Alerts and Updates

SBA and Treasury Release FAQs on Paycheck Protection Program Loans

April 8, 2020

If a business meets the revenue-based or employee-based size standards applicable to its industry under the SBA rules, the business will be eligible for a PPP loan.

On April 6, 2020, the Small Business Administration (SBA), in consultation with the U.S. Department of Treasury, provided brief answers to frequently asked questions (FAQs) on the Paycheck Protection Program (PPP) established under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). This Alert highlights the further clarifications provided by the FAQs for borrowers working their way through the PPP.

Can borrowers satisfy the eligibility requirements even if they have more than 500 employees?

The SBA confirmed that “eligible borrowers” include not only business concerns with 500 or fewer employees[1] but also “small business concerns” (as defined in the Small Business Act) (even if they have more than 500 employees) if the business meets either the SBA’s employee-based or revenue-based size standards, which correspond to particular industries and the NAICS codes.

Therefore, if a business meets the revenue-based or employee-based size standards applicable to its industry under the SBA rules, the business will be eligible for a PPP loan.

Borrowers will need to take into account the revenue of any “affiliates” determined in 13 C.F.R. 121.301(f), as well as the number of employees of the affiliate.

How do borrowers assess affiliation?

Borrowers must apply the affiliation rules and, after analysis, certify that the borrower is eligible for a PPP loan under the affiliation rules. See 13 C.F.R. 121.301(f).

The FAQs also clarified that lenders do not have the responsibility for evaluating affiliation and can rely on the borrower’s certification.[2]

What alternatives are there for a minority shareholder who is an affiliate under SBA rules to cease being considered an affiliate?

The minority shareholder can irrevocably waive or relinquish its rights to prevent a quorum or otherwise block an action by the board of directors, shareholders or other governing body. If those rights are waived, the minority shareholder would no longer be deemed an affiliate.

Note that a temporary or conditional waiver of these rights by a minority shareholder will not satisfy the SBA’s standard; only an irrevocable waiver prevents the minority shareholder from being considered an affiliate of the business.

There is no guidance (yet) if a similar irrevocable waiver would alleviate the present effect treatment for options, convertible debt or other such agreements, but we believe that the same analysis would apply based on the SBA’s previous guidance regarding convertible/exercisable securities. 

The analysis of affiliation and the scope of rights that should be waived is complex, and you should review these matters with your advisors. 

What time period should a borrower use to determine number of employees and payroll costs for purposes of assessing loan eligibility and borrowing amount?

Borrowers can aggregate payroll costs from either (i) the 12-month period before the application is submitted, or (ii) calendar year 2019—it is their choice.

Note that for seasonal businesses, the borrower can use its average monthly payroll for the period between (i) February 15, 2019 to June 30, 2019, or (ii) March 1, 2019 to June 30, 2019.

For the exclusion of compensation above $100,000 for purposes of calculating the borrowing amount under the CARES Act, does that exclusion apply to all employee benefits or just to cash compensation?

The exclusion for compensation above $100,000 for an employee applies only to cash compensation, not noncash benefits.

Noncash benefits will not be excluded from the payroll costs calculation, such as:

  • Employer contributions to defined-benefit or defined-contribution retirement plans;
  • Payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums; and
  • Payment of state and local taxes assessed on compensation of employees.

As a result, practically speaking, the per-employee “payroll costs” could actually exceed $100,000.

Should payments by the borrower to independent contractors or sole proprietors be included in the calculations of the borrower’s payroll costs?

No, any amounts a borrower has paid to independent contractors or sole proprietors should be excluded from its payroll costs. Independent contractors and sole proprietors should apply on their own for a PPP loan. 

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage. 

For Further Information

If you have any questions about this Alert, please contact Nanette C. Heide, Sandra G. Stoneman, Stephen Morrissey, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.

Notes

[1] The FAQs also confirmed that only employees whose principal residence is in the United States are counted.

[2] Federally insured depository institutions and federally insured credit unions also do not need to collect and verify beneficial ownership information for customers applying for new PPP loans, unless the verification is required by the lender’s risk-based approach to BSA compliance.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.