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SBA Issues New PPP Guidance on Loan Forgiveness

Naya Pearlman, J.D., LL.M.

5.29.20 | Client Alert COVID-19 Update

Last week, after releasing the Paycheck Protection Program (PPP) loan forgiveness application form and instructions, the U.S. Small Business Administration (SBA), released two new interim final rules (IFRs) in consultation with the Department of Treasury. The IFRs confirm key aspects of the loan forgiveness process but also contain new provisions such as the loan forgiveness treatment of owner-employees and self-employed individuals. Below are noteworthy points in the new guidance.

Requirements for Loan Forgiveness

  • Timeline and Documentation for Borrowers. Borrowers can seek loan forgiveness as early as 8 weeks following the date of disbursement. To receive consideration for loan forgiveness, a borrower must complete and submit the loan forgiveness application (SBA Form 3508) or a lender equivalent form, along with any supporting documentation that the lender requests. The loan forgiveness application details the documentation requirements.
  • Unforgiven Loan Balance. If the forgiveness request is denied or if only a portion of the loan is forgiven, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity, along with any accrued interest.
  • Payroll Costs can be Paid or Incurred. Consistent with the loan forgiveness application, payroll costs incurred during the portion of a borrower’s last pay period within the covered period1 or the alternative payroll covered period2 are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs can be paid during the covered period or the alternative payroll covered period to be eligible for forgiveness. The alternative period for determining the start of the 8-week period was established to accommodate businesses with biweekly pay cycles that preferred to start the 8-week period on the first day of the pay period instead of on the loan disbursement date.
  • Nonpayroll Costs Eligible for Loan Forgiveness. Similarly, a nonpayroll cost is eligible for forgiveness if it was either paid during the 8 week period, or incurred during the 8-week period and paid on or before the next regular billing date3. While prepayments of rent or utilities during the covered period may qualify for loan forgiveness, advance payments of interest on a covered mortgage obligation are explicitly excluded for forgiveness eligibility. Eligible non-payroll costs4 (mortgage interest, rent, and utilities) cannot exceed 25% of the loan forgiveness amount.
  • Treatment of Bonuses or Hazard Pay to Furloughed Employees. If an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness as a form of compensation. Similarly, if a borrower pays furloughed employees their salary, wages, or commissions or severance during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the 8-week period.
  • New Loan Forgiveness Caps for Owner-Employees and Self-Employed Individuals. To the surprise of many, the SBA imposes a cap on the amount of loan forgiveness available for owner-employees and self-employed individuals based on their 2019 income. For such individuals, payroll compensation cannot be more than the lesser of $15,385 or 8/52 of their 2019 compensation. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit, and general partners are capped by the amount of their 2019 net earnings from self-employment multiplied by .9235. There is also no additional forgiveness for retirement or health insurance contributions of self-employed individuals.
  • Determination of FTE. For purposes of loan forgiveness, full-time equivalent (FTE) employee means an employee who works 40 hours or more (on average) per week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated. Borrowers seeking loan forgiveness must document and compute their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period.5
  • FTE Reductions. If the average number of FTE employees during the covered period or the alternative payroll period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. Therefore, if a borrower had 10.0 FTE employees during the reference period and this reduced to 8.0 FTE employees during the covered period, there would be a 20% reduction and only 80% of otherwise eligible expenses would be available for forgiveness.
  • Effect of Borrower’s Reduction in Employees’ Salary or Wages on Loan Forgiveness. Under the CARES Act, a reduction in an employee’s salary or wages in excess of 25% (limited to employees earning less than $100,000 per year or hired during 2020) will generally result in a reduction in the loan forgiveness amount, unless an exception applies. The IFR explains this reduction calculation is performed on a per employee basis, and not in the aggregate, and based on the average weekly compensation during the first quarter of 2020. Therefore, if a borrower reduces a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period, the first $250 (25% of $1,000) is exempt from the forgiveness reduction. Borrowers seeking forgiveness would list $400 as the salary wage reduction for that employee, resulting from the extra $50 weekly reduction multiplied by 8 weeks.
  • No Double Penalty for FTE Reduction and Decline in Salary and Wages. The IFR clarifies that the salary and wage reductions only apply to the decline in employee salary and wages that is not attributable to an FTE reduction. For example, if an hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of .5) with no change in the hourly wage, the borrower is not required to conduct a wage reduction calculation for that employee since the reduction in the wage is entirely attributable to the FTE reduction. This ensures that borrowers are not doubly penalized.
  • Restoration of FTE Reductions. If the borrower restores reductions made to employee salaries and wages or FTE employees by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to such reductions.
  • FTE Reduction Exemptions and Safe Harbors. FTE reductions that relate to employees whom the borrower offered to rehire, but declined to return, are exempt from the CARES Act’s reduction calculation if the offer to rehire is made in good faith and the borrower maintains records documenting the offer and rejection.6 This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wage. In addition, a borrower’s FTEs, and loan forgiveness amount, will not be reduced if an employee is fired for cause or if the employee voluntarily resigns or voluntarily requests a schedule reduction.

PPP Loan Review Procedures and Related Borrower Responsibilities

  • Borrower Eligibility and Representations. The SBA may review any PPP loan of any size, as the Administrator deems appropriate, to determine whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, and the rules and guidance available at the time of the borrower’s application. The Administrator may also review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses as specified in the CARES Act.
  • Borrower Recordkeeping Requirements. As noted on the loan forgiveness application form, borrowers must retain PPP documentation for 6 years after the date the loan is forgiven or repaid in full to permit authorities to access such files upon request.
  • Borrower Appeal of SBA Determination. If the SBA determines that the borrower is ineligible for a PPP loan or ineligible for the loan forgiveness amount, the borrower may appeal.  The SBA intends to issue a separate IFR addressing the appeal process.
  • Timeline for Lender and SBA. Within 60 days of receiving the borrower’s loan forgiveness application, the lender is required to make a decision and notify the SBA. The SBA then has 90 days to review the loan forgiveness application and remit the forgiveness amount to the lender, plus any interest accrued through the date of payment.

In all likelihood, these IFRs will not be the last word from the SBA. We expect more guidance to come from the SBA in consultation with Treasury. We also expect a new bipartisan bill to pass which would modify various PPP provisions, including the forgiveness of costs beyond the eight-week loan covered period. We are monitoring these updates and will keep you posted of new developments.

In the meantime, please contact your Berdon Advisor if you have any questions on the PPP loan forgiveness process.

1 The start of the covered period is the date of disbursement of the borrower’s PPP loan proceeds.
2 The alternative payroll covered period is the first day of the first payroll cycle in the covered period.
3 The alternative covered period for payroll does not apply to nonpayroll costs.
4 Non-payroll costs include (i) interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal); (ii) payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and (iii) business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.  
5 The borrower’s reference period is either (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.
6 The borrower is subject to other requirements such as informing the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.