment company licensed under the Small Business Investment Act
• Business concerns owned by Indian Tribes, Community Development Corporations
• SBA-approved pool of concerns for a joint program of R&D for defense production
• SBA-approved mentor-protégé agreement
• Member shareholders of a small agricultural cooperative

If you have any questions regarding whether entities are considered affiliates under the SBA regulations, please let us know. The relevant SBA affiliate regulations may be accessed here.

Note: The information in this update is current as of March 31, 2020. We will continue to monitor the CARE ACT and the PPP Loan program and appropriate guidance from the SBA as it is issued.

What type of Borrower qualifies for a PPP Loan?

Borrowers eligible for the PPP Loans include all small businesses with fewer than 500 full or part-time employees, nonprofits (501(c)(3)), Independent Contractors, Self-Employed persons, sole proprietorships, veterans’ organizations (501(c)(19)) and tribal business concerns. Businesses with more than 500 employees operating primarily in the hospitality industry (e.g., restaurants and hotels, ) are also eligible, as long as there are 500 or fewer employees at any single location. The borrower must have been in operation on or before February 15, 2020.  The attribution rules in 13 CFR 121.103 and 121.301 apply to most borrowers and may require a lender to aggregate the employees of an applicant with its affiliates for purposes of determining whether the 500-employee limit has been met.

Who can Lend Under the PPP Loan Program?

All current SBA 7(a) lenders can “opt-in” to the PPP and will be granted delegated authority by the SBA to make and approve the PPP Loans. The specific opt-in process and the SBA required loan forms are still pending. Lenders not currently engaged in SBA 7(a) lending may also participate in providing PPP Loans, provided the lenders are FDIC-insured (banks), FCUA-insured (credit unions) or institutions of the Farm Credit Systems chartered under the Farm Credit Act of 1971. The Secretary of Treasury will issue further guidance for terms of participation of these additional lenders.

What are the terms of a PPP Loan?

The maximum PPP Loan amount is $10 million, but may not exceed 2.5 times the borrower’s average monthly payroll amount over the 12 months prior to origination of the PPP Loan. Payroll costs include compensation to employees and independent contractors, benefits, and payroll taxes. There are certain exclusions to the payroll amount that must be carefully considered. For example, the amount of an employee’s salary in excess of $100,000 is not included in payroll costs. There are slightly different formulas for seasonal businesses and businesses that have not been in business for at least a year. Borrowers who just closed on a regular SBA 7(a) loan on or after January 31, 2020, may refinance the full amount of that loan, up to $10 million.

The maximum interest rate of a PPP Loan is 4%, and there are no prepayment penalties. Borrowers may defer payments on PPP Loans for a six-month period commencing on the origination date. SBA loan fees are waived.  The proceeds must be used for payroll costs, health insurance, rent, utilities and/or mortgage interest obligations. There is no requirement for collateral or personal guarantees under the PPP Loans, and borrowers will not be required to show that they cannot obtain financing elsewhere. The borrower will be required to attest that the uncertainty related to the COVID-19 virus has made the PPP Loan request necessary to support the ongoing operations of the business.

When is the PPP Loan Forgiven?

The PPP Loan is forgiven at the end of the 8-week period after the borrower takes out the PPP Loan. Lenders will verify covered expenses and the proper amount of forgiveness. The principal amount of a loan may be forgiven in an amount equal to payroll costs, interest on mortgage obligations incurred before February 15, 2020, rent payments for leases in force before February 15, 2020, and utility payments for service which began before February 15, 2020 during the 8-week period following the origination of the loan.

How much of the PPP Loan will be forgiven?

The purpose of the PPP Loans are to help small businesses retain employees at their current base pay. If the borrower keeps all of its full-time employees and maintains compensation levels for employees earning less than $100,000, the entirety of the PPP Loan would be forgivable (provided the borrower also incurs eligible rent, mortgage interest or utility expenses during the 8 week period.) If the borrower lays off employees, the forgiveness will be reduced by the percent decrease in the number of employees. If the borrower’s total payroll expenses for workers making less than $100,000 annual salary decreases by more than 25%, PPP Loan forgiveness will be reduced by the same proportion. If the borrower has already laid off some employees or reduced compensation, the borrower can still be forgiven for the full amount of its payroll cost if the borrower rehires the employees and reverses decreases to compensation by June 30, 2020. The SBA has 60 days to make a forgiveness determination and the SBA has 90 days after that determination to make payment to the lender.

