Highlights of SBA's Updated FAQs on the Paycheck Protection Loans

by John Peiffer and Maggie Beecher

On April 8, 2020 (and again on April 13 and 14, 2020), the Small Business Administration (SBA) issued new “Frequently Asked Questions” providing clarifications regarding various aspects of the Paycheck Protection Program (PPP) loans established through sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). The full document is available here.  

Highlights of the clarifications include:  

1. Legal Authority of FAQ. The SBA notes that the “Frequently Asked Questions” are not binding law, but rather a position statement by the SBA, which could change if the administrative leadership changes.  

2. Categories of Eligible Borrowers include, but are not limited to, the following:  

a. Tax-exempt nonprofit organizations described in Internal Revenue Code 501(c)(3) which have fewer than 500 employees in the U.S.

b. Tax-exempt nonprofit organizations described in Internal Revenue Code 501(c)(3) which meet the SBA employee-based size standards for the industry in which they operate.  

3. Affiliation Rules. When determining an organization’s size, the SBA requires borrowers to include employees and revenue from affiliated entities. The SBA has established its own rules regarding affiliation. Many religious organizations may have too many employees to be eligible for aid under these rules, but, fortunately, the SBA recently included a religious exemption in its interim final rule on affiliation.  

4. Signatory. Who can sign the loan application on behalf of the organization? The FAQs clarify that a single individual can sign on behalf of the borrowing organization if the individual is an authorized representative of the borrower. If an organization’s board has not already designated a banking representative, they can do so through an action of the board.  

5. Time Period for Calculating Maximum Loan. Initially, the guidance for nonseasonal employers was unclear as to the proper time period for calculating the payroll costs for the initial loan amount. Some resources indicated the average payroll costs should be calculated based on the twelve months preceding the loan; other resources stated that the average should be based on calendar year ending in December 2019. The FAQs indicate that both options are acceptable.  

6. Payroll Costs. The FAQs clarify two key questions related to calculating “payroll costs” for purposes of the maximum loan, allowable uses of PPP funding, and calculation of loan forgiveness.*

a. Federal Income Tax. Payroll costs do include the employee’s share of Federal Insurance Contributions Act (FICA) and income taxes. However, the payroll costs do not include the employer’s share of FICA.  

b. Salary over $100,000. Under the PPP, “payroll costs” must exclude compensation in excess of $100,000. The SBA FAQs clarify that non-cash benefits including defined-contribution retirement plans (such as 403(b) and 401(k) plans), group health care coverage, and payment of state and local taxes can be included as “payroll” even if these items make an employee’s total compensation more than $100,000. For example, if an employee receives $100,000 in cash compensation, $500 in defined contribution retirement benefits, and $300 in health care insurance, the payroll costs for purposes of loan calculations can include $100,800.  

7. Prior Instructions. The FAQ clarify that a borrower may submit an application under the SBA guidance available at the time of the application and does not need to revise or amend the application if additional guidance is later issued. However, the FAQs note, loan applicants but may do so if their loan application has not yet been processed.  

These key highlights should assist both loan applicants and lenders in processing applications efficiently. Please also see NLI’s post on religious liberty considerations related to PPP and other CARES Act loans.  

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*For a full definition of “payroll costs,” see Title III, Sec. 2(f) of the Paycheck Protection Program Interim Final Rule, available here.