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ESOP Client Alert – March 2020 > The CARES Act

By Christopher L. McLean, ESOPs & Employee Benefits

Federal Government CARES (Act) About ESOPS

As you are probably aware, last week the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was subsequently signed into law late on Friday, March 27, 2020.

There is a lot to the CARES Act, as it is a “stimulus” bill intended to stem the rising tide of economic impacts inflicted by the COVID-19 pandemic by providing programs for businesses and individuals that are affected.  Let’s face it: that means everyone.

As lawmakers hammered out the specifics of the CARES Act over the last few weeks, employee stock ownership plans (“ESOPs”) and ESOP-owned companies played a part of their considerations.  It is important to remember that ESOP-owned companies are, at the end of the day, normal business entities and, therefore, are entitled to a number of programs established or expanded under the CARES Act.  Here are a few main highlights:

SBA Paycheck Protection Loan Program

As mentioned above, ESOP-owned companies are regular businesses and they are also feeling the economic effects of the COVID-19 pandemic.  Accordingly, ESOP-owned companies qualify for the Small Business Administration’s (“SBA”) newly created Paycheck Protection Loan Program (“PPP”), which provides for forgivable loans if the proceeds of the loan are used for approved purposes such as “payroll costs,” group healthcare benefit costs and insurance premiums, mortgage interest (but not prepayments or principal payments) and rent payments, interest on debt that existed as of February 15, 2020, or certain utilities.

These loans are under the SBA’s 7(a) loan program and will be underwritten by local SBA-approved lenders (i.e., likely, your local bank) and guaranteed by the Federal Government—meaning that if the borrowing company properly shows that the proceeds were used for approved purposes, then that portion of the loan balance is forgiven and the lender is reimbursed by the Federal Government.  Just like other 7(a) loans, PPP loans will not require collateral or personal guarantees and the SBA will not charge a guarantee fee, but the lender underwriting the PPP loan may charge a guarantee fee-based per a schedule based on the amount borrowed.

What constitutes “payroll costs”?  The term “payroll costs” includes salaries, wages, cash, tips, paid leave, severance, group healthcare benefits (including insurance premiums), RETIREMENT BENEFITS, state or local payroll taxes, and compensation paid to independent contractors.

So, what does that mean?  It means that ESOP-owned companies, like all impacted businesses, are entitled to apply for and take out an SBA PPP loan to cover its “payroll costs” and other approved expenses.  In addition to the “typical” payroll items for which an ESOP-owned company can use the proceeds, ESOP-owned companies can also use the proceeds to cover their contributions for retirement plans—ESOP contributions as well as 401(k) plan contributions.  Accordingly, an ESOP-owned company could utilize loan proceeds to make an ESOP contribution to cover requirements related to distributions, diversifications, or exempt loan repayments.

It should be noted that the maximum amount to be borrowed under the PPP loan program will be 2.5x the business’s monthly payroll amount with a maximum principal amount of $10 M and a maximum interest rate of 4%.

Expansion of SBA Disaster Loan Program

The CARES Act also makes specific mention of ESOPs with respect to the expansion of the SBA’s Disaster Loan Program.  ESOP Trusts with 500 or fewer participants and beneficiaries are now “eligible entities” under the program and can borrow funds directly from the Federal Government—no local SBA-approved lender.  ESOP-owned companies with fewer than 500 employees are also eligible for the Disaster Loan Program; however, since the PPP loan program has forgivable loan aspects, the Disaster Loan Program may be less attractive.

The Disaster Loans do not have a restriction on purpose, so ESOP Trusts would be able to utilize the proceeds for repayments under exempt loans, and make distributions and diversifications payments.  Repayment under the Disaster Loans are delayed for one year.

It should be noted that since the borrower under the Disaster Loan Program will be the ESOP Trust, which is a qualified, tax-exempt trust under the Internal Revenue Code, we are still awaiting guidance and comment from the Internal Revenue Service and the Department of Labor with respect to the ESOP Trust’s borrowing under this program.

As mentioned, these are just two small pieces of the CARES Act and much more information will become available over the next several days so please visit our Kaufman & Canoles COVID-19 Legal Resources Page to stay up to date.  If you have any questions, please do not hesitate to contact us.


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2020.