According to Eric Stevenson, President, Nationwide Retirement Plans, advisors to retirement plans will play a critical role, stating “This is the time they have to be more visible than they have ever been,” said Stevenson. “They have to be in constant communication with plan sponsors, even if from a distance.”
Nationwide has 2.5 million participants in its retirement plan unit. Earlier in the market panic, they were handling call center inquiries at more than 1,000 times their average rate. Stevenson stated the number has leveled, but remains active since Congress passed and the President signed a historical rescue package into law, an effort he called “amazing.”
Retirement provisions of the CARES Act will be familiar to plan advisors. A new coronavirus hardship distribution will be available for up to $100,000 from accounts, as well as a new $100,000 loan limit. The 10 percent penalty on both will be waived. Those that tap savings will have more time to pay the loans back, and more time to pay the taxes owed.
Although other provisions of the bill will be more immediately critical to employers. Stevenson believes plan advisors can be indispensable in helping their sponsor clients understand provisions of the bill.
Individuals and families will receive a one-time payment of up to $3,800 for a family of four. The federal government will be adding $600 to weekly unemployment checks issued by states for 14 weeks. According Treasury Secretary Steven Mnuchin, checks will be arriving in about three weeks. The money could help many savers avoid using 401(k) accounts for loans. Loan activity at Nationwide has slowed, but Stevenson expects it to increase.
Nick Thornton, financial writer who reports on retirement and health care issues for BenefitsPRO and ALM Media, outlined several provisions that plan advisors can help plan sponsors understand about the Paycheck Protection Program (PPP). Thornton developed a synopsis from the PPP bill, Treasury Department, and analysis by Bijal Vira and Nirav Bhatt, Shepard Mullin corporate finance attorneys.
Funding for up to eight weeks of payroll
The PPP provides small businesses with funds to pay up to 8 weeks of payroll costs, including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. (Source: Treasury Department)
$349 billion in total federally backed loans
The CARES Act has authorized commitments to the SBA 7(a) loan program, as modified by the CARES Act, in the amount of $349 billion. The PPP covers the period beginning February 15, 2020 and ending on June 30, 2020 (the Covered Period). (Analysis: Sheppard Mullin)
Loans forgiven if they are used to keep employees paid
Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities, due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. (Source: Treasury Department)
Firms with 500 or fewer employees, and self-employed can apply
Small businesses with 500 or fewer employees, including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors, are eligible. Businesses with more than 500 employees are eligible in certain industries.
- Starting April 3, 2020, small businesses and sole proprietorships can apply.
- Starting April 10, 2020, independent contractors and self-employed individuals can apply.
Everyone should apply quickly because there is a funding cap.
Relaxed loan vetting
For eligibility purposes, requires lenders to, instead of determining repayment ability, which is not possible during this crisis, determine whether a business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor. (Source: Legislative synopsis)
Calculating the loan value
During the Covered Period, the maximum loan amount permitted for an eligible Covered Entity is the lesser of $10,000,000 and an amount calculated based on a payroll formula that essentially equals 2.5 x the average total monthly payroll cost incurred in the one-year period before the loan is made.
The interest rates for loans borrowed by a Covered Entity under the program may not exceed four percent (4%).
Any Paycheck Protection Loan that has a remaining principal balance after any applicable loan forgiveness must have a maturity date no later than 10 years from the date on which the borrower applied for loan forgiveness.
The SBA will direct lenders to defer all payments, principal, interest and fees, otherwise due under a Paycheck Protection Loan for a minimum of 6 months and a maximum of 12 months. (Analysis: Sheppard Mullin)
Loan forgiveness tied to keeping employees on books
During the 8-week period beginning on the date a Paycheck Protection Loan is funded (the Forgiveness Period), a borrower will be eligible for forgiveness and cancellation of indebtedness for up to the full principal amount of such loan. The amount eligible for forgiveness (the Total Eligible Forgiveness Amount) is equal to the total costs incurred and payments made during the Forgiveness Period for (1) payroll, (2) mortgage interest, (3) rent and (4) utilities.
The loan forgiveness amount available to a borrower is subject to reduction if the borrower terminates employees or reduces employee salary and wages during the Forgiveness Period. There is, however, relief from the forgiveness reduction if the borrower rehires employees or makes up for wage reductions by June 30, 2020. (Analysis: Sheppard Mullin)