PPP Loan Forgiveness Update: SBA Issues New Interim Final Rule to Provide Additional Guidance Surrounding Loan Forgiveness
On June 22, 2020, the Small Business Administration (SBA) issued its latest Interim Final Rule, providing borrowers and lenders with additional guidance surrounding the Paycheck Protection Program (PPP) loan forgiveness process. While questions and open items remain, we have been provided with clarity on the items listed below:
Timeline for Application for Loan Forgiveness
The release of Form 3508EZ, PPP Loan Forgiveness Application and Form 3508, PPP Loan Forgiveness Application Revised June 16, 2020, provided borrowers with the means to apply for loan forgiveness. The Interim Final Rule confirms the following timeline:
- The lender has 60 days from the receipt of the Form 3508EZ or the Form 3508 to render its loan forgiveness decision to the SBA.
- Provided the lender has determined that full or partial loan forgiveness is in order, the SBA has 90 days from the date the loan forgiveness decision is rendered to remit appropriate forgiveness amount to the lender.
- If applicable, the SBA will deduct Economic Injury Disaster Loan (EIDL) Advances from the forgiveness amount remitted to the lender.
- The lenders will inform the borrowers of the SBA’s loan forgiveness decision, with the unforgiven portion requiring payment on or before the maturity date of the loan.
This timeline applies only to loan forgiveness applications that are not reviewed by the SBA prior to the lender’s decision on the forgiveness application. Refer to the Interim Final Rule issued on May 22, 2020 entitled “SBA Loan Review Procedures and Related Borrower and Lender Responsibilities” for additional guidance surrounding the loan review process.
Deferral Period and Forgiveness
With the expansion of the Covered Period from 8 weeks to 24 weeks, borrowers and lenders were left wondering when to apply for loan forgiveness, especially in light of the December 31, 2020 date for full-time equivalent (FTE) employee restoration. This Interim Final Rule clarifies a number of open items related to this topic, including:
- Borrowers may submit a loan forgiveness application at any time on or before the maturity of the loan date. Specifically, borrowers are not required to wait for the close of the Covered Period to submit loan forgiveness applications.
- Borrowers submitting loan forgiveness applications prior to the end of the Covered Period that have reduced employee salaries or wages in excess of 25% must account for the excess salary reduction for the full 8-week or 24-week Covered Period. The Interim Final Rule provides the following example to illustrate this:
- Borrower selects 24-week Covered Period;
- Borrower reduced a full-time employee’s weekly salary from $1,000/week to $700/week (e., 30% reduction);
- Employee continued to work on a full-time basis (FTE score of 1.0);
- The first $250/week (e., 25% of $1,000) is exempted from loan forgiveness reduction;
- Remaining $50/week (e., $300 – $250 = $50) is subject to loan forgiveness reduction;
- Borrower multiples $50 times 24 weeks to arrive at loan forgiveness reduction of $1,200.
Had the borrower in this example been eligible for and selected the 8-week Covered Period, the loan forgiveness reduction would be $50 times 8 weeks or $400.
An area of significant emphasis, the rehire exceptions have been further clarified and revised. The amendments to the CARES Act initially provided borrowers encountering the situations below with a means to avoid negative forgiveness implications in situations where:
- Employees were terminated for cause; or
- Employees voluntarily resigned; or
- Employees voluntarily requested and received a reduction in hours;
Additionally, the PPP Flexibility Act of 2020 added two new rehire exemptions. Notably, (1) borrowers who attempt, but are unable, to rehire employees who were employed as of February 15, 2020 and rehire similarly qualified employees for unfilled positions by December 31, 2020, as well as (2) borrowers who are unable to return to pre-February 15, 2020 levels of business activity due to governmentally-established direct and indirect requirements implemented between March 1, 2020 – December 31, 2020 related to maintenance of standards for sanitation, social distancing or any other COVID-19 related worker or customer service requirements may avoid negative loan forgiveness implications.
Borrowers should note that the rehire exemption surrounding employees terminated for cause has been revised. Borrowers must now follow the mandates of the PPP Flexibility Act of 2020, thus requiring an attempt to rehire employees employed as of February 15, 2020 or rehire similar qualified employees for unfilled positions by the close of 2020 (e.g., strictly terminating employees for cause gives rise to a reduction in loan forgiveness).
To meet these standards, borrowers are once again reminded that proper written documentation of these good-faith offers is critical and is required. Depending upon the rehire exemption claimed, documentation includes, but is not limited to:
- Written offer to rehire the employee;
- Written record of the rejection;
- Written record of the efforts to hire a similarly qualified employee;
- Copies of applicable COVID requirements or guidance for each business location; and/or
- Relevant financial records
Lastly, the SBA will publish guidance on its website for situations in which borrowers are required to inform the applicable state unemployment agency of an individual’s rejection of an offer of re-employment.
Owner/Self-Employed Individual Compensation Limits
As referenced in the loan forgiveness application forms, as well as the SBA Interim Final Rule issued on June 16, 2020, owner compensation is limited as follows:
- 8-Week Covered Period: Lesser of 8/52 of (i) 2019 compensation or (ii) $15,385 per individual.
- 24-Week Covered Period: Lesser of 2.5/12 of (i) 2019 compensation or (ii) $20,833 per individual.
This Interim Final Rule provides clarity surrounding caps for cash and non-cash compensation for owner-employees of the entity types listed below:
- C-Corporation Owner-Employees: Employer retirement and health insurance contributions made on their behalf are forgiveness eligible.
- S-Corporation Owner-Employees: Employer retirement contributions made on their behalf are forgiveness eligible, but health insurance contributions are excluded from forgiveness.
- Schedule C or Schedule F Filers: Cash compensation eligible for forgiveness is limited to the lesser of 2019 compensation or (i) either $15,385 or (ii) $20,833 (depending upon the selection of the 8-Week or 24-Week Covered Period).
- General Partners: Cash compensation is capped by the amount of 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
Furthermore, self-employed individuals, including Schedule C filers, Schedule F filers and general partners are excluded from including retirement and health insurance benefits in forgiveness requests.
Recap of the Payroll Cost Paid and Incurred Standard
The paid and incurred standard, along with the start dates associated with the Payroll Cost Covered Period and the Alternative Payroll Covered Period are reiterated. As a reminder, Payroll Costs are considered paid when paychecks are distributed and/or when ACH credit transactions are originated while the incurred date aligns with the date the Payroll Costs are earned. For employees who are not performing work but are still on the borrower’s payroll, Payroll Costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed the work).
Recap of the Non-Payroll Cost Paid and Incurred Standard
The paid and incurred standard for Non-Payroll costs is reiterated as well. As a reminder, Non-Payroll costs are eligible for forgiveness provided these costs are paid during the Covered Period or incurred during the Covered Period and paid on or before the next billing date, even if the billing date falls outside the Covered Period.
Additional Items of Note
In addition to the items discussed above, this Interim Final Rule addresses and recaps the loan forgiveness procedures that lenders undertake as part of the loan forgiveness process.
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.