Who funds the PPP Loan?

The lender funds the PPP Loan. The lender may sell the PPP Loan to the SBA based upon an estimated forgiveness amount, and the SBA would purchase the expected forgiveness amount within 15 days. However, the PPP Loan will carry a 0% risk-weighting, negating the impact on risk-based capital ratios if the lender holds the PPP Loan on its balance sheet (though liquidity and leverage ratios would be impacted by retaining the PPP Loan).

Can a Potential Borrower Start Providing Underwriting Documents?

The guidelines have not yet been published on the forms and specific underwriting documentation, but one of the most important considerations is that the borrower will need to establish an average monthly payroll over the last 12 months. We expect the SBA to issue guidance advising on how loan applicants may demonstrate their average payroll costs for purposes of determining maximum loan eligibility, but early indications are that borrowers should provide W-2s, 1099s, and evidence of state payroll tax payments. The borrower can begin gathering documents now; in addition to payroll information, they will want to ensure that their financial records allow them to quickly identify payments made for payroll and benefits, rent, mortgage interest, and utilities.

What issues should potential Lenders consider in implementing this program for its Borrowers?

1.  Can my operations process a large influx of applications?
2.  Do we have to create and implement new procedures to develop, originate and service PPP Loans?
3.  Do we have the bandwidth to handle customer service questions and concerns regarding the PPP Loans?
4.  Do we have safeguards in place to mitigate fraud risk for this new program?
5.  Will we accept applications from non-traditional borrowers, such as independent contractors or sole-proprietors, who will be eligible for small PPP Loans?

Should you wish to discuss any of the topics addressed above or other questions your organization may have as a result of the current environment, please feel free to contact our team.

NOTE: The information in this Alert is current as of March 30, 2020, 12:00 pm Central Time. This is a rapidly-evolving situation and circumstances and guidance may change.

Which employers does it cover?

The Response Act applies to employers with fewer than 500 employees, measured at the time the employee’s leave is taken.  This includes:

• all full-time and part-time employees within the United States;
• employees currently on leave;
• temporary employees jointly employed by multiple employers;
• laborers supplied by a temporary agency; and
• corporations with separate establishments or divisions (the “covered employers”).

Workers who are independent contractors under the Fair Labor Standards Act (the “FLSA”) are not considered employees for purposes of the 500-employee threshold.

Where a corporation has an ownership interest in another corporation, the two corporations are considered separate employers unless they are joint employers under the FLSA with respect to certain employees.  If the two entities are found to be joint employers, all of their common employees must be counted.

In addition, two or more businesses are considered separate employers unless they meet the integrated employer test under the Family and Medical Leave Act (the “FMLA”).  Separate entities or corporations may be parts of a single employer for FMLA purposes if they meet the integrated employer test which considers common management, interrelation between operations, centralized control of labor relations, and the degree of common ownership or financial control.

Employers with fewer than 50 employees may apply for an exemption from the Response Act if complying with its requirements would jeopardize the viability of the business as a going concern.  Additional information regarding how to apply for that exemption should be available soon, but the DOL has made clear that any such submissions should not be directed to them.

Emergency Paid Sick Leave

The Response Act requires covered employers to provide two weeks of emergency paid sick leave to eligible full-time employees for up to two weeks (80 hours) and part-time employees for the typical number of hours that they work in a typical two-week period. Employers should utilize the higher of the employee’s regular rate or the applicable minimum wage.

The employer must provide for two weeks of paid sick leave at an employee’s regular rate, up to $511 per day and $5,110 total if the employee is unable to work or telework and is:

• subject to a Federal, State, or local quarantine or isolation order related to coronavirus;
• advised by a health care provider to self-quarantine related to coronavirus; or
• experiencing coronavirus symptoms and is seeking a medical diagnosis.

