*This post was originally posted on May 19, 2020, and was updated on May 28, 2020. Updates are underlined and in blue.
On May 15, 2020, the Small Business Administration (“SBA”) issued its loan forgiveness application for businesses that received loans under the Paycheck Protection Program (“PPP”). On May 22, 2020, the SBA issued two new interim rules providing further guidance to borrowers and lenders. The applications and interim rules are available by clicking below.
Loan Forgiveness Application
May 22 Interim Final Rule 1
May 22 Interim Final Rule 2
Below are the key take-aways for PPP loan recipients from the forgiveness application and interim rules:
Alternative Payroll Covered Period: Loan forgiveness is calculated based on eligible costs spent during an 8-week covered period. The application provides borrowers the option to elect an “Alternative Payroll Covered Period” which begins on the first day of the pay period following disbursement of the loan. Previously, the 8-week “Covered Period” could only begin the day the loans were disbursed. Employers may select either covered period but may find the Alternative Payroll Covered Period easier administratively to calculate. The interim final rule confirms the new alternative payroll covered period but remains silent on whether there is a deadline for borrowers to submit the loan forgiveness application (Updated 5/27).
Timing of Payroll Costs: Loan recipients previously expressed confusion regarding whether payroll costs had to be both “incurred” and “paid” during the covered period to be forgivable. The instructions make clear that they do not. Under the instructions, a payroll cost is incurred the day the employee’s pay is earned, while the cost is paid the day checks are distributed or employees receive an ACH credit transaction. The instructions and interim final rule clarify that payroll costs that are incurred but not paid during the last pay period of the covered period are eligible for loan forgiveness so long as they are paid on or before the next regular payroll date. Note* Employers who pay employees in arrears may have to modify their pay dates to ensure these amounts remain forgivable.
Bonuses, Furlough and Hazard Pay (Updated 5/27): The interim rule clarifies that wages paid to furloughed employees, bonuses and hazard payments made during the 8-week covered period are eligible for loan forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period.
Owner-Employee Payroll Costs (Updated 5/27): The interim confirms that the amount of loan forgiveness requested for owner-employees can be no more than the lesser of 8/52 of 2019 compensation, or $15,385 per individual. In addition, this amount is limited to cash compensation and employer retirement and health care contributions made on their behalf.
Eligible Non-Payroll Costs: The application and interim final rule clarify the following regarding eligible non-payroll cost:
- Eligible non-payroll costs must be paid or incurred during the covered period and paid on or before the next regular billing cycle, even if the billing date is after the covered period.
- Covered rent or lease payments are extended to include both real and personal property subject to a lease agreement in force before February 15, 2020.
- Non-payroll costs that were both paid and incurred during the covered period should only be counted once.
- Despite requests from industry groups for increased flexibility, consistent with prior SBA guidance, non-payroll costs cannot exceed 25% of the forgivable loan amount.
Average Full-time Equivalents for Loan Forgiveness Reduction Formula: Loan forgiveness is reduced, in part, by a percentage of the reduction in average full-time equivalent employees (FTE) that occurs during the 8-week covered period. The instructions provide a worksheet to guide the employer through the reduction formula. The instructions also clarify how employers may count their average FTEs for purposes of the reduction formula. For each employee, the employer can take the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. As an alternative, employers may simply assign a 1.0 for employees who work 40 hours or more per week, and 0.5 for employees who work fewer hours per week. In addition, the instructions guide employers through determining whether they qualify for a safe harbor provision which provides that employers who reduced staffing levels between February 15, 2020, and April 26, 2020, can still receive loan forgiveness if by June 30, 2020, the employer restores staffing levels to where they were as of February 15.
FTE Reduction Exceptions (updated 5/27): The application and interim rule clarify recent guidance from the SBA and provides that reductions in FTE will not result in loan forgiveness reduction if during the covered period, the employer made a good-faith, written offer to rehire an employee or restore their reduced hours, which was rejected by the employee. The interim rule adds a requirement for the employer to inform the applicable state unemployment insurance office of the rejected offer of reemployment within 30 days of the rejection of the offer. In addition, reductions in FTE as the result of terminations for the cause or voluntarily resignations or reductions in hours during the covered period will not result in loan forgiveness reduction.
