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The CARES Act: Interim Final Rule Re: Payroll Protection Program Loans

On April 20, 2020, the Small Business Administration issued this interim final rule explaining details of the Paycheck Protection Program. The regulations address some recurring questions.

For those that applied for the Economic Injury Disaster Loan, this guidance from the Small Business Administration confirms that this loan will provide $1,000 per employee up to $10,000. This puts a new limit on how these funds will be distributed.
• EIDL Loan advances will start to be distributed this week. $1000 per employee up to $10,000 max

• Interest Rate: Contrary to earlier announcements from SBA, the interest rate for PPP loans has now been set at 1.0 percent, up from the 0.5 percent reported earlier this week.

• Application: Borrowers must complete the SBA Form 2483 (Paycheck Protection Program Application Form) and provide payroll documentation.

• Payroll Costs Defined: Since this is important, this is what the SBA says in its entirety: “Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.”

Exclusions from payroll costs include compensation for employee based outside the U.S,, compensation in excess of $100,000 (prorated), federal payroll taxes, qualified paid leave under the Families First Act.

• Calculating Payroll Costs: The rule lays out a five-step process for calculating payroll costs for purposes of PPP loans:
1. Aggregate payroll costs (see above) for last 12-months;
2. Subtract pay from each employee in excess of $100,000;
3. Divide step 2 total by 12 months to get the monthly average;
4. Multiply step 3 total by 2.5; and then
5. Add any outstanding amount from an EIDL loan received between 1/31/2020 and 4/3/2020, “less the amount of any ‘advance’ under an EIDL COVID-19 loan (because it doesn’t have to be repaid).”

It’s a simple as that.

• Lender Scrutiny should be minimal. The interim final rule states: “The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.”

• 75%-25% Rule for Forgiveness: Another decision made official in the new rule is that SBA will limit how much of a loan can be forgiven based on how the borrower spends the money. SBA states that loan forgiveness requires that at least 75 percent of the loan amount be spent on payroll and no more than 25 percent on other eligible expenses (rent/mortgage, utilities). This restriction isn’t in the statute but SBA says it is imposing the restriction to promote employment.