The employer must provide for two weeks of paid sick leave at two-thirds an employee’s regular rate, up to $200 per day or $2,000 total if the employee is unable to work or telework and is:

• caring for an individual subject to an order described in (a) above or self-quarantine as described in (b) above;
• caring for a child whose school or place of care is closed, or child care provider is unavailable for reasons related to coronavirus. “Child” is defined as under 18 years of age and biological, foster, adopted, a stepchild, a child of a domestic partner, a legal ward, or a child of a person standing in loco parentis, for which the employee has assumed parental status and obligations, as well as an adult (i.e., 18 years of age or older), who (1) has a mental or physical disability, and (2) is incapable of self-care because of that disability; or
• experiencing any other substantially-similar condition specified by the U.S. Department of Health and Human Services. However, this is not currently a qualifying reason to request leave because the Secretary of Health and Human Services has not yet identified any conditions substantially similar to coronavirus.

Emergency Family and Medical Leave Expansion

The emergency FMLA leave may be used if an employee is unable to work or telework due to a need to care for a child, as defined above, whose school or place of care is closed, or child care provider is unavailable, for reasons related to coronavirus. Unlike most provisions of the FMLA, which apply only to employers with fifty or more employees, the emergency FMLA under the Response Act applies to all covered employers with fewer than 500 employees. Employees who have been employed with an employer for more than thirty days as of the date of the request may be eligible for up to twelve weeks of partially paid emergency FMLA leave. The emergency FMLA leave is another form of FMLA leave and an employee is entitled to a total of twelve weeks of FMLA leave during the employer’s FMLA year; therefore, any amount of emergency FMLA leave will reduce the amount of FMLA leave an employee can take for other reasons during the applicable FMLA year. The first ten days of the emergency FMLA leave are unpaid and the remaining time is to be paid at two-thirds of the higher of the employee’s regular rate or the applicable minimum wage for up to $200 daily and $10,000 total.

The DOL recommends that the emergency paid sick leave and the emergency FMLA leave be used together; the emergency paid sick leave can be used for the first ten days (up to 80 hours) to cover the otherwise unpaid time under the emergency FMLA leave, and then the emergency FMLA is used for the additional ten weeks, for a total of up to $200 daily and $12,000 altogether. An employee may elect to substitute any accrued vacation leave, personal leave, or medical or sick leave for the first unpaid ten days of emergency FMLA leave, but they may not be required to do so.

The DOL’s current employer guidance regarding the Response Act can be accessed here and the DOL’s FAQ regarding the Response Act can be accessed here.

Employer Payroll Tax Credits for Emergency Paid Sick and Family and Medical Leave

To help covered employers comply and maintain adequate cash flow to pay their employees, the Response Act also provides a refundable tax credit equal to 100% of qualified emergency paid sick leave and emergency FMLA leave wages paid by an employer up to the appropriate per diem and aggregate payment caps listed above, plus the cost of the employer’s health insurance premiums during leave. The credit can be used to offset all federal income tax withholding from all employees, including those still working, and both the employer and employee portions of Social Security and Medicare taxes for all employees. Employers may opt out of the applicable refundable credit. The Internal Revenue Service may also provide additional guidance regarding information and procedures that must be followed to retain the credit.

Required Response Act Poster

Each covered employer, including those with fewer than fifty employees who may qualify for an exemption, must post a notice of the Response Act requirements in a conspicuous place in each of its premises. An employer may satisfy this requirement by e-mailing or direct mailing this notice to employees, including to all new hires, or posting this notice on an employee information internal or external website. The required poster may be accessed here, but please check back for any required updates. For further clarification, the DOL’s FAQ regarding the poster can be accessed here.

