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Paycheck Protection Program Frequently Asked Questions

(as of April 29, 2020)[1]

The purpose of this FAQ is to provide family office clients with preliminary guidance on frequently asked questions related to the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or the act). The Small Business Administration (SBA) has not yet offered definitive guidance on the PPP, and rules may change. This FAQ is a high-level overview of the PPP and is not intended to be used as legal advice.

The purpose of the PPP is to provide economic relief to small businesses adversely impacted by the COVID-19 crisis and help these businesses retain their employees by providing forgivable loans. The proceeds of these loans are used for payroll costs, mortgage interest, rent and utility costs.

Lenders approved to make PPP loans have been authorized to verify documents from PPP borrowers regarding allowable uses of proceeds that may affect the calculation of loan forgiveness. We have previously noted that most lenders have conservatively interpreted the act when reviewing loan applications. Further, we have noted that the Interim Final Rules, issued by the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corp., and interim guidance issued by the SBA appear to impose restrictions on the administration of the PPP that do not appear in the express language of the act.

We anticipate that PPP lenders, the SBA and various other governmental authorities will continue to trend toward a restrictive interpretation of the act. We expect this to include a requirement that employers maintain employment at levels not less than those in effect as of February 15, 2020 and continue payment to each employee of total salary and wages at not less than 75 percent of the level in effect during the quarter immediately preceding the date that a PPP loan was funded. While we hope that more favorable guidance will be issued for borrowers, this FAQ offers conservative guidance for planning and educational purposes as of the date set forth in the title. THE PUBLICATION OF ADDITIONAL AUTHORITATIVE RULES AND GUIDANCE MAY MAKE THIS PRELIMINARY GUIDANCE OBSOLETE OR MISLEADING. We encourage you to check with the authors of this document for any updates.

1. Question: Question: Are family offices eligible for PPP loans?

Answer: It depends on the activities of the family office. Some family offices operate as quasi-private equity or hedge funds, while others focus more on the provision of services, such as estate planning, wealth management and tax preparation services (and others are a combination of both). The SBA has determined that hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan.[2] To the extent a family office is engaging solely in activities identical to those engaged in by hedge funds and private equity firms, that family office should consider itself to be primarily engaged in investment or speculation and to therefore be ineligible. However, because the activities of a family office are typically broader in nature, each family office will need to make a fact-specific determination of eligibility.

2. Question: Question: Is a portfolio company of a family office ineligible for a PPP loan under the SBA affiliation rules?

Answer: Possibly yes. The affiliation rules apply to private equity-owned businesses in the same manner as they apply to any other business subject to outside ownership or control.[3] By extension, this would apply to family offices engaged in private equity-type activities. Subject to certain exceptions, a business concern generally is ineligible for the PPP if it has more than 500 employees or otherwise fails to qualify as a small business pursuant to the SBA's size standards for the relevant industry or the SBA's alternate size standards.[4] When calculating the size of a business concern, the SBA will aggregate this entity with its controlling parent companies and their respective portfolio companies. This means that while an individual business may satisfy the SBA size standards by itself, its affiliations may push it over the size limit.

3. Question: If a family office has a minority investment in a portfolio company, will that portfolio company be affiliated with the family office for purposes of calculating PPP eligibility?

Answer: Yes, if the family office is able to exercise negative control. The SBA has established four affiliation tests to determine whether a parent can exercise control over a portfolio company (and is therefore affiliated with that portfolio company for purposes of calculating the applicable size determination), namely, that the affiliation (1) is based on ownership; (2) arises under stock options, convertible securities and agreements to merge; (3) is based on management; or (4) is based on identity of interest. As to item 1, if a parent owns or controls more than 50 percent of the voting equity of a business, the SBA deems that parent to have control over the business and to therefore be subject to the affiliation rules. However, the SBA will deem a minority shareholder to have negative control over a business (and therefore be subject to the affiliation rules) if that shareholder has the "ability, under the concern's charter, by-laws, or shareholder's agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders."[5]

