FAQs About the Paycheck Protection Program for Small Businesses

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020. A key component of the new legislation is the $349 billion small business loan program known as the Paycheck Protection Program (PPP). The PPP will be administered by the Small Business Administration (SBA) as part of its existing Section 7(a) loan program and is designed to allow employers to continue to pay payroll, rent and other obligations while their businesses are impacted by the COVID-19 pandemic. While we await further guidance from the SBA on the implementation of the PPP, we have set out below answers to frequently asked questions based on the information that is currently available. We will continue to monitor this area and will release further information as it becomes available.

Who is eligible to receive a loan?

• • Business concerns either located in the United States or that operate primarily within the United States, including nonprofit organizations, that satisfy the employee size restrictions.
  • Eligible employers must employ no more than the greater of (i) 500 employees or (ii) the number of employees in the size standard designation for the NAICS code for the industry in which the employer operates, which can be found here.
  • “Employee” is defined as any individual employed on a full-time, part-time or other basis.

Are there any exceptions to the employee size restrictions?

• • Employers in the restaurant and accommodation industries[1] and who operate at more than one physical location will qualify for a PPP loan if they have 500 or fewer employees at each location, even if they have more than 500 employees overall.
  • The SBA’s affiliation rules, in which employees of companies under common control (such as portfolio companies of private equity sponsors) are generally aggregated together, do not appear to have been waived for purposes of determining PPP eligibility except for (i) businesses in the restaurant and accommodation industries, (ii) businesses operating as a franchise (as identified by the SBA) or (iii) businesses receiving assistance from a licensed SBIC. It is possible that the SBA will announce a further easing of the affiliation rules when the PPP is implemented.

Who is making the loans and how do employers apply?

• • The loans will be made by private lenders and guaranteed by the SBA under the SBA’s Section 7(a) loan program.
  • The application process for the PPP loans has not been finalized by the SBA, but will be included in the implementing regulations, which are required to be issued within 15 days after the implementation of the CARES Act.
  • Employers are encouraged, in the meantime, to reach out to existing lenders or banks with whom they already have a relationship to determine whether the bank is, or intends to become, a participant in the PPP loan program.

How much can be borrowed?

• • Loans to individual employers are capped at the lesser of (i) 2.5 times the borrower’s average monthly payroll costs for the one-year period before the loan is made or (ii) $10 million.

• • If an employer was not in business during the period from February 15, 2019 to June 30, 2019, the calculation is the lesser of (i) 2.5 times the borrower’s average monthly payroll costs between January 1, 2020 and February 29, 2020 or (ii) $10 million.

• • Special rules apply for seasonal businesses.

What is included in “payroll costs” for purposes of determining loan amounts?

• • Payroll costs include the sum of any of the following compensation payments to employees: (i) salary, wage, commission or similar compensation, (ii) payments of cash tips or equivalent, (iii) payments for vacation, parental, family, medical or sick leave, (iv) allowances for dismissal or separation, (v) payments required for the provision of group health care benefits, including insurance premiums, (vi) payment of any retirement benefit, and (vii) the payment of state and local taxes assessed on the compensation of employees.

• • Payroll costs also include the sum of payments of any compensation to an independent contractor or sole proprietor that is a wage, commission, income, net earnings from self-employment or similar compensation in an amount that is not more than $100,000 annually, pro-rated for the period between February 15, 2020 and June 30, 2020.

• • Payroll costs under the PPP exclude: (i) compensation of an individual employee in excess of $100,000 annually, pro-rated for the covered period, (ii) Federal withholding taxes and FICA, (iii) compensation of employees with a primary place of residence outside the U.S. and (iv) qualified sick leave wages and family leave wages for which credit is allowed under the Families First Coronavirus Response Act.

Are there other requirements for getting a PPP loan?

An employer applying for a PPP loan must make a good faith certification:

• • That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.

• • Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.

• • That the employer does not have an application pending for another Section 7(a) loan for the same purpose and duplicative of amounts applied for or received under a PPP loan.

• • That during the period beginning on February 15, 2020 and ending on December 31, 2020, that the employer has not received amounts under another Section 7(a) loan for the same purpose and duplicative of amounts applied for or received under a PPP loan.

As noted above, we expect the SBA to issue guidance regarding the implementation of the PPP program, which may establish additional requirements.

What can the loans be used for?

The proceeds of PPP loans can be used for:

• • Payroll costs, including insurance premiums and the continuation of group health care benefits.

• • Rent payments.

• • Utility payments

• • Payments of mortgage interest (not principal or prepayments).

• • Interest payment on any other debt incurred before February 15, 2020.

Will the loans be forgiven?

Amounts under PPP loans that are used to pay the following expenses during the 8-week period following the date the PPP loan is made are eligible to be forgiven:

• • Payroll costs, including insurance premiums and the continuation of group health care benefits.
  • Rent payments.
  • Utility payments.
  • Payments of mortgage interest (not principal or prepayments).

Note that amounts used for interest payments on pre-existing debt (other than mortgages) are not eligible for forgiveness, although the PPP loans may still be used for such payments.

Can the amount of the loan forgiven be reduced, even if the loan is only used for approved purposes?

• • The amount of the loan that can be forgiven is subject to reduction in the event of (i) reductions in employee headcount and (ii) reductions in employee compensation.

• • Reductions in employee workforce are determined by comparing (i) the average number of monthly full-time-equivalent (FTE) employees employed by the employer during the 8-week period for which loan forgiveness is available to (ii) the average number of monthly FTE employees employed by the employer during either the period between February 15 and June 30, 2019 or the period between January 1 and February 29, 2020, with the period used up to the election of the employer.

• • The reduction of any employee’s salary or wages by more than 25% as compared to the most recent full quarter during which the employee was employed before the covered 8-week period will also lead to a reduction in loan forgiveness. This does not apply to any employee that received, during any single pay period in 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.

What if employees are rehired or salary and wages restored?

• • The amount of loan forgiveness shall be determined without regard to any reductions in work force or employee salaries and wages during the period beginning on February 15, 2020 and ending 30 days after enactment of the CARES Act if the employer has eliminated those reductions not later than June 30, 2020.
  • This allows employers some flexibility to rehire terminated employees and return salaries to past levels without jeopardizing loan forgiveness.

The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.

[1] Those with a NAICS code that starts with 72.