Required Documentation for Leave

If employees take emergency paid sick leave or emergency FMLA leave pursuant to the Response Act, employers must require employees to provide appropriate documentation to support the reason for leave. Therefore, employers should consider creating a Request for Leave form under the Response Act, to help evaluate whether employees fit within the required criteria and to allow the employer to claim the applicable tax credit. Within the form, employers should request true and correct copies of any relevant orders, documentation from health care providers or schools and daycares, and other documents to determine whether the employees qualify for the requested leave. Please contact us to request assistance in drafting a Request for Leave form.

Other Important Considerations

The Response Act states that an employee affected by coronavirus has the right to use paid emergency sick leave before using existing vacation or paid time-off benefits; therefore, an employer cannot require an employee to use vacation or paid time-off benefits prior to receiving benefits under the Response Act.

Employers may not discharge, discipline, or otherwise discriminate against any employee for taking leave under the Response Act or for filing a complaint or instituting a proceeding under or related to the Response Act for failure to comply.

U.S. Environmental Protection Agency

The EPA has announced that it will exercise enforcement discretion for certain types of noncompliance resulting from the COVID-19 pandemic retroactive to March 13.

The EPA asks that entities make every effort to comply with environmental obligations, but if compliance is not reasonably practicable, the entities should take the following steps:

1. Act to minimize the effects and duration of any noncompliance;
2. Identify the specific nature and dates of noncompliance;
3. Identify how COVID-19 was related to the noncompliance, how this was handled by the regulated party, including the party’s best efforts to comply and steps taken to come into compliance;
4. Return to compliance as soon as possible; and
5. Document all of the above.

While the EPA is not requiring parties to notify the EPA of its intent to take advantage of this policy subject to the significant exceptions below, the documentation described above must be provided to the EPA, a state or a tribe upon request.  That said, the EPA’s policy does not give facilities a free pass – with respect to those situations that do not require a facility to disclose the issue, the EPA has stated that it “will consider the circumstances, including the COVID-19 pandemic, when determining whether enforcement response is appropriate.”  As a result, facilities should ensure that any incident of noncompliance meets the parameters of the EPA’s policy.  Minnesota companies also need to be aware that most facilities in Minnesota are directly regulated by the MPCA, which is requiring regulated entities to make a request for flexible treatment, as described below.

The EPA’s policy applies to routine compliance monitoring and reporting; settlement agreement and consent decree reporting obligations and milestones; facility operations (including failure of air emission control or wastewater or water treatment systems or other equipment; delays in timely transfer of hazardous waste generated at a facility; or change in concentrated animal feeding operation (CAFO) status).  Public water systems and critical infrastructure are also addressed.

If the noncompliance will cause an acute risk or imminent threat to human health or the environment, facilities should contact the implementing authority for the relevant program, which could be an EPA region, state, or tribe.  Similarly, if COVID-19 issues could cause the facility to exceed enforceable limitations on air emissions, water discharges, or land disposal, or other unauthorized releases, facilities are to contact the implementing authority as quickly as possible.  The responsibility to respond to accidental releases or spills is not changed by this policy.

The policy explicitly excludes criminal violations, conditions of probation in criminal sentences or activities under Superfund or Resource Conservation and Recovery Act (RCRA) Corrective Action enforcement instruments.  Imports are also expressly excluded from the policy.  The EPA also specifically notes that it expects to focus on ensuring compliance with requirements (such as the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA)) with respect to  pesticide products that claim to address COVID-19 impacts.

The EPA will provide seven days’ notice of its intent to terminate this policy.

Authorized states, such as Minnesota, and tribes, are able to take a different approach.  Minnesota’s policy is discussed below – other states may have declined to provide regulatory flexibility at this time or developed their own policies.

Detailed information on the EPA’s policy is available here:  https://www.epa.gov/enforcement/enforcement-policy-guidance-publications

Minnesota Pollution Control Agency

The MPCA is responsible for enforcing most environmental laws and permit conditions applicable to facilities in the state (with the exception of those subject to tribal jurisdiction) pursuant to delegated authority.