There is some uncertainty as to the degree of negative control a minority shareholder can possess before that negative control rises to the level of affiliation. While the affiliation guidance specific to the PPP does not address such matters of degree, the SBA has historically drawn a distinction between the ability to block ordinary day-to-day actions (such as establishing the budget, hiring and firing officers, and setting employee compensation) versus extraordinary actions (such as entering into any substantially different business, increasing or decreasing the size of the board of directors, or selling all or substantially all assets). Absent specific SBA guidance on this issue as it relates to the PPP and based on regulatory rulings by the SBA's Office of Hearings and Appeals, the ability to block ordinary actions may trigger the affiliation rules, while the ability to block only extraordinary actions may not.[6] If a minority shareholder irrevocably relinquishes its negative control rights, then the SBA will no longer consider that shareholder to be an affiliate of the business (assuming this affiliation arose solely from that negative control).[7]

4. Question: When applying for a PPP loan, what evidence, if any, should the PPP applicant have to support its certification to the PPP lender that "the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the PPP applicant"?

Answer: There is no bright-line test for making this certification; the PPP applicant is required to act in good faith. We recommend that PPP applicants maintain contemporaneous records, prepared prior to making any loan certifications (or, if later, prior to May 7, 2020)[8] documenting their basis for making a good faith determination of the need for the PPP loan to support ongoing operations, including projections showing a base case, best case and worst case forecast. Borrowers should know that their status as a PPP loan recipient could be made public, raising potential reputational concerns in addition to any regulatory compliance concerns borrowers may have. The SBA has provided the following guidance:

Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.[9]

Although the example cited in the guidance above references a public company, the Treasury Department subsequently supplemented that guidance to clarify that the requirement for a good faith certification applies to private companies as well. If a borrower is a private company with significant access to liquidity, the SBA will apply the same reasoning to the private company's certification as to the necessity of the PPP loan to support ongoing operations.[10]

We anticipate that certain categories of borrowers will face heightened scrutiny regarding their certifications, and the Treasury Department and the SBA have already begun to provide limited guidance to this effect. For example, the Treasury Department and the SBA jointly have advised the public that the SBA "will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender's submission of the borrower's loan forgiveness application."[11] The joint statement leaves open the door as to whether the SBA will continue to devise categories of borrowers and loans subject to enhanced scrutiny. It also does not address whether borrowers who do not seek forgiveness at all will be subject to review. While additional guidance on forgiveness is forthcoming from the Treasury Department, given the degree of uncertainty, it is prudent for all borrowers to plan, well in advance, for more rigorous retrospective review of their initial loan certifications.

5. Question: What is the relevant time period for calculating forgivable expenses?

Answer: The time period for calculating forgivable expenses is eight weeks, beginning on the origination date of the loan.[12] The origination date is the date the lender makes the first disbursement of the PPP loan to the borrower.[13] The lender must make the first disbursement of the loan no later than 10 calendar days from the date of loan approval.[14]

6. Question: Is payment of paid time off included in the calculation for loan forgiveness?

Answer: Yes. Payment for vacation and parental, family, medical or sick leave are considered payroll costs and therefore are forgivable under the act.[15] However, qualified sick or family leave wages, for which credit is allowed under the Families First Coronavirus Response Act, are excluded from payroll costs.[16]

7. Question:Under the PPP, is every allowable, or permitted, use of the covered loans eligible for loan forgiveness?

Answer: No. Not all allowable uses are eligible for loan forgiveness, notwithstanding contrary guidance that certain nationally recognized business associations issued to their members in early April. The categories of allowable uses for the PPP loan listed in Section 7(a)(36)(F)(i) of the Small Business Act are clearly broader than the uses that are forgivable under Section 1106(b) of the CARES Act. The table below highlights the differences.

Allowable Uses

(15 U.S.C. 636(a)(36)(F)(i))

Forgivable Expenses

(CARES Act § 1106(b))

1.

Payroll costs (as limited by the act and the subsequent guidance, including the FAQ referred to below)

1.

