One of the provisions of the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the Paycheck Protection Program (PPP). The program allows small businesses to apply for a loan that can potentially be forgiven entirely, granted that funds are used as required. An interesting part of the PPP is that one of the incentives for loan forgiveness is severance pay. Including this benefit in the definition of payroll expenses may give employers a reason to terminate employees they might consider “problematic.” However, such action is not without consequences.
PPP Loans Must Be Used for Qualifying Expenses
The novel coronavirus (COVID-19) pandemic has had substantial impacts on the U.S. economy. Some businesses have struggled to maintain revenue, while others have had to shutter their doors completely. This has made it challenging for many companies to keep up with financial obligations, such as paying their employees or mortgages.
The House approved the CARES Act to help stimulate the economy by providing aid to individuals and businesses alike. The PPP was developed specifically to help small companies that had 500 or fewer employees as of February 15, 2020. The alluring aspect of the PPP is that the loan can be forgiven – in full or in part – as long as the business uses the funds for qualifying expenses.
The PPP loans must be used for the following:
- Payroll costs
- Mortgage interest payments
- Lease payments
- Utility payments
The businesses that receive a PPP loan have 8 weeks to use the funds, and a majority of the use must be for payroll-related expenses. If the company does not use the loan as required, it must repay what it borrowed.
Payroll Costs Defined
As mentioned above, a company that receives a PPP loan and is hoping to get the amount forgiven after the 8-week covered period must use 75% of it for payroll-related expenses.
Payroll costs include:
- Salaries and wages
- Vacation, sick, medical, or family leave pay
- Health care benefits
- Retirement benefits
- Severance pay
Severance pay is a benefit employers provide employees that is paid out if the employee separates from the company involuntarily. Including it as an incentive for loan forgiveness under the PPP could allow employers to let go of employees during the current crisis and have the severance payments come out of a federally-backed loan.
However, if an employer does release an employee during the covered period, their loan may not be fully forgiven. The laws concerning the PPP provide that businesses that received loans must maintain their full-time employees during or quickly after the covered period. If an employee is terminated during the 8-week loan period, the forgiveness amount will be reduced.