The MPCA’s policy recognizes that some regulated entities may be impacted from a reduced workforce necessary to maintain normal operations at certain facilities.  While the MPCA reminds the regulated community that while permittees and operators are expected to meet all terms and conditions of their permits, the MPCA is accepting requests for regulatory flexibility for unavoidable noncompliance situations directly due to impacts from COVID-19.  Specifically, the MPCA intends to assist entities by providing alternative approaches to maintaining compliance, such as extending reporting deadlines, extensions of operator certifications and other forms of regulatory relief.

While the EPA’s policy does not require regulated entities to notify the EPA of intent to use the policy, the MPCA is requiring regulated parties to reach out.

Requests for regulatory flexibility should be sent to [email protected] and should include specific information similar to that sought by the EPA, including:

1. The name of the entity requesting relief along with an applicable permit number;
2. Identification of a contact individual and phone number;
3. Identification of the specific statute, rule and/or permit condition at issue;
4. A discussion of why relief is necessary, including actions the requesting party has taken before making the request, and how the need for relief is connected to the COVID-19 pandemic;
5. Identification of specific measures that will be taken to mitigate or otherwise minimize any potential environmental impacts from the noncompliance, in bullet-point format; and
6. Designation of the time period the request is intended to cover, as well as the rationale for that time period.

The regulated party is required to maintain all records relating to the noncompliance as well as any alternative compliance methods authorized.

The MPCA has indicated that it may, if warranted, grant sector-wide relief from some requirements in the future.

Detailed information on the MPCA’s policy is available here: https://www.pca.state.mn.us/covid-19/covid-19-and-regulatory-flexibility

UPDATE:  The Wisconsin Department of Natural Resources has announced a COVID-19 compliance policy similar to that in place in Minnesota for regulated entities operating in Wisconsin.  Details here:  https://dnr.wi.gov/emergency/COVID19Compliance.html

The COVID-19 pandemic has led to dramatic fluctuations in the stock market and the value of closely held businesses.  Although we all hope that the massive dips in values are temporary, these challenges present unique opportunities for individuals who would be subject to federal or state estate taxes.  Lower values allow more assets to be moved out of your estate while using less of your available gift and estate tax exemption amounts.

Estate planning strategies to consider implementing during this time:

• Make gifts to Irrevocable Trusts using depressed values of assets.  These Irrevocable Trusts can be Spousal Lifetime Access Trusts (SLATs) that allow your spouse to control and have access to the assets in the trust.
• For those who already have created SLATs and used their full gift tax exemption, sell assets for current FMV to the trust in return for a promissory note using current low applicable federal rates (AFR).  If using closely held business interests, discounts may also be available.
• Create and fund Grantor Retained Annuity Trusts (GRATs).  GRATs are ideal estate planning vehicles at times of low interest rates and for assets that are likely to appreciate significantly over time.  These trusts rely on the appreciation on the assets beating the growth the IRS presumes (based on current AFR).
• If you currently have grantor trusts in place, consider swapping assets that have a currently depressed value for assets inside the trust that are more stable.  This allows the recovery in the currently depressed assets to occur outside of your estate.
• Consider a Roth conversion for IRA assets, particularly in light of the changes to inherited retirement assets after the passage of the SECURE Act.

For more information or help making changes to your estate plan, please feel free to contact a member of Winthrop & Weinstine’s Trust and Estates team.

Governor Evers’ Safer at Home order took effect in Wisconsin at 8:00AM  on Wednesday, March 25, and will remain in effect until 8:00AM on April 24.  Every person is ordered to remain at home, though exception is made for the following permitted reasons:

• Essential Activities
• Essential Government Functions
• Essential Business and Operations
• Minimum Basic Operations
• Essential Travel
• Special Situations

As defined in the order, financial institutions and services—including banks, credit unions and other depository or lending institutions—are considered Essential Businesses and Operations.

At this time, individuals are not required to carry documentation nor acquire special permission to leave their homes, but they must comply with the order on permissible reasons to leave home. In light of this, best practice is to provide employees with a letter confirming their employment at the bank as an Essential Business, in case they are questioned.

If you have any questions about drafting such a letter or other matters related to COVID-19 and your institution or employees, please do not hesitate to reach out to us.