Payroll costs incurred during the eight-week covered period (as limited by the act and the subsequent guidance including the FAQ referred to below)

2.

Mortgage interest payments (but not mortgage prepayments or principal payments)

2.

Mortgage interest payments on real or personal property (but not mortgage prepayments or principal payments) on mortgage obligations incurred before February 15, 2020

3.

Rent payments

3.

Rent payments on leases dated before February 15, 2020

4.

Utility payments

4.

Utility payments under service agreements dated before February 15, 2020

5.

Costs related to the continuation of group health care benefits during the periods of paid sick, medical or family leave, and insurance premiums

5.

Likely not forgivable[17]

6.

Employee salaries, commissions or similar compensation in excess of $100,000 per year for any employee[18]

6.

Not forgivable[19]

7.

Interest on any other debt obligation incurred before February 15, 2020

7.

Not forgivable[20]

8.

Refinancing SBA Economic Injury Disaster Loans made between January 31, 2020 and April 3, 2020

8.

Not forgivable

8. Question: Can PPP loan proceeds be used for payments to outsourced providers such as office services suppliers or independent contractors that receive payments reported on IRS Form 1099-NEC[21]?

Answer: Probably not. According to the act, an eligible recipient may use the proceeds of a covered loan for payroll costs.[22] The act defines "payroll costs" to include "the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period."[23]

This provision of the act could be interpreted to mean that businesses may use the proceeds of the PPP loan to cover payments made to compensate independent contractors. However, "the sum of payments of any compensation to ... [an] independent contractor" language is conspicuously absent in the first Interim Final Rule published by the SBA on April 2, 2020 (the First Interim Rule). Under Paragraph III.2.f. of the First Interim Rule, "wage, commissions, income, or net earnings from self-employment or similar compensation" for an independent contractor qualify as payroll costs. However, Paragraph III.2.h. states that since independent contractors "have the ability to apply for a PPP loan on their own … they do not count for purposes of a borrower's PPP loan calculation." Based on the foregoing, most lenders and commentators have concluded that payments by borrowers to independent contractors should not be included in calculation of payroll costs either for purposes of determining use of proceeds or for purposes of calculating loan forgiveness amounts.

Moreover, as of April 17, 2020, the SBA, in consultation with the Department of the Treasury, published FAQ to clarify some of the ambiguities in the act.[24] This guidance definitively states, "Any amount that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business's payroll costs."

While Paragraph III.2.e. of the First Interim Rule includes amounts paid to independent contractors in the methodology to calculate the maximum amount an applicant can borrow, given the weight of the other provisions, this may be a drafting error.

With an eye toward achieving maximum loan forgiveness, we are encouraging clients to first use loan proceeds during the covered period for the following, in order of priority:

    • Payment of compensation with respect to employees, including (1) salary, wages, commissions or similar compensation (excluding amounts paid to any employee in excess of $100,000 annualized); (2) payment for vacation or parental, family, medical or sick leave; (3) allowance for dismissal or separation; (4) payment required for the provision of group health care benefits, including insurance premiums; (5) payment of any retirement benefit; and (6) payment of state or local taxes assessed on the compensation of employees
    • Rent and/or mortgage interest
    • Covered utilities

Only if the estimated total of the above-referenced items does not result in 100 percent loan forgiveness (calculated without respect to applicable reductions) should a PPP borrower consider using the funds for other purposes permitted under the act. Before you use loan proceeds for payments to outsourced providers or independent contractors, we encourage you to discuss your plans with your attorney.

9. Question: Can PPP loan proceeds be used for payments to individuals that receive guaranteed payments reported on a Schedule K-1 (IRS Form 1065)?

Answer: Yes. In fact, recent SBA guidance has stated that "if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual."[25] However, in practice, some lenders have excluded payments to partners from payroll costs. Before using loan proceeds for payments to K-1 employees, we encourage you to discuss your plans with your attorney.

