CARES ACT-PAYCHECK PROTECTION PROGRAM: Treasury Department Issues Additional Guidance for Loans Pursuant to the Paycheck Protection Program
Author: Bruce S. Goodman, Esq.
Lenders began accepting applications for loans pursuant to the CARES Act's (Act) Paycheck Protection Program (PPP) last Friday, April 3, 2020. Given the many questions that remained open notwithstanding previous guidance and publication of the Interim Final Rule, the Treasury Department has issued additional guidance attempting to answer both borrowers' and lenders' questions.
Significantly, the new guidance provides that, even if the business exceeds the Act's 500-employee threshold, it may still be eligible for a PPP loan under the Small Business Act's rules for determining what qualifies as a small business concern. Here's what you need to know:
- A borrower that exceeds the Act's 500-employee threshold may still qualify for a PPP loan if:
- it meets the existing statutory and regulatory definition of a "small business concern" pursuant to section 3 of the Small Business Act; or
- it meets both tests of the SBA's "alternative size standard" as of March 27, 2020: (i) maximum tangible net worth of the business is not more than $15 million, and (ii) the average net income after Federal income taxes (excluding carryover losses) of the business for the two full fiscal years before the application date is not more than $5 million.
- The Act's cap on payroll costs in excess of an annual salary of $100,000 applies only to cash compensation, not to non-cash benefits such as employer contributions to retirement plans, payments to group health insurance plans, or payment of state and local taxes assessed on employee compensation.
- Borrowers can calculate their payroll costs using data either from the previous 12 months or from calendar year 2019.
- If a borrower was not in business from February 15, 2019 to June 30, 2019, it may use average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
- Borrowers may use their average employment during the same time periods to determine the number of their employees. Alternatively, borrowers may elect to use the SBA's usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application, or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months.
- Payments a borrower made to an independent contractor or sole proprietor should be excluded from determining a borrower's eligible payroll costs.
- Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as an employee's share of FICA and income taxes required to be withheld from employees. However, employer side federal payroll taxes imposed on an employee's salary are excluded from payroll costs.
- A borrower may use PPP loan proceeds to pay for employee vacation, and family, medical or sick leave.
- Lenders are not obligated to "replicate every borrower's calculation" in the loan application. Lenders are only obligated to "perform a good faith review, in a reasonable time, of the borrower's calculations and supporting documents concerning average monthly payroll cost." Further, a "[m]inimal review of calculations based on a payroll report by a recognized third-party payroll processor" is deemed reasonable.
- Lenders are not obligated to make an independent determination regarding the applicability of the affiliation rules (13 C.F.R. § 121.301(f)). The borrower is responsible for determining its eligibility under the affiliation rules and is required to make the proper certification on the loan application.
- Lenders may accept a signature on a loan application from a single individual authorized to sign on the borrower's behalf.
- A lender does not need to take further action for loans it filed or approved before the issuance of the additional guidance on April 6, 2020. It is entitled to rely on the laws, rules, and guidance available to it at the time the borrower submitted the application.
- Lenders may use their own online portals and electronic forms to collect the same information and certifications as set forth in the application form the Treasury Department promulgated, provided the lender uses the same language.
- PPP loans for existing customers are not considered new accounts for FinCEN Rule CDD purposes. Lenders do not need to re-verify information already provided by the applicant.
- Federally insured depository institutions and credit unions that have not collected beneficial ownership information on an existing customer do not need to collect and verify beneficial ownership information for those customers applying for a PPP loan, unless indicated by the lender's risk-based approach to BSA compliance.