On May 21, 2020, the U.S. Small Business Administration (SBA), in consultation with the Department of Treasury, issued two Interim Final Rules pertaining to loan forgiveness under the Paycheck Protection Program (PPP). The first Interim Final Rule, entitled SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, provides rules regarding procedures for borrowers and lenders to adhere to during the PPP loan application and loan forgiveness application processes. The first Interim Final Rule also establishes new rules for the SBA when reviewing eligibility of a borrower for loans under the PPP. The second Interim Final Rule, entitled Paycheck Protection Program – Requirements – Loan Forgiveness, establishes new rules for the PPP loan forgiveness process.
Please note that on May 28, 2020, the House of Representatives passed legislation that, if implemented, would substantially change – and liberalize – PPP loan requirements. Most noteworthy in the pending legislation are the following: the legislation would extend the window borrowers have to spend PPP funds from eight (8) weeks to twenty-four (24) weeks and extend the timeline borrowers have to repay the loan. The legislation also would lower the percentage of funds that borrowers are required to spend on payroll from 75% to 60%, as well as extend the deadline to re-hire workers. The legislation is headed to the Senate next. It is anticipated that the Senate will adopt the legislation and it will become effective. Therefore, borrowers should periodically check for updates to the PPP loan requirements.
Below is an overview solely of the rules implemented by the SBA’s Interim Final Rules.
1. General Loan Forgiveness Rules
Borrowers of PPP loans will be eligible to receive forgiveness of their PPP loans in an amount equal to the sum of the following cost incurred and payments made during the covered period:
- Payroll costs (e.g., salary, wages, commissions and similar compensation; cash tips or their equivalents; payment for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits; payment of state and local taxes assessed on employee compensation; and wages/commission/income/similar compensation of independent contractors).
- Interest payments on business mortgage obligations for real or personal property incurred prior to February 15, 2020 (except prepayment of payment of principal).
- Payments for business rent obligations on real or personal property under lease prior to February 15, 2020.
- Business utility payments for the distribution of electricity, gas, water, transportation, telephone or internet access if service began prior to February 15, 2020.
For payroll costs to be eligible for forgiveness, they must be paid or incurred during the eight (8) week period (i.e., 56 days) beginning on either: (1) the date of disbursement of the PPP loan or (2) the first day of the first payroll cycle in the covered period. The second option only applies when payroll costs are calculated. All non-payroll costs (e.g., rent, utilities and mortgage interest payments) will be calculated from the date the first loan proceeds are received. Borrowers may elect either start date when seeking forgiveness. Typically, payroll costs are incurred on the day the employee worked. For employees that are on payroll but not working, payroll costs are incurred based on their schedule (i.e., the day they would have worked). Note that increased hazard pay/bonuses are eligible for forgiveness (up to the annualized $100,000 cap) when calculating payroll costs.
Note that there is a cap for owner-employees and self-employed – such individuals may only seek forgiveness for 8/52 of their 2019 net compensation. Loan forgiveness is not available for retirement or health insurance contributions for self-employed workers or general partners.
2. Loan Forgiveness Process Overview
Upon completing its 8-week covered period, a borrower may apply for loan forgiveness. To be eligible for loan forgiveness, borrowers must submit the Loan Forgiveness Application (SBA Form 3508) or an equivalent form from the lender). Upon submission, the lender will review the application and render a decision to the SBA within sixty (60) days. If the lender approves the borrower for forgiveness (either partial or full), they will request payment from the SBA when they submit their decision. The SBA will then remit the appropriate forgiveness amount to the lender, plus any interest, within ninety (90) days of receiving the lender’s determination. Note that the SBA may review any loan or loan application to determine if the borrower is entitled to forgiveness. Should the lender deny loan forgiveness, the borrower will have thirty (30) days to request the SBA to review the decision.
3. FTE Employee Status, Furloughed Employees, and Employees with Decreased Wages
The SBA considers a full-time equivalent (FTE) employee that works 40+ hours/week to be a 1.0 FTE employee. The SBA will typically consider all other employees .5 FTE employees. Alternatively, the borrower may elect to calculate the employees FTE status by dividing the number of hours they work each week by 40 (i.e., an employee working 30 hours/week would be a .75 FTE employee).
A decrease in FTE employees (i.e., employees that work 40+ hours each week) will result in a reduction of the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. The SBA has implemented three safe harbors related to this issue, benefitting borrowers. First, if the borrower’s FTE employee count on June 30, 2020 is equal to or greater than the count on February 15, 2020, the borrower will not be penalized. Second, borrowers will not be penalized for employees that refuse an offer of re-employment. Third, borrowers will not be penalized for employees that voluntarily resign or are terminated for cause. As such, borrowers should document any refusals of re-employment, voluntary resignations, and terminations.
