Payroll Protection Program Loan Regulations on Forgiveness
On May 22, 2020, the U.S. Small Business Administration (SBA), in consultation with the Department of Treasury, issued an interim final rule (regulations) on the forgiveness process, requirements and considerations with respect to Payroll Protection Program (PPP) loans. This interim final rule provides information to borrowers on forgiveness and is in line with the guidance contained in the Loan Forgiveness Application published on May 15, 2020.
LOAN FORGIVENESS PROCESS
Generally, after the 8-week loan period, borrowers must submit an application for forgiveness to their lender. The lender is required to make a decision, being either approval (in whole or in part) or denial not later than sixty (60) days after receipt of a complete loan forgiveness application and submit such decision to the SBA. Not later than ninety (90) days after the lender submits its decision to the SBA, the SBA will remit the appropriate forgiveness amount (less any EIDL advance amount the borrower received under the loan program) to the lender, plus any interest accrued through the date of payment, unless the SBA denies without prejudice the forgiveness application due to a pending SBA review of the forgiveness amount sought. If only a portion of the PPP loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan.
In the event the lender denies a forgiveness application during its sixty (60) day review period noted above, the lender must notify the borrower of such denial. If a borrower receives such a denial notice from its lender, the borrower may (within 30 days of receiving the lender’s notice of denial) request that the SBA review the lender’s decision. The SBA will then have the statutory ninety (90) day period to review the PPP loan and forgiveness documentation.
During the SBA’s 90 day review period, both in the normal course of the forgiveness process and in the event of a lender denial, the SBA may make a determination that the loan is not eligible for loan forgiveness or that the borrower was ineligible for a PPP loan or loan amount granted. If any such determinations are made by the SBA, the SBA will direct the lender to deny the loan forgiveness application (in whole or in part) and may seek repayment of the outstanding PPP loan balance or pursue other available remedies, depending on the determination of ineligibility made by the SBA.
FORGIVENESS FOR PAYROLL AND NON-PAYROLL COSTS PAID AFTER THE 8-WEEK PERIOD
The interim rule confirms the understanding of the “incurred AND paid” language of the PPP provisions of the CARES Act. Specifically, borrowers are eligible for forgiveness for both their payroll costs paid AND those incurred (with some qualifications as noted below) during the 8-week period. This gives the borrower some flexibility in its calculation. Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid within the 8-week period are eligible for forgiveness if paid on or before the next regular payroll date. This flexibility means that payroll costs to be forgiven can be calculated in a manner that maximizes the potential benefit based on payroll timing.
Additionally, a borrower may also achieve forgiveness for eligible non-payroll cost amounts, being rent obligations, mortgage interest expense and utilities, that were either paid during the 8-week period OR incurred during the 8-week period and paid on or before the next regular billing date, even if the billing date is after the 8-week period. Again, the effect is to maximize the potential amount to be forgiven.
The interim rule also provides for an “alternative payroll covered period” allowing borrowers with a bi-weekly (or more frequent) payroll cycle to elect to make their 8-week covered period be that period which begins on the first day of the first payroll cycle following issuance of the loan (not the date of issuance) and continue for the following eight (8) weeks. As with the standard 8-week period, if payroll or non-payroll costs are incurred during this 8-week “alternative payroll covered period,” but paid after the “alternative payroll covered period,” such payroll costs will be eligible for forgiveness if they are paid no later than the first regular payroll date. Yet again, the effect is to maximize the potential amount to be forgiven and provide flexibility to borrowers.
FULL-TIME EQUIVALENT (FTE) EMPLOYEE AND CALCULATION
The PPP provisions of the CARES Act did not provide a definition or guidance on what would constitute a “full-time equivalent” (FTE) employee for payroll calculation and head count. The interim rule establishes that a FTE is an employee that works 40 hours or more, on average. Borrowers calculate FTEs by entering the average number of hours paid per week per employee, divided by 40, and round the total to the nearest tenth. Alternatively, the interim rule allows borrowers to elect to use a FTE equivalency of 0.5 for each part-time employee, but notes the borrower must select or apply either the calculation method or 0.5 equivalency method consistently to all of their part-time employees for the 8-week forgiveness period.