10. Question: When calculating the amount of rent payments made during a covered period, does "rent" include annual true-up payments for building operating and common area expenses (Building OpEx) that are invoiced by the landlord in a month preceding the covered period but are payable during the covered period?

Answer: Most likely. Most commercial leases define "rent" to include Building OpEx. As long as Building OpEx is included in the definition of "rent" under the applicable lease agreement, PPP loan proceeds may be used for payment of the Building OpEx amounts during the covered period.[26]

11. Question: Can a covered rent obligation paid during the PPP loan covered period but accrued during the two months immediately preceding the commencement of the covered period be included in the calculation of the amount of debt eligible for forgiveness?

Answer: Maybe not. Section 1106(b) of the act states: "An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period: (1) Payroll costs[,] (2) Any payment of interest on a covered mortgage obligation[,] (3) Any payment on any covered rent obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation)[,] (4) Any covered utility payment." A strict reading of the act indicates that only covered rent obligations incurred and paid during the covered period are eligible for loan forgiveness.[27] Here, even though PPP loan proceeds can be used to pay the covered rent obligation (and other allowable expenses), whether or not incurred during the covered period,[28] because the rent obligation was incurred prior to the covered period, it is possible that the payment may not be includable in the calculation of loan forgiveness.

12. Question: Can payroll costs paid during the PPP loan covered period but partially incurred in the week immediately preceding the commencement of the covered period be included in the calculation of the amount of debt eligible for forgiveness?

Answer: No. Payroll costs must be incurred during the covered period to be eligible for loan forgiveness.[29] An eligible recipient should prorate payments of payroll costs to include only amounts actually incurred during the covered period.

13. Question: If an employer would normally make payroll disbursements covering seven of the eight weeks included in a covered period under the PPP, can the employer make an additional payroll disbursement to pay payroll costs incurred (accrued) during the entire eight-week period?

Answer: Yes. The employer may accelerate payment of costs already incurred. While it is possible that payroll costs that have accrued during the covered period but for which payments have not been made will still be eligible for loan forgiveness, absent further guidance from the SBA, we are advising clients to accelerate, if possible, payroll payments during the covered period.

14. Question: Can discretionary bonus payments made to employees during the covered period be included in the calculation of the amount of debt eligible for forgiveness under the PPP?

Answer: Yes. Bonuses fall within the act's definition of "payroll costs," which are eligible for forgiveness under the PPP.[30] However, these remain subject to the $100,000 annualized cap on compensation.[31]

15. Question: Can an employer include in its calculation of payroll costs eligible for forgiveness the quarterly fees paid to the 401(k) administrator during the covered period?

Answer: No. While payments of retirement benefits are included in the definition of "payroll costs" under the act and therefore are eligible for loan forgiveness, administrative fees paid by an employer for a retirement benefit plan are not generally considered a retirement benefit and therefore likely cannot be included in the calculation of payroll costs under the PPP.[32]

16. Question: Can profit-sharing contributions made to employees' 401(k) accounts during the covered period be included in the calculation of the amount of debt eligible for forgiveness?

Answer: Probably not. Although payments of retirement benefits are eligible for loan forgiveness,[33] because they are considered payroll costs, they must be incurred during the covered period to be included for purposes of calculating the amount eligible for loan forgiveness under the PPP.[34] Therefore, while the act allows an applicant to use the loan proceeds to make profit-sharing contributions to employees' 401(k) accounts to fulfill an employer's obligations that may have accrued before the applicable covered period, such payments likely cannot be included in the calculation of the amount of eligible loan forgiveness under the act.

17. Question: Can a borrower receive 100 percent forgiveness of the principal amount of a PPP loan even after reducing (without restoration) its number of full-time equivalent employees (FTEs) or salary and wages?

Answer: This is unclear. Depending on how CARES Act Sections 1106(d)(1), 1106(d)(2), and 1106(d)(3) are interpreted, there may be some circumstances under which 100 percent forgiveness can be achieved despite an unrestored reduction in FTEs or salary and wages. Limitations on forgiveness based on FTE reductions and compensation reductions are prescribed, respectively, by Sections 1106(d)(2) and 1106(d)(3) of the act.