Should an employer reduce an employee’s wage more than 25%, the borrower must reduce the total loan forgiveness amount by the total dollar amount of the reduction in excess of 25%. For example, an employer that cut an employee’s wages that made $1,000/week to $700/week (i.e., 30%), would be required to decrease their forgiveness amount by $400. The first $250 of the decrease would be waived, but the remaining 5% decrease (i.e., $50/week) would be multiplied by 8 (i.e., the number of weeks in the applicable time period) to equal a $400 reduction in the loan forgiveness amount. Employers do not need to conduct such a salary/wage reduction calculation if the reduction in the employee’s salary/wages is due to a change in the employee’s FTE status.
Employers may include the following if they do not exceed an annual limit of $100,000, prorated during the applicable time period: (1) salary, wages, or commission paid to furloughed employees (i.e., temporarily laid off employees); (2) increased hazard pay; and (3)bonuses.
4. Documentation Requirements for PPP Loans
The rules reference the loan forgiveness application, which specifies that borrowers are to retain PPP documentation for at least six (6) years after the date the loan is either forgiven or repaid in full. Further, PPP borrowers should document all actions and transaction that support their PPP application or that may impact loan forgiveness.
At a minimum, the following should be retained: (1) loan application, forgiveness application and all supporting documents; (2) bank account statements/payroll process reports documenting the amount of cash compensation paid to employees; (3) tax form for periods that overlap with the covered period, including payroll tax filings (e.g., IRS form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings; (4) payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health and retirement benefits plans; (5) documentation supporting the calculation of the number of FTEs during each of the relevant periods (e.g., timesheets, payroll tax filings, etc.); (6) documentation regarding non-payroll costs (i.e., business mortgage interest payments, business rent or lease payments, business utility payments); and (7) the PPP Schedule A Worksheet and all supporting documentation
5. PPP Loan Reviews
The SBA may review any PPP loan, as it deems appropriate. Further, the SBA may initiate a review at any time in its own discretion. Note that the SBA has previously stated it will audit all borrowers that receive more than $2 million in PPP loans. Further, the loan application requires each borrower to identify whether it, along with its affiliates, received more than $2 million, in aggregate, in PPP loans. This suggests borrowers that receive more than $2 million may be at a higher risk of audit. However, as noted above, the SBA may audit any entity they deem necessary. As such, borrowers should ensure they adhere to the documentation requirements above. The SBA may focus its audit review on the following:
- Whether the borrower is eligible for a PPP loan under the CARES Act;
- Whether a borrower calculated the loan amount correctly and used the loan appropriately, as specified under the CARES Act; and/or
- Whether a borrower is entitled to loan forgiveness in the amount claimed by the borrower on their Loan Forgiveness Application.
6. SBA Safe Harbor Pertaining to Audits
On May 13, 2020, the SBA issued a FAQ (i.e., #46 on the FAQ list) pertaining to the PPP loan requirement that borrowers certify, in good faith, that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA announced a safe harbor for any borrower that, together with its affiliates, receives less than $2 million in PPP loans. Such borrowers are deemed to have met the certification requirement. Many borrowers may mistakenly believe that this safe harbor eliminates audit risk for borrowers (along with any affiliates) that received less than $2 million in PPP loans. This is inaccurate. The safe harbor pertains solely to the borrowers’ certification of need for the PPP loan. As discussed above, all borrowers are subject to SBA audit.
7. SBA Determination of Borrower Ineligibility
Should the SBA determine the information submitted by the borrower indicates they are ineligible for a PPP loan, the SBA will require the lender to contact the borrower, in writing, to request additional information. The SBA may choose to contact the borrower directly for such additional information. Should the SBA determine that the borrower is, in fact, ineligible for a PPP loan, the loan will not be forgiven. Further, if the SBA determines the borrower is eligible for a PPP loan but is ineligible for the PPP loan amount or loan forgiveness amount, the SBA may direct the lender to deny loan forgiveness in whole or in part, as it deems appropriate. In addition to denying loan forgiveness, the SBA may seek repayment of the PPP loan balance or pursue other remedies against an ineligible borrower. Any amount of the PPP loan not forgiven must be repaid by the borrower.
8. Appeals to SBA Determinations
The interim final rules provide that borrowers will be able to appeal SBA decisions regarding loan forgiveness. The SBA will detail the appeals process in a separate interim final rule issued at a later time.
For any questions regarding the new PPP loan forgiveness rules, please contact your regular HLP attorney, or Partners@thehlp.com, or call (212) 734-0128 or (248) 996-8510.