May 26 New PPP Update: SBA Releases Guidance on Loan Forgiveness Application Interpretations
The Small Business Administration (SBA) issued two Interim Final Rules on Friday, May 22nd. The first of these two Interim Final Rules provides interpretations and clarifications on the requirements governing Paycheck Protection Program (PPP) loan forgiveness, the highlights of which can be found below. The second of these two Interim Final Rules details the procedures the SBA will undertake to review selected loans. Refer to our e-blast on the Interim Final Rule’s guidance on loan procedures here for additional information.
As referenced above, the first of the two most recently issued SBA Interim Final Rules clarifies certain questions and open items that emerged after the May 15, 2020 release of Form 3508, Paycheck Protection Program Loan Forgiveness Application. In particular, this Interim Final Rule offers guidance to borrowers and lenders in a number of different areas, including:
General Processes & Procedures
- Loan Forgiveness: The lenders have 60 days after borrower submission of Form 3508 to determine if loan forgiveness is approved. Once approved, the lenders will seek payment from the SBA. In turn, the SBA, after completing its loan review procedures (if applicable), has 90 days to remit the forgiven funds to the lender. EIDL advances, if any, will be deducted from the forgiveness amount at this time.
- Loan Application & Loan Forgiveness Application: As referenced above, the SBA has issued a separate Interim Final Rule to outline the procedures it will undertake to review PPP loan applications and loan forgiveness applications.
- Documentation: Reference is made to the documentation submission and retention requirements detailed in the Form 3508 application form.
- Covered Period Options: Borrowers may seek forgiveness for payroll costs paid or incurred during the 8 consecutive weeks beginning on either the:
- Date of loan disbursement; or
- First day of the payroll cycle in the covered period.
- Paid: The paid standard is reiterated, stipulating that paycheck distribution and/or ACH transaction initiation is the trigger.
- Incurred: The incurred standard is recapped as well, indicating that payroll costs are generally incurred on the date the pay is earned. As detailed in the loan forgiveness application, payroll costs incurred during the borrower’s last pay period are eligible for forgiveness if paid on or before the next regular payroll date.
- Employees Not Performing Work: For employers who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on a schedule established by the borrower. Typically, this would be each day that the employee would have performed work.
- Furloughed Employees, Bonuses & Hazard Pay: As long as payroll costs for furloughed employees, as well as for bonus and hazard pay, do not exceed the annualized $100K cap, these costs are forgiveness eligible.
Owner-Employees & Self-Employed Individuals
- Caps & Thresholds: As clarified in the loan forgiveness application, the amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation cannot exceed the lesser of:
- 8/52 of 2019 compensation; or
- $15,385 (i.e., $100K annualized).
- Owner-Employees: Capped by the amount of their 2019 employee cash compensation and employer retirement and healthcare contributions made on their behalf.
- Schedule C Filers: Capped by the amount of their owner compensation replacement, calculated based on 2019 net profit in accordance with the Interim Final Rule released on April 20, 2020.
- General Partners: Capped by the amount of their 2019 net earnings from self-employment with certain reductions.
The provisions of this Interim Final Rule further stipulate that no additional forgiveness is provided for retirement and/or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as these expenses are paid out of net self-employment income. An open item exists for corporate owner-employees, as the guidance suggests that the non-cash benefits (i.e., employer-funded contributions to healthcare and retirement) in these situations are included in requested borrower forgiveness.
- Paid or Incurred: The paid or incurred standard from the loan forgiveness application is clarified, providing that non-payroll costs (i) paid during the covered period or (ii) incurred during the covered period and paid on or before the next regular billing date are eligible for forgiveness.
- Advance Payments of Mortgage Obligations: Similar to prepayments, advance payments of this nature are ineligible for loan forgiveness.
Loan Forgiveness Reductions
- Rehires & Work Restoration: As stipulated in FAQ #40 and amplified by the loan forgiveness application, the negative implications to borrower forgiveness have been removed in situations where employees declined written employer offers for rehire and/or hour restoration. Provided the borrower has made a good-faith, written offer to rehire the employee and/or restore the hours for the same salary or wages prior to separation, a rejection of this offer should not cause a loan forgiveness reduction. The borrowers are responsible to maintain records to support the rejection.
- Additional Re-Hire Substantiation Requirements: To avoid the negative forgiveness implications referenced in the prior bullet, borrowers are now also required to inform the applicable state unemployment agency of the employee’s rejected offer within 30 days of the rejection. The SBA will provide further instructions on how this process will operate in future guidance.
- Full-Time Equivalent (FTE) Computation/Reduction: The rules surrounding FTE count, including the hourly requirements, as well as the methods to compute FTEs, are recapped. In addition, the comparative periods to determine if an FTE reduction has occurred are also listed.
- 25% Salary/Wage Reduction: The 25% reduction rule surrounding wage reduction is recapped as well. For each new employee in 2020 and each existing employee who was not paid more than $100K annualized in any 2019 pay period, the borrowers must reduce the total forgiveness amounts by the total average salary/wage reduction in excess of 25% of the average salary or wages between January 1, 2020 – March 31, 2020.
- Double-Penalty Avoidance: To avoid situations in which borrowers could be penalized due to both an FTE and compensation reduction, the 25% salary/wage reduction referenced above only applies to the portion of the decline in employee salary/wage that is not attributable to an FTE reduction.
- For example, an hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0).;
- The borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5).;
- There was no change to the employee’s hourly wage during the covered period.;
- Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.
- Other Areas: The June 30th date to restore FTE headcount and/or salaries and wages is re-emphasized, along with further confirmation that borrower loan forgiveness will not be reduced if an employee is fired for cause, voluntarily resigns or voluntarily requests a reduction in hours.
While this Interim Final Rule provides certain borrower and lender clarifications, tune into our webinar on Thursday, May 28h at 10AM for additional information on this topic. View the invite and register here.
Sax will continue to update you as further details are made available. Reach out to your Sax advisor or email [email protected] with questions. For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.