Example: A PPP borrower receives a $10 million loan. During the covered period, the PPP borrower incurs and pays payroll costs and other forgivable expenses totaling $13.5 million ("PPP Expenses"). Also during the covered period, the PPP borrower reduces the total salary and wages of selected employees by an amount in excess of 25 percent of the total salary or wages of the employees during the most recent full quarter during which the selected employees were employed before the covered period. The amount of that excess beyond the 25 percent threshold is $3 million. Below is a comparison showing two ways the required limitation of forgiveness might be applied consistent with Section 1106(d)(3) of the act.

CARES Act

Description

Conservative

Aggressive

Hypothetical

Principal Amount of PPP Loan

$10,000,000

$10,000,000

Section 1106(b)

PPP Expenses Eligible for Forgiveness

$13,500,000

$13,500,000

Section 1106(d)(1)

PPP Eligible Expenses Limited to Principal Amount of PPP Loan?

Yes

No

Section 1106(b) (conservative)

Section 1106(b) (aggressive)

Adjusted PPP Expenses Eligible for Forgiveness

$10,000,000

$13,500,000

Section 1106(d)(3)

Forgiveness Penalty Based on Reduction of Salary and Wages

($3,000,000)

($3,000,000)

Section 1106(b)

PPP Expenses Eligible for Forgiveness After Reductions

$7,000,000

$10,500,000

Section 1106(d)(1)

Cap of PPP Eligible Expenses Based on Loan Amount

N/A

$10,000,000

Percentage of Loan Forgiven

70%

100%

Based on the text of Section 1106 of the act, each of the conservative and aggressive calculations described above may be defensible. Consistent with the legislative objective of the PPP, however, the conservative calculation ensures that PPP borrowers that reduce the salary and wages of lower-compensated employees (i.e., employees with annual compensation of $100,000 or less) by more than 25 percent will not be entitled to full forgiveness of the PPP loan principal. But the aggressive calculation allows employers with payroll costs (or a combination of payroll costs, rent and utilities) in excess of the amount borrowed under the PPP to mitigate, in whole or in part, the limitations on forgiveness intended to be imposed by Sections 1106(d)(2) (reductions based on number of employees) and 1106(d)(3) (reductions based on salary and wages) of the act.

Section 1106(d) sets forth certain restrictions on the amount of loan forgiveness. Section 1106(d)(1) states that "the amount of loan forgiveness ... shall not exceed the principal amount [of the PPP loan]" (the Principal Cap). Section 1106(d)(2) and Section 1106(d)(3) set forth required reductions to the amount of loan forgiveness based on reductions in the average number of FTEs and reductions in total salary or wages of each employee earning less than $100,000.

The text of the act does not make clear whether the amount of loan forgiveness under Sections 1106(d)(2) and 1106(d)(3) is calculated before or after application of the Principal Cap. As demonstrated above, for eligible recipients that have reduced FTEs and/or salary and wages but can demonstrate aggregate PPP Expenses in excess of the Principal Cap, the most favorable way to apply the limitations and reductions in Section 1106(d) may be to first apply the reductions against the aggregate PPP Expenses and, then, if the resulting amount exceeds the Principal Cap of the PPP loan, apply the Principal Cap. For these recipients, this order of application would limit (or in some cases eliminate) the adverse effect of reductions based on the employer's reductions of FTEs and/or salary and wages.

While the text of the act seems to permit the application of reductions before the application of the Principal Cap, we anticipate that SBA lenders will apply the Principal Cap prior to calculating reductions to the amount of loan forgiveness. This would incentivize employers to minimize any reductions in the number of FTEs or total salary and wages of employees. Any other interpretation would defeat the intention of Congress to incentivize maintenance of pre-COVID-19 employment and compensation levels among PPP borrowers.

Due to the uncertainty as to the order of application of the limitations and reductions under Section 1106(d) and the apparent legislative intent, we recommend that clients take the conservative approach and assume that the Principal Cap will apply prior to the limitations required based on reductions to FTEs or salary and wages.

