On May 22, 2020, the Small Business Administration (SBA) and the Department of the Treasury (Treasury) issued two Interim Final Rules related to the Paycheck Protection Program (PPP): 1) an Interim Final Rule on loan forgiveness, which clarifies certain forgiveness and calculation issues, and 2) an Interim Final Rule on SBA loan review procedures. Each of these rules supplements earlier guidance provided by the SBA and Treasury and also clarifies certain items required by the PPP loan forgiveness application released by the SBA and Treasury on May 15, 2020.
Interim Final Rule on Loan Forgiveness
The rule clarifies that the applicable eight-week covered period during which payroll costs are eligible for forgiveness may begin either:
- on the date the borrower receives its PPP loan proceeds, or
- for borrower’s with a bi-weekly (or more frequent) payroll cycle, at their option, on the first day of the first payroll cycle that starts after receipt of the PPP funds.
Regardless of which covered period applies, payroll costs incurred during the period are eligible for forgiveness if they are paid on or before the next regular payroll date, even if that date occurs after the end of the covered period.
An open issue is whether payroll costs incurred before the start of the covered period but not paid until after the start of the covered period are eligible for forgiveness, but the guidance is clear that nonpayrolll costs are eligible for forgiveness if they are paid during the covered period, even if the costs were incurred prior to the covered period. In addition, nonpayroll costs are eligible for forgiveness if they are incurred during the covered period but paid on or before the next regular billing date, even if that date is outside the covered period. The rule reaffirms that nonpayroll costs cannot exceed 25% of the forgiven amount.
The new rule also clarifies that hazard pay and bonuses paid to employees during the covered period are eligible for forgiveness so long as the employees’ total compensation including hazard pay and bonuses does not exceed $15,385 during the covered period ($100,000 on an annualized basis).
Finally, the new rule includes additional guidance on reductions to the forgivable amount based on decreases in headcount or salaries:
- As previously announced, borrowers must first select a reference period of either February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020 (seasonal employers can choose either of those two reference periods or may choose a consecutive 12-week period between May 1, 2019 and September 15, 2019).
- If a borrower has an average number of full-time equivalent (FTE) employees during its eight week covered period that is less than the average number of FTE employees during its reference period, then the forgivable amount of its PPP loan is reduced by a proportional amount. For example, a borrower with 10 FTE employees during its reference period but only eight FTE employees during its covered period will be eligible for forgiveness of only 80% of its otherwise eligible expenses.
- Borrowers must calculate the number of FTE employees by dividing, for each employee, the average number of hours paid to that person per week by 40, capping the quotient at 1.0. This means an employee who works an average of 50 hours per week will be counted as a 1.0 FTE employee, and an employee who works an average of 30 hours per week will be counted as a 0.75 FTE employee. Borrowers may elect to use a full-time equivalency of 0.50 for each part-time employee for administrative convenience.
- If a borrower reduces the salary of any employee earning less than $100,000 on an annualized basis by more than 25% during the covered period, then the forgivable amount of its PPP loan will be reduced dollar-for-dollar by the amount of reduction in excess of 25%. This means that a borrower would be permitted to reduce an employee’s salary from $1,000 per week to $750 per week with no reduction to its forgivable amount. But if a borrower reduces an employee’s salary from $1,000 per week to $700 per week, then the amount of its PPP loan eligible for forgiveness would be reduced by $50 (the amount of the reduction in excess of 25%) for each of the eight weeks in the covered period, or $400 total.
- There are several important exceptions to the rules for reducing the forgivable amount based on reductions in headcount or salaries:
- To avoid double counting, forgivable amounts will not be reduced for reductions in salaries that are attributable to reductions in FTE numbers.
- Borrowers can avoid reductions in their forgivable amounts if they eliminate wage reductions or decreases in FTE numbers by June 30, 2020. It is not required that FTE numbers be increased by rehiring the same employees as were previously laid off.
- Forgivable amounts will not be reduced because employees who were laid off or whose hours were reduced decline written offers made during the applicable covered period to be rehired or for their hours to be increased. Borrowers must notify the applicable state unemployment insurance office within 30 days of any employee’s rejection of any such written offer. The SBA has indicated that it will provide further information regarding how borrowers will be required to report rejected offers for reemployment at a later time.
- Forgivable amounts will not be reduced if employees are terminated for cause, voluntarily resign or voluntary request a reduction in schedule and pay.
Interim Final Rule on SBA Loan Review Procedures
Lenders are required to review a borrower’s application for PPP loan forgiveness and to notify the SBA of its decision regarding forgiveness within 60 days of receiving the application from the borrower. The SBA then has 90 days to review the lender’s decision and remit the appropriate forgiveness amount to the lender. Notwithstanding that initial 90-day period, the SBA is permitted to review PPP loans of any size at any time in its discretion, and borrowers are required to retain backup documentation for six years after the date the loan is forgiven or repaid in full.
If the SBA determines that a borrower is ineligible for all or a portion of a PPP loan, or ineligible for forgiveness of all or a portion of the proceeds, the borrower may appeal that decision. The SBA will issue separate guidance addressing the appeal process at a later time.