Paycheck Protection Program – Exemption to Owner-Employee Compensation Rule

Rules intended to prevent owner-employees from receiving a windfall from the Paycheck Protection Program (PPP) have been loosened for employees with a small ownership interest in their company.

On August 24, 2020, the Small Business Administration (SBA) released a new Interim Final Rule specifying that employees with less than a five percent ownership stake in a C or S corporation are exempt from restrictions that apply to “owner-employees”. In other words, they are not subject to the owner-employee compensation rule discussed below.

The PPP was enacted to help employers keep employees on the payroll. Neither the SBA nor the U.S. Treasury defined “owner-employee” for the purposes of this owner-employee compensation rule. Therefore, the restriction appeared to apply to all owner-employees.

Forgivable payroll costs for all employees were originally limited to annualized cash compensation of $100,000 ($15,385 for an 8-week covered period; and $46,154 for a 24-week covered period). 

To prevent the PPP from being a windfall for owner-employees, the SBA and the U.S. Treasury passed rules further limiting the forgivable payroll for owner-employees to the lesser of:

1. 2.5 months of $100,000 annualized for a 24-week covered period ($20,833); or
2. 2019 compensation (across all businesses) for a similar period.

For an 8-week covered period, these amounts would be prorated for 8 weeks. 

This exemption is intended to cover owner-employees that have no meaningful ability to influence decisions over how loan proceeds are allocated.

For more information about rules for the Paycheck Protection Program, contact us. We are here to help.

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