18. Question: Is head count a determinant in the calculation of loan forgiveness under Section 1106 of the act?

Answer: No. Head count, or the total number of employees, is a determinant only in eligibility for applying for the loan. Businesses with a head count of not more than 500 employees are eligible for a loan under the PPP.[35]

The number of FTEs, and not head count, is used for determining whether there will be a reduction in the amount of loan forgiveness.[36] For example, if two half-time employees are replaced by one FTE, the head count will drop but the number of employees for loan forgiveness purposes should stay the same, resulting in no reduction of the amount of loan forgiveness.[37]

19. Question: For purposes of calculating the amount of PPP debt eligible for forgiveness, what federal, state and local payroll tax payments can be included in payroll costs?

Answer: The employer-paid portion of federal employment tax is excluded from payroll costs.[38] However, "payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer[.]"[39] This is because the employee-imposed taxes are already reflected in gross wages. The SBA guidance confirms that the term "payroll costs" as defined in the act is not intended to reduce the amount of gross wages.[40]

Further, the definition of "payroll costs" expressly includes "payment of state or local tax assessed on the compensation of employees."[41] We interpret this to mean that employer-paid state and local taxes, such as unemployment insurance tax, are included in the calculation of payroll costs. Thus, while the employer-paid portion of federal employment tax is not included in payroll costs, similar state and local taxes paid by employers would be.

20. Question: When applying the exemption for rehires described in Section 1106(d)(5) of the act, if the number of FTEs remains reduced during the entire covered period that ends prior to June 30, 2020 and the eligible recipient fully eliminates this reduction on June 30, 2020, will the amount of loan forgiveness be reduced due to the reduction of FTEs during the covered period?

Answer: Most likely not. We expect more guidance to be issued on calculations related to loan forgiveness; however, we interpret the act to mean that so long as an eligible recipient rehires an equivalent number of FTEs by June 30, 2020, its loan forgiveness will not be reduced. We recognize, however, that this interpretation may lead to a politically unacceptable result, and backlash may result in an interpretation that requires employers to rehire employees early in the covered period.

21. Question: When applying the exemption for rehires described in Section 1106(d)(5) of the act, if a reduction of salary or wages of specific employees remains in effect during the entire covered period that ends prior to June 30, 2020, and the eligible recipient fully eliminates such reduction in salary or wages effective on June 30, 2020, will the amount of loan forgiveness be reduced due to the reduction relating to salary and wages?

Answer: No. We expect more guidance to be issued on calculations related to loan forgiveness; however, we interpret the act to mean that so long as an eligible recipient eliminates the reduction in salary or wages by June 30, 2020, its loan forgiveness will not be reduced.

22. Question: When applying the exemption for rehires described in Section 1106(d)(5) of the act, if a reduction of salary or wages of specific employees remains in effect during the entire covered period that ends prior to June 30, 2020, and the eligible recipient limits each such reduction in salary or wages to less than 25 percent as of June 30, 2020, will the amount of loan forgiveness be reduced due to the reduction relating to salary and wages?

Answer: This is unclear. The amount of loan forgiveness will be reduced only when there has been a 25 percent or greater reduction in salary or wages of any employee.[42] To receive exemption from the reduction in loan forgiveness, an eligible recipient must eliminate the reduction in salary or wages of such employee no later than June 30.[43] It is unclear whether "the reduction" described in Section 1106(d)(5) refers to the total reduction in salary or wages of the employee or describes only the salary or wage reduction in excess of the 25 percent limit that triggered the reduction in loan forgiveness. We expect further guidance regarding the exemptions to reductions in loan forgiveness.

For this question and the preceding two questions, keep in mind that if an employer plans on maintaining any level of reduction during the covered period, even if the reduction is reduced on June 30, the employer is still obligated to use 75 percent of the loan proceeds on payroll costs for the remaining expenditures to qualify for loan forgiveness.[44] All things being equal, a 25 percent reduction in salary will leave a surplus of loan proceeds.