Salary/Hourly Wage Reduction (updated 5/27): Loan forgiveness is also reduced if an employer reduces wages by more than 25% during the Covered Period as compared to the period of January 1, 2020, through March 31, 2020. The instructions provide a detailed worksheet to assist employers in determining whether wages decreased by more than 25% during the covered period. In addition, the CARES Act includes a safe harbor provision which provides that employers who reduce wages by more than 25% during the covered period can still receive full loan forgiveness if they restore wages by June 30, 2020. The worksheet guides employers through determining whether they meet the safe harbor provision.
Because loan forgiveness is reduced by a reduction in FTE, and a reduction in wages, there was a possibility employers would be doubly penalized. To avoid this, the interim rule clarifies that forgiveness reduction based on decreased wages only applies to the portion of the decline in employee wages not attributable to the FTE reduction. For example, if an employee had been working 40 hours per week (FTE employee of 1) and during the covered period the employer reduced the employee’s hours to 20 hours per week at the same wage (FTE .5), the reduction in wages is mainly attributable to the FTE reduction. In this example, the employer would be assessed the penalty for a FTE reduction, but not for the resulting decrease in wages.
Supporting Documentation: The instructions identify various documents employers can provide to verify eligible expenditures:
- Payroll Cost/FTE
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees;
- Payroll tax filings;
- State quarterly business and individual employee wage reporting and unemployment insurance tax filings.
- Non-payroll Costs
- Copy of lender amortization schedule and receipts or canceled checks verifying mortgage interest payments;
- Copy of current lease agreements and receipts or canceled checks verifying eligible payments;
- Copy of utility invoices and receipts, cancelled checks, or account statements verifying payments.
Supporting Documentation Retention: The instructions provide that for a period of 6 years after the loan is forgiven or repaid in full, employers must maintain all records relating to its PPP loan, including documentation submitted with its PPP loan application, documentation supporting certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the employer’s loan forgiveness application, and documentation demonstrating the employer’s material compliance with PPP requirements. In addition, employers must permit authorized representatives of the SBA, including its Office of Inspector General, to access such files upon request.
Loan Review Process and Responsibilities (updated 5/27): The second interim rule provides details regarding the loan review process and responsibilities of the borrower and lender. The guidance provides the following:
- Accuracy of Calculations: The interim final rule makes clear that it is the responsibility of the borrower to provide an accurate calculation of the loan forgiveness amounts. However, lenders are required to make a good-faith review and work with the borrower to cure any discrepancies.
- SBA Review of Loans: At any time, the SBA can review any PPP loans of any size, regarding borrower eligibility, proper use of loan proceeds, and loan forgiveness amounts. If the SBA initiates a review, it must notify the lender in writing. Additionally, the lender must notify the borrower within 5 business days. If the SBA determines that a borrower is not eligible for loan forgiveness, or was not eligible for a PPP loan, the borrower may appeal the SBA’s determination. The SBA plans to issue a separate interim final rule addressing the appeals process.
- Loan Approval Procedure: Lenders have 60 days from receipt of a complete application to issue a decision on loan forgiveness to the SBA. The decision options include 1) approval (in whole or in part); 2) denial; or 3) denial without prejudice due to a pending review of the loan. If loan forgiveness is awarded fully or in part, the lender must request payment from the SBA. If the lender decides the borrower is not entitled to loan forgiveness, it must notify the borrower directly. Within 30 days of notice from the lender, the borrower may request the SBA review the lender’s decision. As provided above, the borrower can appeal the SBA’s determination regarding eligibility and loan forgiveness upon its review.
We will continue to provide updates regarding the SBA’s guidance and other news related to the Paycheck Protection Program.