FTE/SALARY REDUCTION AND SAFE HARBORS
Forgiveness of the sum of costs incurred and paid during the 8-week period can be reduced due to certain factors. One factor being a reduction in the Borrower’s weekly average FTE employee head count. The regulation confirms a borrower may compare the 8-week FTE head count against the average weekly FTE during either: (a) February 16, 2019 to June 30, 2019 or (b) January 1, 2020 to February 29, 2020 to determine if there has been a reduction in head count requiring a reduction in the forgiveness amount. Further, the regulation confirmed the safe harbor allowing a borrower to avoid a reduction for head count if the borrower restores its FTE level not later than June 30, 2020 to its FTE levels during borrower’s pay period that included February 15, 2020.
In addition to the safe harbor for FTE head count, the regulation states that payroll costs and head count, respectively, will include employees who are not performing work but are still on the borrower’s payroll: furloughed employees who are paid salary, wages or commissions during the 8-week period; and hazard pay and bonuses to employees. This expressly allows borrowers to continue paying 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, and to compensate some employees for significant work contributions at this time.
The interim rule also confirms that a borrower may exclude FTE reductions that are due to: (1) any position for which the Borrower made a good-faith, written offer to rehire during the 8-week period or restore hours of such employee which was rejected by the employee; and (2) any employee who during the 8-week period was (i) fired for cause; (ii) voluntarily resigned; or (iii) voluntarily requested and received a reduction of their hours. Any written offer to rehire or restore hours should be documented, must provide the employee with the same salary or wages, and be for the same number of hours of such employee as the employee was paid/earned in the last pay period prior to the employee’s separation or reduction in hours. Further, any rejection by an employee must be documented, and the borrower must inform the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection.
A borrower’s forgiveness amount may also be reduced if an employee’s total compensation during the 8-week period is reduced by more than 25%. The regulation confirms that this is employee specific, but clarifies that the borrower is to compare the employee’s 8-week average annualized salary or hourly wages against the employee’s average annualized salary or hourly wage during the period from January 1, 2020 through March 31, 2020. For many borrowers, employees may have been unemployed or furloughed during that comparison period, which could minimize the impact of any reduction. Finally, the interim rule again provides a safe harbor to borrowers for reduction in compensation if the borrower is able to restore an employee’s annual salary or hourly wages no later than June 30, 2020.
OWNER COMPENSATION/SOLE PROPRIETORS
Finally, the regulation provides that during 8-week period compensation for any owner-employee, self-employed, or individual or general partner is capped at the lesser of $15,385 (equivalent of $100,000 per year) or the 8-week equivalent (prorated over an 8-week period) of their applicable compensation in 2019. Specifically, owner-employees are capped by the amount of their 2019 employee cash compensation, employer retirement and health care contributions made on their behalf and Schedule C files are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. This limitation as to owner-employee, self-employed or an individual or general partner appears to limit any hazard or bonus compensation such owner-employee, self-employed or an individual or general partner may receive forgiveness on during the 8-week period. Additionally, the regulation states that no forgiveness shall be provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.
Note: Sole Proprietors or Schedule C filers were not eligible for a PPP loan if the net income amount (line 31 of Schedule C) is $0 or less.
FORGIVENESS CONSIDERATIONS ACTION ITEMS
Borrowers should consult with employment counsel to ensure that any claim to a safe harbor against reduced head count or reduced hours of employees is properly documented and any necessary steps are taken with State unemployment office. Borrowers should work with their payroll, tax and legal advisors in completion of the Forgiveness Application. If a borrower receives written notice from its lender that the lender has denied is forgiveness or the SBA is reviewing the borrower’s PPP loan, the borrower should respond to all correspondence in a timely manner and strongly consider engaging counsel to assist/support the borrower in the appeal or review/audit process by the SBA.