23. Question: When applying the exemption for rehires described in Section 1106(d)(5), do the same employees need to be rehired?

Answer: No. New employees may be hired, and they would count the same as rehired employees. The employer need only eliminate the reduction in the number of FTEs.[45]

24. Question: In applicable provisions of the PPP, does the exclusion from the definition of "payroll costs" of employee compensation in excess of $100,000 in annual salary include all employee benefits of monetary value?

Answer: No. With respect to payroll costs, according to the U.S. Treasury Department's most recent FAQ page, the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to noncash benefits such as:

  • Employer contributions to defined-benefit or defined-contribution retirement plans;
  • Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
  • Payment of state and local taxes assessed on compensation of employees.[46]

25. Question: For loan forgiveness purposes, is it better to cut employee salaries than lay off or furlough employees?

Answer: Generally, yes. The act provides more leniency if an employer implements pay cuts rather than layoffs. The amount of loan forgiveness will be reduced in proportion to the reduction in FTEs.[47] By contrast, an employer may reduce employee salaries by up to 25 percent without any penalty and will reduce the eligible forgiveness amount dollar for dollar for any reduction in excess of 25 percent.[48] Nevertheless, each employer must consider its unique business needs while considering how reductions in salary or layoffs will impact its business.

AUTHORS:

Rick Harris rdharris@daypitney.com

David Waizer dwaizer@daypitney.com

Michael Kaufman mkaufman@daypitney.com

Deanna Christian dchristian@daypitney.com


[1] Based on the issuance of official guidance, evolving consensus interpretations, and further legal analysis of the CARES Act, the answers to the questions in this document may change, even daily, and additional questions may be added. Please contact your Day Pitney attorney to make sure you are using the most up-to-date FAQ document.

[2] Interim Final Rule, Docket No. SBA-2020-0021, Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Promissory Notes, Authorizations, Affiliation, and Eligibility, 13 C.F.R. Parts 120 and 121, U.S. Small Business Administration, ¶ 2.a.

[3] Id. at ¶ 2.b.

[4] PAYCHECK PROTECTION PROGRAM LOANS, Frequently Asked Questions (FAQs), Department of Treasury, Q.2, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.

[5] Affiliation Rules Applicable to U.S. Small Business Administration Paycheck Protection Program, Department of the Treasury, https://home.treasury.gov/system/files/136/Affiliation%20rules%20overview%20%28for%20public%29.pdf.

[6] Size Appeal of: Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (August 30, 2018).

[7] FAQs Q.6.

[8] In FAQs Q.31, SBA clarifies the standard against which each borrower must make its certification as to the necessity of the loan to support ongoing operations. Any borrower that applied for a PPP loan prior to April 24, 2020 and repaid the loan prior to May 7, 2020, will be deemed by SBA to have made the required certification in good faith, regardless of whether the required certification met the standard articulated in FAQs Q.31.

[9] FAQs Q.31.

[10] FAQs Q.37.

[11] Joint Statement by Secretary Steven T. Mnuchin and Administrator Jovita Carranza on the Review Procedure for Paycheck Protection Program Loans (April 28, 2020), https://home.treasury.gov/news/press-releases/sm991 (last visited April 29, 2020).

[12] CARES Act § 1106(a)(3).

[13] FAQs Q.20.

[14] Id.

[15] 15 U.S.C. 636(a)(36)(A)(viii)(I)(aa)(CC); CARES Act § 1106(a)(7)(A).

[16] 15 U.S.C. 636(a)(36)(A)(viii)(II).

[17] Note that payments required for the provision of group healthcare benefits are forgivable as a portion of payroll costs. There is some question as to whether payments made to cover continuation of group healthcare benefits post-employment are forgivable. For conservative planning purposes, absent further guidance, these costs should be treated as nonforgivable.

[18] Note: This was listed as an allowable use in Small Business Act Section 7(a)(36)(F)(i)(III) but omitted from the list of allowable uses in Paragraph III.2.r of the First Interim Rule published by the SBA on April 2, 2020.

