CARES Act: SBA Clarifies Application of Affiliate Rules for Paycheck Protection Program | Practical Law

CARES Act: SBA Clarifies Application of Affiliate Rules for Paycheck Protection Program | Practical Law

The Small Business Administration (SBA) issued a second interim final rule (IFR) to clarify application of the affiliate rules to the SBA's Paycheck Protection Program (PPP) created under Title 1 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)). The IFR clarifies that the affiliate rules for the PPP apply to certain businesses with no more than 500 employees in the hotel and food services industries, franchises, entities receiving financial assistance under the Small Business Investment Act of 1958 (15 U.S.C. § 681), and faith-based organizations. Non-profit organizations that meet the PPP requirements are also eligible for PPP loans.

CARES Act: SBA Clarifies Application of Affiliate Rules for Paycheck Protection Program

by Practical Law Finance
Published on 08 Apr 2020 • USA (National/Federal)
The Small Business Administration (SBA) issued a second interim final rule (IFR) to clarify application of the affiliate rules to the SBA's Paycheck Protection Program (PPP) created under Title 1 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)). The IFR clarifies that the affiliate rules for the PPP apply to certain businesses with no more than 500 employees in the hotel and food services industries, franchises, entities receiving financial assistance under the Small Business Investment Act of 1958 (15 U.S.C. § 681), and faith-based organizations. Non-profit organizations that meet the PPP requirements are also eligible for PPP loans.
On March 27, 2020, the US Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136 (H.R. 748)), which President Trump signed into law, effective immediately. The CARES Act is the third major piece of legislation enacted in response to the COVID-19 outbreak in the US and is intended to provide economic relief to individuals and businesses facing economic hardship due to the outbreak. Under the CARES Act, the Small Business Administration (SBA) is offering loans under the Paycheck Protection Program (PPP) (§§ 1102 and 1106) and Economic Injury Disaster Loan Program (EIDL) (§ 1110).
On April 2, 2020, the SBA issued an interim final rule (Initial Rule) outlining the key provisions for implementing the PPP which was effectively immediately.
Thereafter, the SBA issued a second interim final rule (IFR) that supplements the Initial Rule with additional guidance on application of certain affiliate rules applicable to the PPP. This IFR is effective immediately. Public comment on the proposed rule is due 30 days after publication in the Federal Register.

Affiliate Rules for Paycheck Protection Program

Application of Affiliate Rules

Section III of the IFR clarifies that the affiliate rules for the PPP in 13 CFR § 121.301 (other than the detailed affiliation standards contained in § 121.103) apply to borrowers of PPP loans, except for:
  • Businesses with not more than 500 employees and a North American Industry Classification System Code beginning with 72 (hotel and food services industries).
  • Franchises with an SBA franchise identifier code.
  • Entities receiving financial assistance under § 301 of the Small Business Investment Act of 1958 (15 U.S.C. § 681).
  • Faith-based organizations.

Eligibility Requirements

Non-profit entities are eligible for the PPP if they meet the program's requirements. An entity is generally eligible for the PPP if it, combined with its affiliates, is a small business as defined in § 3 of the Small Business Act (15 U.S.C. § 632), or has no more than 500 US employees or operates in a certain industry and meets applicable SBA employee-based size standards for that industry, and is one of the following:

Faith-Based Organizations

Qualified faith-based organizations are exempt from the SBA's affiliate rules (including 13 CFR Part 121). The SBA determined this exemption is required under the Religious Freedom Restoration Act (RFRA) (P.L. 103-141) because the application of the affiliate rules would substantially burden those organizations’ religious exercise.
For summaries of the SBA PPP, see Checklists, CARES Act: Stimulus for Small Businesses Under the SBA and CARES Act: Small Business Administration Payroll Protection Program: Lender Guidance.
For information on calculating the affiliate rules, see Legal Update, Bradley Arant Boult Cummings LLP: CARES Act: Small Business Loan Eligibility & "Affiliation" Issues Explained.
For additional guidance from the Treasury Department, see: