On Friday, May 22, 2020, the SBA issued a long-overdue interim final rule providing guidance on how forgiveness will work for PPP loans. Below is a summary of how the new rule addresses or, in some cases, do not address, the top concerns of borrowers about how the forgiveness process will work. These concerns cover the following main areas:
- Forgiveness application process
- Payroll costs eligible for forgiveness
- Nonpayroll costs eligible for forgiveness
- Forgiveness Reduction
- Documentation to be submitted to lenders
Forgiveness Application Process
Forgiveness applications will go through each borrower’s lender or loan servicer. The application will either be on SBA Form 3508 or the lender’s equivalent application. Each lender has 60 days from receipt of the application to report to the SBA its determination as to whether, and how much of, the loan will be forgiven. If any amount is forgiven, the lender will request payment from the SBA at the time it reports its determination. The lender will notify each borrower of its forgiveness amount. The rule also states that additional guidance will be issued in a separate interim final rule, in which the SBA will describe its procedures for reviewing forgiveness applications.
While the general application procedure is described, the rule does not indicate precisely when borrowers will be required to submit applications. The rule does contain language indicating that a borrower may receive a determination regarding the forgiven amount after the borrower already has made “scheduled payments on the loan after the initial [6-month] deferment period,” which suggests that the application time-frame may be well after the covered period ends.
Some loans will be reviewed, although it’s not clear which ones. It is reasonable to expect that loans with principal amounts exceeding $2 million will be reviewed. SBA must remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, within 90 days after the lender issues its decision to SBA, “subject to any SBA review of the loan or loan application.” The rule also indicates that, for loans that are subject to SBA review, the SBA has the power to invalidate forgiveness based on a determination that the borrower was ineligible for the loan under “provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application.”
Payroll Costs Eligible for Forgiveness
Payments of compensation to furloughed employees, bonuses and/or hazard pay are eligible for forgiveness. As long as those payments do not exceed an annual salary of $100,000, as prorated for the covered period. The rule reflects the SBA’s desire to enable borrowers “to continue paying their employees even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations.
Payments made for employees not reporting to work are also eligible for forgiveness. The rule permits this and states that payroll costs are considered incurred based on the schedule established by the borrower – typically, each day that the employee would have performed work.
In general, payroll costs paid or incurred during the “covered period” (or “alternative payroll covered period”) are eligible for forgiveness. Payroll costs are considered paid on the day paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be forgiven. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked).
Nonpayroll Costs Eligible for Forgiveness
A nonpayroll cost is eligible for forgiveness if it was paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. As an example, a utility bill incurred in May but paid in June, during the hypothetical covered period, to be eligible for forgiveness. The SBA intended to provide flexibility to borrowers but also notes that “the 25 percent cap on nonpayroll costs will avoid excessive inclusion of nonpayroll costs.”
The rule does not provide additional clarity on which “transportation” expenses will be forgiven. Nor does it states that prepayments of mortgage interest will not be eligible for forgiveness.
To maximize loan forgiveness, borrowers are encouraged to retain their full-time employees and avoid reducing their employee’s wages during the 8-week covered period. Subsequent guidance from the SBA/Treasury has provided that as long as employees are rehired or wages fully restored prior to June 30, 2020, then no reduction in loan forgiveness will occur.
A borrower may use the PPP loan for permissible purposes but can only receive forgiveness for eligible forgiveness purposes. In addition, subsequent SBA/Treasury guidance provided that in order to be eligible for forgiveness a borrower must not use more than 25% of the loan proceeds on nonpayroll costs.
What happens if my employees won’t come back to work? Will my loan forgiveness be reduced?
If an employee refuses to return to work the borrower will not have their loan forgiveness reduced if they take certain steps:
- Make a good-faith, written offer to rehire the employee or restore their reduced hours, during the covered period;
- Provide the same salary or wages and the same number of hours that the employee worked in the last pay period before the separation or reduction in hours;
- Receive a rejection of the written offer by the employee;
- Document the rejection and retain such documentation; and
- Report the rejection of the offer to the applicable state unemployment insurance office within 30 days of the employee’s rejection.
If a borrower takes these steps, they may exclude any reduction in full-time equivalent employee headcount that is attributable to that individual employee.
Under the CARES Act, any reduction in the number of full-time employees during the covered period or alternative covered period reduces the loan forgiveness by the same ratio as the reduction in full-time employees. Therefore, based upon the reference period utilized, if a borrower reduces their full-time employee count by 20% then the otherwise forgivable amount will also be reduced by 20%.
Originally, it was suggested that for purposes of the PPP loan, a full-time employee was an individual who worked more than 30 hours. However, for purposes of loan forgiveness under the updated guidance, a full-time employee is an employee who works for 40 or more hours per week.
For purposes of calculating the number of full-time employees, a borrower must treat each employee who works 40 hours or more as one employee. For each employee who works less than 40 hours, a borrower may either:
- divide the total number of hours of that employee over 40 (e.g. averaged 30 hours per week during the covered period equals .75 full-time employee equivalent), or
- count each part-time employee as .5 full-time employee equivalent.
A borrower may not use a combination of the two methods. Once the total number of full-time employee equivalents is calculated, then a borrower will divide the average number of full-time employees during the covered period (or alternative covered period) by the average number of full-time employees during the selected reference period.
Documentation to be Submitted to Lenders
Borrowers are encouraged to provide to their lender the following documentation:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees
- Tax forms or equivalent third-party payroll service provider reports for eight weeks after the loan was disbursed, including Form 941 or other payroll tax filings reported to the IRS and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported to the relevant state
- Payment receipts, canceled checks or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that for which the borrower requested forgiveness.