New Interim Final Rules Released by the Small Business Administration on the Paycheck Protection Program

The Small Business Administration (‘SBA”) issued two interim final rules on May 22, 2020 addressing Paycheck Protection Program (“PPP”) loan forgiveness, loan review procedures and borrower and lender responsibilities. This client alert will focus on the interim final rules related to PPP loan forgiveness.  Please note that this Client Alert was published early on May 29, 2020 and is for informational purposes only. Developments regarding PPP loan forgiveness are ongoing and new interim rules or new statutory obligations could impact the information set forth herein.

Generally, borrowers are eligible for PPP loan forgiveness in an amount equal to payroll costs, mortgage interest, rent and utilities incurred and paid by borrower during the 8-week covered period. To be eligible for full forgiveness, at least 75% of the total PPP loan proceeds must be used for payroll costs, while up to 25% of the total PPP loan proceeds may be used for mortgage interest, rent and utilities.

Loan forgiveness is reduced if: (1) the average number of borrower’s full-time equivalent employees is reduced when compared to a chosen reference period (either Feb. 15, 2019 through June 20, 2019 or Jan. 1, 2020 through Feb. 29, 2020); or (2) borrower employees who made less than $100,000 in annualized wages in 2019 receive a pay reduction of more than 25% during the 8-week covered period.

However, reductions in employment or salary that occurred between Feb. 15, 2020 and April 26, 2020 can be “cured” and will not reduce the amount of loan forgiveness if, by June 30, 2020, the borrower eliminates the reduction in employees or the reduction in wages, as applicable, by rehiring employees, hiring new employees, or restoring wages.

The new interim final rule provides additional clarification regarding PPP loan forgiveness:

  • When does the 8-week covered period begin? The 8-week covered period begins on the date the PPP loan is disbursed by the lender, although borrowers with a biweekly (or more frequent) payroll may elect an “alternative payroll covered period” which begins on the first day of the first payroll cycle after the loan is disbursed.
  • Must expenditures be incurred and paid within the 8-week covered period to be eligible for forgiveness? Generally, payroll costs paid or incurred by borrower during the 8-week covered period are eligible for forgiveness. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., the day the employee worked). If an employee is not performing work but is still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (i.e., each day the employee would have performed work). Approved non-payroll costs (i.e., mortgage interest, rent and utilities) are eligible for forgiveness if paid during the 8-week covered period or incurred during the 8-week covered period and paid on or before the next regular billing date, even if the next regular billing date is after the 8-week covered period. If the non-payroll expense is for a period that spans both the covered and noncovered period, and is paid after the covered period, the borrower may seek partial forgiveness of such expenses incurred during the covered period.
  • Are there caps on compensation payable to owner-employees and self-employed individuals when determining eligibility for forgiveness? Owner-employees and self-employed individuals are limited to “payroll compensation” no greater than 8/52 of 2019 compensation or $15,385 per individual (based on the annualized $100,000 limitation). Owner-employees are further capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.
  • Are payments to furloughed employees and payments of bonuses and hazard pay to employees considered “payroll costs” that are eligible for forgiveness? Payments of salary, wages or commissions to furloughed employees, and payments of bonuses and hazard pay to employees are considered payroll costs, subject to the limitation that cash compensation to any individual employee cannot exceed $100,000 on an annualized basis. In other words, these payments should not push an individual employee’s total compensation above $15,385 during the 8-week covered period.
  • How should a borrower calculate full-time equivalent employee? A full-time equivalent employee is an individual who works 40 hours or more each week. For employees who work less than 40 hours each week, the borrower can either (i) calculate the average number of hours paid per week divided by 40, or (ii) use a full-time equivalency of 0.5 for each employee. The chosen method must be consistently applied to all employees in all relevant periods.
  • How is loan forgiveness impacted if an employee rejects an offer to be rehired, or if an employee is fired for cause, voluntarily resigns or voluntarily requests a schedule reduction?
    • If an employee was initially laid off, but then refuses to be rehired, the borrower’s forgiveness amount won’t be reduced if:
      • Borrower made a good faith, written offer to rehire the employee (or restore reduced hours) during the 8-week covered period;
      • The offer was for the same salary and number of hours earned by the employee in the last pay period prior to the separation or reduction in hours;
      • The offer was rejected by the employee;
      • Borrower has records documenting the offer and rejection; and
      • Borrower informed the state unemployment insurance office about the rejected the offer of reemployment within 30 days of the employee’s rejection.
    • Any employee who is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction and receives a reduction of their hours will not reduce the borrower’s loan forgiveness.
  • Will reductions in employee salary/wages be counted towards a reduction in salary/wages and reduction in the number of full-time equivalent employees for purposes of calculating loan forgiveness? Borrowers will not be doubly penalized for reductions in employee salary and wages. A reduction in employee salary/wage because of a reduction in employee hours will only be counted towards a reduction of employee salary and wages, and will not also be considered a reduction of the number of borrower’s full-time equivalent employees.
  • How long should borrowers keep their PPP documentation? Borrowers should retain all PPP documentation for at least 6 years after the loan is forgiven or paid in full.

Link to full text of the new interim final rules relating to forgiveness can be found here.

Information contained in this alert is for general information purposes only. It should not be considered as legal advice or the sole source of information when analyzing and resolving a legal issue. If you have specific questions regarding your particular circumstances, please do not hesitate to contact your CH& counsel.