The coronavirus of 2019 (COVID-19) has caused unprecedented disruption for small businesses in the United States. In response, the federal government has created and expanded several assistance programs for certain impacted businesses, including a paycheck protection program (PPP). Here are answers to some common questions about the PPP.
Note: In June 2020, Congress enacted the Paycheck Protection Program Flexibility Act (PPPFA), which makes important changes to PPP loan forgiveness. The forgiveness information below reflects these changes.
Q: What is the PPP?
A: The PPP is a new loan program for small businesses and certain other covered entities. The program is administered by the Small Business Administration (SBA). To learn more about the Paycheck Protection Program, including information on how to apply, click here.
Q: How does the PPP work? If I decide it's right for my business, how do I apply?
A: The SBA will fully guarantee loans provided by approved lenders to eligible entities. Forgiveness of these loans is also available under certain circumstances (see below).
Employers can apply for a PPP loan through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. Consult with your local lender to find out if it's participating in the program.
Q: Who can apply for a PPP loan?
A: All businesses with 500 or fewer employees and certain other covered entities can apply for a PPP loan.
Q: When can I apply for PPP? How long will the PPP last?
A: Some lenders started processing loan applications on April 3, 2020 for businesses and sole proprietors and the program runs through June 30, 2020.
Q: What can the PPP loan be used for?
- Payroll costs.
- Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums.
- Employee compensation.
- Payments of interest on any mortgage obligation incurred before February 15, 2020.
- Rent under lease agreements in force before February 15, 2020.
- Utilities for which service began before February 15, 2020.
- Interest on any other debt obligations incurred before February 15, 2020.
Q: How are "payroll costs" defined under the PPP?
A: Under the PPP, payroll costs generally include:
- Salary, wage, commission, bonuses, or similar compensation (capped at $100,000 on an annualized basis for each employee);
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefit; or
- Payment of state or local tax assessed on employees' compensation.
They also 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 is no more than $100,000.
Q: How large can PPP loans be?
A: PPP loans will be provided in amounts approximately equivalent to ten weeks of payroll costs. Loan amounts are determined based on 250% of average monthly payroll costs, taking into consideration average wages paid during the applicable period (which will either be the one-year period prior to the loan or calendar year 2019, as determined by the lending institution), up to a limit of $10 million. There are alternate periods for seasonal employers and those not in business in the prior year.
Q: How much of the PPP loan may be forgiven?
A: Up to 100 percent of the PPP loan is forgivable (to the extent that employers maintain specified staffing and wage levels). The loan will be fully forgiven if the loan proceeds are spent, or the qualifying costs incurred, within the applicable Covered Period*; the funds are used for payroll costs and the other loan uses described above, provided that at least 60 percent of the forgiven amount must have been used for payroll costs; and certain other conditions are met. Employers can apply for loan forgiveness through the lender that is servicing the loan. Lenders have 60 days to make a decision on loan forgiveness.
* Loan proceeds must be spent during the 24-week period immediately following disbursement of the loan or by December 31, 2020, whichever is earlier (the Covered Period). If you received your loan prior to June 5, 2020, you may choose the 8-week period following disbursement of your loan as your Covered Period. Also, if you pay your employees on a biweekly or more frequent schedule, you may choose to begin the covered period on the first day of the first pay period following disbursement of the loan ("Alternative Payroll Covered Period") for qualifying payroll costs only.
Q: How will the amount that is forgiven be determined?
A: The specific amount will generally depend in part on what portion of the loan is used on eligible payroll costs and whether the employer has maintained staffing and pay levels during the Covered Period.
A loan may be fully forgiven if all the following three conditions are met:
- The loan proceeds are spent, or qualifying costs are incurred, within the applicable Covered Period following receipt of the loan proceeds (unless using an Alternative Payroll Covered Period for payroll costs.
- At least 60 percent of the loan amount was used for eligible payroll costs, and no more than 40 percent was used for the other loan uses described above.
- Staffing and pay levels must be maintained during the applicable covered period immediately following disbursement of the loan.
To determine whether staffing levels have been maintained, the average number of full-time equivalent employees (FTEEs) during the Covered Period or Alternative Payroll Covered Period will be compared to one of two time periods. Borrowers may either use the period from February 15 through June 30, 2019 or January 1 through February 29, 2020. For instance, if the employer had 20 FTEEs from February 15 through June 30, 2019 and 18 FTEEs from January through February 2020, the borrower would most likely choose the latter time period since it may be more advantageous. If the number of FTEEs during the Covered Period or Alternative Payroll Covered Period is lower than the time period chosen, the amount of loan forgiveness may be reduced proportionately.
