A new bit of guidance has emerged from the Small Business Administration, with another interim final rule (IFR) appearing on the Federal Register website in pre-publication form.[1] This IFR contains a number of changes to the third and sixth interim final rule on PPP loans, mainly conforming language to agree with changes made in the Paycheck Protection Program Flexibility Act (PPPFA).

However, the IFR does contain some guidance related to the maximums that can be used for payroll costs for a single employee and income replacement for an owner-employee in obtaining forgiveness for borrowers that opt to take advantage of the 24 week covered period added by the PPPFA.

The option to select an 8- or 24-week period for borrowers who had loans prior to June 5, 2020 is described as follows in the IFR:

“Covered period,” as that term is used in section 1106 of the CARES Act, was originally defined as the eight-week period beginning on the date of the origination of a covered loan. However, section 3(b) of the Flexibility Act extended the length of the covered period as defined in section 1106 of the CARES Act from eight to 24 weeks, while allowing borrowers that received PPP loans before June 5, 2020 to elect to use the original eight-week covered period.[2]

24-Week Per Employee Cash Compensation Cap

The limit on cash compensation on a per-employee basis after the modification to a 24-week period is described in the IFR as follows:

The actual amount of loan forgiveness will depend, in part, on the total amount spent over the 24-week period beginning on the date your PPP loan is disbursed3 (“covered period”) on:

i. payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);[3]

The resulting cap of $46,154 on an employee’s cash compensation is the expected amount, taking into account the $100,000 limit as applied to 24 weeks ($100,000 times 24/52, or $46,154) as opposed to 8 weeks ($100,000 times 8/52, or $15,385).

The IFR notes the following in a footnote:

Given the 2.5 multiplier in the calculation of maximum PPP loan amount in SBA Form 2483, this per-individual maximum would only be reached if the borrower had reduced its FTEs but was eligible for an exemption (safe harbor) from the resulting reduction in forgiveness.[4]

24 Week Owner Compensation Replacement

However, this tripling of the limit does not carry over to owner compensation replacement. While the number rises, it does not rise to 24/52 of 2019’s net profit, which would be a tripling of the 8/52 for the 8-week test. Rather, the owner-compensation is limited as follows:

The actual amount of loan forgiveness will depend, in part, on the total amount spent over the 24-week period beginning on the date your PPP loan is disbursed3 (“covered period”) on:

…

ii. owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA;[5]

The IFR provides the following justification for limiting the owner’s compensation to 2.5 months of 2019 net profit:

Specifically, Congress determined that the maximum loan amount is generally based on 2.5 months of the borrower’s average total monthly payroll costs during the one-year period preceding the loan. 15 U.S.C. 636(a)(36)(E). For example, a borrower with one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee.[6]

The IFR notes that for a sole-proprietor with no employees, this change has no real impact—the income replacement would now be equal to the loan amount, allowing for 100% forgiveness of the loan:

For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll.[7]

What About “Owner-Employees”?

Readers should take care to note that this guidance does not discuss the impact on “owner-employees,” a topic covered in the IFR issued on May 23, 2020,[8] well after the two IFRs modified by the above guidance were issued.

While until the SBA issues revisions to that IFR the final answer can’t be known for sure, one likely option is that the SBA limits owner-employees to 2.5/12 of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf, with a likely cap at $20,833 across all businesses.

[1] RIN 3245-AH51, “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to the Third and Sixth Interim Final Rules,” Small Business Administration, June 16, 2020, scheduled for publication on June 19, 2020, https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-13293.pdf (retrieved June 16, 2020)

[2] RIN 3245-AH51, Section 1.b

[3] RIN 3245-AH51, Section 1.b, Revised Part III.1.f of Third Interim Final Rule (85 FR 21747, 21750)

[4] RIN 3245-AH51, Section 1.b, Revised Part III.1.f of Third Interim Final Rule (85 FR 21747, 21750), Footnote 4

[5] RIN 3245-AH51, Section 1.b, Revised Part III.1.f of Third Interim Final Rule (85 FR 21747, 21750)

[6] RIN 3245-AH51, Section 1.b, Revised Part III.1.f of Third Interim Final Rule (85 FR 21747, 21750)

[7] RIN 3245-AH51, Section 1.b, Revised Part III.1.f of Third Interim Final Rule (85 FR 21747, 21750)

[8] RIN 3245-AH46, “Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Loan Forgiveness,” Small Business Administration, May 22, 2020