PPP Loan Forgiveness: The Two New Interim Final Rules & What’s Next for Borrowers

On May 22nd, the Small Business Administration (SBA) issued the fourteenth and fifteenth Interim Final Rules, which add to what is known about Paycheck Protection Program (PPP) loan forgiveness and the SBA and lender review process. The fourteenth Interim Final Rule, “Requirements – Loan Forgiveness” focuses on, as the name suggests loan forgiveness, and the fifteenth Interim Final Rule, “SBA Loan Review Procedures and Related Borrower and Lender Responsibilities” focuses on the policies and procedures surrounding the review of these loans. Together, these two Interim Final Rules begin to resolve some of the remaining questions surrounding PPP loan forgiveness.

Interim Final Rule: Requirements – Loan Forgiveness

It should be noted that this Interim Final Rule does not make changes to the Covered Period or Alternative Payroll Covered Period during which PPP funds must be spent to qualify for forgiveness. It also does not make changes to the rule requiring at least 75% of forgiven funds to be used on payroll costs (Payroll Cost 75% Requirement). The Covered Period and the Payroll Cost 75% Requirement are the focus of multiple bills working their way through the House and the Senate. As such, it is possible the items discussed below could change.

Significant matters from this Interim Final Rule are summarized below. Much of this guidance is an elaboration of items initially discussed on the Loan Forgiveness Application.

The Covered Period

As noted on the Loan Forgiveness Application, borrowers with biweekly or more frequent payroll have the option to choose an Alternative Payroll Covered Period for payroll costs. The Alternative Payroll Covered Period is the eight-week period that begins on the first day of the first pay period following receipt of PPP funds. Borrowers that choose to use this alternative period must still use the regular Covered Period for non-payroll costs. The regular Covered Period is the eight-week period that starts on the day the borrower receives their PPP funds.  Borrowers who pay less frequently than biweekly must use the regular Covered Period for their payroll costs, and borrowers who elect to use the Alternative Payroll Covered Period must do so consistently.  Many organizations, including the AICPA, have recommended flexibility with regards to the covered period to allow for greater efficiency in using PPP funds.

Bonuses, Hazard Pay & Paying Furloughed Employees

Bonuses and hazard pay (extra payment for working under dangerous conditions) were clarified to be payroll costs eligible for loan forgiveness. The Interim Final rule also clarified that salary, wages, or commission payments made to furloughed employees are also eligible payroll costs. However, such payments fall under cash compensation and as such cannot cause the cash compensation paid to any one employee to exceed the $100,000 cap as prorated for the covered period.

Caps on Compensation Paid to Owner-Employees

The Interim Final Rule made additional clarifications regarding compensation for owner-employees and self-employed individuals. It was clarified that a single business owner can only receive a maximum of $15,385 across all businesses owned. Guidance regarding the compensation paid to general partners was also updated. Additionally, for the self-employed individuals, including Schedule C filers and general partners, no additional forgiveness is provided for retirement or health insurance contributions, as these expenses are paid out of net self-employment income.

Non-Payroll Costs – Paid vs. Incurred

To qualify for forgiveness, non-payroll costs need to be paid during the eight-week Covered Period or incurred within the eight weeks and paid on or prior to the next regular billing date. What constitutes non-payroll costs has not changed. Such costs include mortgage interest, covered rent obligations for real or personal property, and covered utility payments. Rent payments must be pursuant to a lease agreement and all non-payroll costs must have been established before February 15, 2020. Advance mortgage interest payments are not eligible for forgiveness.

Full-Time Equivalency Reduction Exceptions

When calculating the reduction in full-time equivalency (FTE) for loan forgiveness, employers are afforded an exception for employees who decline to be rehired after a “good faith” offer of employment was made. The Interim Final Rule elaborates on the requirements a borrower must meet in order to qualify for this exception, which requires borrowers to notify their state unemployment office of a rejected offer within 30 days.

The other FTE Reduction exceptions, including employees who are fired for cause, voluntarily resign, or voluntarily request a schedule reduction, remain unchanged.

Calculating FTEs

The SBA has defined full-time equivalent (FTE) as an employee who works 40 hours or more, on average, each week. This is unchanged from the instructions on the Loan Forgiveness Application. Borrowers seeking forgiveness must document their average number of FTE employees during the Covered Period, or if applicable, the Alternative Payroll Covered Period, and their chosen reference period. The SBA recognizes the complexity of this and decided to afford borrowers flexibility in calculating the full-time equivalency of their part-time employees with one of two methods described in these Interim Final Rules.

FTE Reduction and Salary/Hourly Wage Reduction

The Interim Final Rule clarified that the safe harbor of restoring wages or FTE employees by June 30, 2020 is only available for borrowers who made reductions between February 15, 2020 and April 26, 2020. Borrowers who made reductions after that timeframe are not eligible for the safe harbor. It should be noted that borrowers taking advantage of the safe harbor still need to meet the Payroll Cost 75% Requirement. Further, the guidance said loan forgiveness totals would not be reduced by both the FTE Reduction and the Salary/Hourly Wage Reduction for the same employee if the Salary/Hourly Wage Reduction was attributable to the FTE Reduction. For example, if an employee’s hours are cut, but their hourly wage remains unchanged, they would only be subject to an FTE reduction for that employee, and not subject to the Salary/Hourly Wage Reduction.

Interim Final Rule: SBA Loan Review Procedures and Related Borrower and Lender Responsibilities

This Interim Final Rule covers procedural details surrounding the PPP loan review process.

For Borrowers

This Interim Final Rule reiterated that at any time the SBA can review any PPP loan at the SBA’s discretion. Borrowers are required to retain PPP documentation for six years after the date the loan is forgiven or repaid in full and must allow the SBA to access those files upon request. SBA’s review of loans will focus on three main borrower representations: borrower eligibility, loan amounts and use of proceeds, and loan forgiveness amounts.

If a borrower’s loan is reviewed, the SBA will require the lender to contact the borrower in writing to request additional information. However, the SBA may also reach out to borrowers directly. Borrowers may appeal the SBA’s determination of ineligibility, with details of an appeal process coming later.

For Lenders

Lenders must issue a decision to the SBA regarding loan forgiveness within 60 days of receipt of the Loan Forgiveness Application from their borrower. The SBA will then have 90 days to review the submitted applications.

We expect more PPP forgiveness guidance to continue to come in and will keep you informed.

Questions? Contact covid19relief@hertzbach.com.