[19] Absent authoritative guidance, there is some uncertainty as to whether the entire amount or excess amounts, calculated on a prorated basis, paid to any employee who earns in excess of $100,000 will be excluded from the calculation of forgivable amounts. At this time, we have concluded that the best interpretation is that the exclusion is limited to amounts (prorated) in excess of $100,000.

[20] Only interest payments on debt not secured by a "mortgage" or incurred after February 14, 2020 will be excluded from the debt forgiveness calculation. Whether "mortgage" refers only to debt secured by real property and associated personal property or to any debt secured by real or personal property is unclear.

[21] IRS Form 1099-NEC, Nonemployee Compensation, replaced Form 1099-MISC.

[22] 15 U.S.C. 636(a)(36)(F)(i)(I).

[23] 15 U.S.C. 636(a)(36)(A)(viii)(I)(bb).

[24] FAQ Q.15.

[25] Interim Final Rule, Docket No. SBA-2020-[ ], Business Loan Program Temporary Changes; Paycheck Protection Program-Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, 13 C.F.R. Part 120, U.S. Small Business Administration, ¶ 2.a.

[26] 15 U.S.C. 636(a)(36)(F)(i)(V).

[27] It remains unclear whether costs and expenses need to be both incurred and paid in order to be included in the calculation of forgiveness. Under one possible interpretation, only payroll costs need be "incurred" during the covered period and other expenses (e.g., rent or utilities) need only be paid during the covered period. Consistent with our theme of conservative planning, we have adopted a most conservative interpretation requiring payroll costs and other expenses to be incurred and paid during the eight-week covered period. We also note the term "incurred" is not defined and its meaning remains uncertain. We anticipate further authoritative guidance on this subject in the next several weeks.

[28] 15 U.S.C. 636(a)(36)(F)(i)(V).

[29] See CARES Act § 1106(b).

[30] See 15 U.S.C. 636(a)(36)(A)(viii)(I)(aa)(AA), (BB).

[31] 15 U.S.C. 636(a)(36)(A)(viii)(II)(aa).

[32] 15 U.S.C. 636(a)(36)(A)(viii)(I)(aa)(FF).

[33] 15 U.S.C. 636(a)(36)(A)(viii)(I)(aa)(FF); CARES Act § 1106(b)(1).

[34] CARES Act § 1106(b).

[35] 15 U.S.C. 636(a)(36)(D)(i)(I).

[36] CARES Act § 1106(d)(2).

[37] See Internal Revenue Code § 4980H(c)(2)(E). There is some uncertainty as to how FTEs will be counted under CARES Act Section 1106(d)(2). Will FTEs be based only on the number of hours worked for a given employee or, for example, are two half-time employees counted as one FTE? Also, neither the CARES Act nor current guidance is clear on whether ex-employees are taken into account in calculating the forgiveness reduction on account of (1) the reduction calculated on the basis of FTE employee count, (2) the reduction calculated on the basis of compensation reduction or (3) both.

[38] 15 U.S.C. 636(a)(36)(A)(viii)(II)(bb) (excluding from payroll costs "taxes imposed or withheld under chapters 21 [FICA], 22 [Railroad Retirement Tax Act], or 24 [withholding] of the Internal Revenue Code of 1986 during the covered period."); FAQ Q.16.

[39] FAQ Q.16.

[40] Id.

[41] 15 U.S.C. 636(a)(36)(A)(viii)(I)(aa)(GG).

[42] CARES Act § 1106(d)(3)(A).

[43] CARES Act § 1106(d)(5)(B)(ii)(II).

[44] First Interim Rule, ¶ III.2.o.

[45] CARES Act § 1106(d)(5)(B)(i)(II).

[46] FAQs Q.7; see also 15 U.S.C. 636(a)(36)(A)(viii)(II)(aa).

[47] CARES Act § 1106(d)(2).

[48] CARES Act § 1106(d)(3).