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Interim Final Rule: PPP Loan Forgiveness

May 26, 2020

Overview

On May 22, 2020, the Department of the Treasury, in coordination with the Small Business Administration (“SBA”), issued an Interim Final Rule – Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Loan Forgiveness (the “IFR”) addressing issues related to the loan forgiveness aspects of the Paycheck Protection Program under the CARES Act. The IFR is effective immediately, but subject to a 30-day comment period. It therefore could be subject to further changes to address issues raised by the public comments.

The main points of the IFR are as follows:

Process: Each borrower must apply to its lender for loan forgiveness. “As a general matter,” the lender will review the forgiveness application and make a decision on loan forgiveness within 60 days of receipt of the completed application. The lender will then request payment from the SBA, and the SBA has 90 days to remit payment (the forgiveness amount plus interest through the date of payment) to the lender. This entire process, however, is subject to SBA review prior to the payment to the lender of the forgiveness amount of the borrower’s eligibility for the PPP loan. If that review discloses that the borrower was not eligible for a PPP loan, then the loan will not be eligible for forgiveness. This process applies only to loan forgiveness applications that are not reviewed by the SBA prior to the lender’s decision on the forgiveness application. See https://home.treasury.gov/system/files/136/PPP-IFR-SBA-Loan-Review-Procedures-and-Related-Borrower-and-Lender-Responsibilities.pdf.

Payroll costs: Payroll costs must be both incurred and paid within either the covered period (the eight weeks following the funding of the loan) or the alternative payroll covered period (the eight-week period starting with the date of the first payroll following the funding of the loan). For situations where there is a gap between the end of the pay period and the payroll date, payroll costs incurred during the last pay period of the chosen covered period are eligible for forgiveness if paid on or before the next regular payroll following the end of the chosen covered period. This should allow a borrower with bi-weekly or other pay periods, or those that have a gap between the end of the payroll period and the actual payroll date, to be able to seek forgiveness for the full eight weeks without having to make adjustments to their payroll process.

Furloughed employees compensation eligible for forgiveness: The IFR confirms that payment of salary, wages, or commission to furloughed employees, including bonuses and hazard pay, are eligible for forgiveness (subject to the $100,000 annual cash compensation limitation).

Non-payroll costs: Non-payroll costs include interest on business mortgage obligations incurred before February 15, 2020 (but not prepayment of interest or any principal payments), payment of business rent under real or personal property leases in force before February 15, 2020, and business utility payments for utility service that began before February 15, 2020. These are eligible for forgiveness if paid during the covered period (that eight-week period beginning on the date the loan was funded), or incurred during the covered period and paid on or before the next regular utility “billing date,” even if that date is after the expiration of the covered period. No clarification was provided regarding what is meant by “billing date,” i.e., whether it is the date the invoice issues or the stated due date in that invoice.

Reductions in loan forgiveness amount; reduction in FTEs: The amount of loan forgiveness is reduced if there is a reduction in the average number of FTEs employed during the covered period or the alternative payroll covered period, compared to the average number of FTEs employed by the borrower during either (at the borrower’s election) that period (i) from February 15, 2019, to June 30, 2019, or (ii) from January 1, 2020, to February 29, 2020. A percentage reduction in FTEs will reduce the loan forgiveness amount by the same percentage.

The IFR confirms that an employee who was laid off or whose hours were reduced, but then who receives but declines a bona fide offer of re-employment or restoration of hours (a “re-hire offer”) will not cause a reduction in the forgiveness amount. To avail itself of this provision: (i) the employer must make a good faith written re-hire offer during the covered period (or the alternative payroll covered period); (ii) the offer must be for the same compensation and the same number of hours the employee had for the last pay period prior to being laid off or having his or her hours reduced; (iii) the offer must have been rejected by the employee; (iv) the employer must maintain records documenting the offer and its rejection; and, (v) importantly, within 30 days of the rejection of the re-hire offer, the borrower must affirmatively inform the applicable state unemployment insurance office of the employee’s rejection of the offer. The SBA will provide further information regarding how employers will report information concerning rejected re-hire offers to state unemployment insurance offices on its website at some future time.

The IFR further states that loan forgiveness will not be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction during the eight-week period following the funding of the loan or following the first payroll after the funding of the loan. If that occurs, the employer may treat that individual at the same full-time equivalency level as was the case before the firing, resignation, or schedule reduction.

To calculate the reduction in loan forgiveness amount due to a reduction in FTEs, the borrower must first select a reference period (either that period (i) from February 15, 2019, to June 30, 2019, or (ii) from January 1, 2020, to February 29, 2020) and calculate the number of FTEs during the covered period or alternative payroll covered period. If the average number of FTEs employed during the covered period or the alternative payroll covered period is less than during the selected reference period, the total eligible expenses (not just the payroll costs) are reduced proportionately. For purposes of determining the number of FTEs, employers must divide the average number of hours paid for each employee per week by 40, but without regard to any hours worked by an employee during any week in excess of 40 hours (i.e., an employee who worked 48 hours during a given week will be considered a 1.0 FTE, not a 1.2 FTE). The IFR gives employers an option with respect to part-time employees or employees who were paid for less than 40 hours per week. Their FTE can be calculated based upon the actual hours worked during a given week relative to 40 hours, or each part-time employee may be assigned a 0.50 FTE. Whichever method is selected must be applied to all part-time employees.

Reduction in loan forgiveness amounts; reduction in employee compensation: The amount of loan forgiveness will also be reduced by the amount of any reduction in total compensation of any employee during the covered period that is in excess of 25 percent of the total salary or wages of that employee (subject to the $100,000 annual compensation limitation) for the period from January 1 to March 31, 2020. This is a calculated on a per-employee basis, so any increases in compensation for one employee will not offset a reduction in compensation for another. To ensure that employers are not doubly penalized, the compensation reduction applies only to the portion of the decline in employee compensation that is not attributable to the FTE reduction.

The IFR confirms that employers may cure reductions in FTEs or compensation greater than 25% that were made between February 15 and April 26, 2020, or both, not later than June 30, 2020, and in so doing, the employer is exempt from any loan forgiveness reductions that would otherwise be required by the CARES Act.

Related article: Six Things to Know About the PPP Loan Forgiveness Application

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