Seasonal employers may compare the average FTEEs employed during the Covered Period or Alternative Payroll Covered Period to either period listed above or to any consecutive 12-week period between May 1 through September 15, 2019.
However, your forgiveness amount will not be reduced by a failure to maintain staffing levels during the Covered Period or Alternative Payroll Covered Period if: (a) your average FTEEs between February 15 and April 26, 2020 is lower than your FTEEs as of February 15, 2020; and (b) you restored the level of FTEEs by December 31, 2020 to be equal or higher to the FTEE levels as of February 15, 2020.
Loan forgiveness will not be reduced based on an inability to rehire employees if the employer can document: (1) written offers to rehire individuals who were employed on February 15, 2020; or (2) an inability to hire similarly qualified employees for unfilled positions by December 31, 2020. Additionally, forgiveness will not be reduced for failure to maintain employment levels if the organization is able to document an inability to return to the same level of business activity as existed prior to February 15, 2020, due to compliance with COVID-19-related guidance for sanitation, social distancing, or worker or customer safety requirements from the Health and Human Services (HHS), the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) between March 1 and December 31, 2020. Employees who are terminated for cause, voluntarily resign, or voluntarily request and receive a reduction of hours may also be excluded from the FTEE reduction calculations.
Repayment of part of the loan may be required if an employee's average annual salary (for salaried employees) or average hourly rate (for hourly employees) are reduced by 25% or more during the Covered Period or Alternative Payroll Covered Period compared to the period of January 1 through March 31, 2020.
However, if: (a) a given employee's wage levels between February 15 and April 26, 2020 are lower than as of February 15; and (b) you restore the wage levels by December 31, 2020 to be the same or higher than as of February 15, 2020, there will be no reduction in forgiveness based on that employee's wage levels.
Note: When comparing wage levels to determine if your loan forgiveness amount will be reduced, employees who earned wages or a salary at an annualized rate of more than $100,000 in any pay period of 2019 aren't considered.
Q: Will ADP® provide me with the documentation I need when applying for the PPP loan?
A: RUN Powered by ADP® clients now have access to a new report that will provide payroll data to help them complete the loan application. In RUN, the report is called CARES SBA-PPP: Monthly Payroll Cost.
Note: As a result of changes in guidance from the government, we encourage clients that ran their payroll cost report before April 8, 2020, to re-run their report, and to do so as close in time as possible to submitting their application to their lending institution.
Q: With other loans, I have had to make a personal guarantee and provide collateral. Is this also the case with PPP loans?
A: Borrowers won't be required to make a personal guarantee for the PPP loan or to provide collateral, and don't need to be unable to obtain credit elsewhere. However, borrowers must make certain good-faith certifications, including, but not limited to, that:
- The uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.
- They have not and will not receive another PPP loan.
- They will provide the lender with documentation verifying the FTEs and the dollar amounts of covered costs for the eight-week period after getting the loan.
- The tax documents submitted to the lender are identical to those submitted to the IRS.
Q: What are the terms of a PPP loan?
A: PPP loans have an interest rate of 1 percent and a maturity date of 5 years (for loans issued on or after June 5, 2020). Interest accrues from the origination date. Loan recipients can defer principal and interest payments on their PPP loans. The PPPFA extends the deferral period from 6 months to the time when the SBA compensates the lender for forgiven amounts, except that repayments can be required if the borrower has not applied for forgiveness within 10 months of the expiration of the borrower's covered period.
Q: Are there any PPP restrictions I should consider when determining whether the PPP is right for me?
A: Yes, restrictions include but aren't limited to:
- Loan proceeds may not be used to pay:
- Wages exceeding $100,000 per employee (prorated for the covered period)
- Employees who live outside the U.S.
- FFCRA paid leave wages for which credit is allowed
- Employers that receive the Employee Retention Credit for Closures Due to COVID-19 under Section 2301 of the CARES Act aren't eligible for the PPP.
More information on these and other government assistance programs may be found in our Resource Center. Small businesses should work with an experienced financial advisor to carefully assess all of the available assistance programs to determine the interplay and best option for their specific circumstances.