The SBA Issues PPP Loan Forgiveness Rules

May 26, 2020

By: Kimberly Klein

On May 22, 2020, the U.S. Small Business Administration (SBA) issued Interim Final Rules (the “Rules”) to help employers prepare and submit Paycheck Protection Program (“PPP”) loan forgiveness applications and advise lenders and borrowers on the loan forgiveness process.

We summarize the highlights in the below bullet points and provide greater detail in the alert below:

  • The eight-week loan forgiveness period can start on the first day of the payroll cycle following receipt of the loan (as opposed to receipt of the loan disbursement).
  • Supplemental wages, such as hazard pay and bonuses, can be included in payroll costs subject to the $100,000 cap.
  • Full-time employees are those that work 40 hours or more per week.
  • Employers may use one of two baselines when calculating FTE employees: 1) February 15 to June 30, 2019; or 2) January 1 to February 29, 2020.
  • Employers may use one of two methods when calculating FTE employees for loan forgiveness: 1) the average number of hours worked in a week; or 2) assigning a quotient of 1.0 to each full-time employee and .5 to each part-time employee.
  • Employers will not suffer double damages for reducing an employee’s hours and wages, if not restored.
  • Employers will not be penalized if an employee rejects an offer of rehire as long as the offer and rejection are properly documented and the State unemployment insurance office is timely notified.
  • An employer’s loan forgiveness amount will not be reduced if an employee was fired for cause, voluntarily resigned or voluntarily requested a schedule reduction.
  • Lenders have 60 days to issue a decision concerning loan forgiveness following the submission of a completed application; the SBA has 90 days to review the decision.
  • Any borrower whose loan forgiveness application is rejected, in whole or in part, will be able to respond and appeal the decision, if applicable.

The Covered Period

Payroll costs1 and non-payroll costs2 over an 8-week period are eligible for forgiveness. (See endnotes for which costs are included).  The 8-week period can start either from the date of the loan disbursement or the first day of the payroll cycle following the loan disbursement (the “Covered Period”).  Using the payroll cycle date may appeal to employers who received the loan disbursement in the middle of a payroll cycle.  For example, if a loan is disbursed on June 1, but the employer’s first payroll period following the disbursement begins on June 7, the 56-day covered period will run through August 1, not July 26.  

Forgivable non-payroll costs must be incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.  For example, a utility bill paid after the Covered Period for costs incurred during the Covered Period can be forgiven.  Forgiven non-payroll costs cannot exceed 25 percent of the total loan forgiveness amount.

Reductions to Loan Forgiveness Amount

Loan forgiveness amounts will be reduced if an employer reduced its full-time equivalent (FTE) employees or employee wages during the Covered Period, unless the employer rehires the employees or restores wage levels to the pre-Covered Period levels by June 30, 2020.  Pre-Covered Period employment and wage levels will be measured by the employer’s workforce between February 15 and June 30, 2019, if the employer was in business during that period; otherwise by the workforce between January 1 and February 29, 2020.  For seasonal employees, employers may use either of these two methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019. 

If the average number of FTE employees during the Covered Period is less than during the pre-Covered Period, the amount of the loan eligible for forgiveness will be reduced proportionally.  The Rules define a full-time employee as one who works 40 hours or more each week.  Each employee working at least 40 hours per week will be counted as 1.0 FTE employee.  Employers may calculate the FTE of part-time employees in two ways.  First, employers may take the average number of hours worked in a week to determine FTE.  For instance, an employee who works 30 hours per week would receive a quotient of .75.  Second, employers may appoint a FTE quotient of .50 to all part-time employees.  The Covered Period and pre-Covered Period must use the same method when calculating FTE employees.

Likewise, loan forgiveness will be reduced proportionately if salaries are not restored.  If an employee’s salary was reduced in excess of 25 percent, the loan forgiveness amount will be reduced by the amount that exceeds 25 percent.

An employer that reduces an employee’s salary and hours will not be penalized twice, however, as long as the hourly wage was not reduced.  In such instances, the reduction will be attributed only to the FTE reduction.  For example, an employer that reduces the hours of a full-time employee from 40 to 20 hours but does not reduce the hourly wage can treat the reduction as part of the FTE reduction calculation instead of a wage reduction for that employee.

Exceptions to Loan Reduction

The Rules provide for statutory exemptions from loan reductions in certain circumstances.  As noted above, if an employer reinstates employees or restores their salaries and wages in excess of 25 percent on or before June 30, 2020, the employer will be exempt from wage- or workforce-related forgiveness reductions.

Employers also will not be penalized if they offer to rehire workers or restore hours, but the offer is declined.  Employers in these situations must offer to rehire the same employee for the same salary and the same number of hours (or restore the reduced hours).  The refusal must be documented. The employer must be able to show that: 1) the employer made a good faith, written offer to rehire or restore wages equivalent to the employee’s last pay period prior to the separation or reduction in hours; 2) the employee rejected the offer; 3) the employer retained records documenting the offer and rejection; and 4) the employer informed the applicable state unemployment insurance office within 30 days of the employee’s rejection of the offer.  

Finally, the Rules provide that an employer’s loan forgiveness amount will not be reduced if an employee was fired for cause, voluntarily resigned or voluntarily requested a schedule reduction. 

The Loan Application Process

Understanding the application process is critical, as the penalties are substantial.  A false statement in connection with an SBA-guaranteed loan carries penalties of up to five years imprisonment and/or a fine up to $250,000.

Following the submission of a completed PPP Application, lenders have 60 days to issue a decision to the SBA on whether the loan is forgiven and request reimbursement for forgiveness.  The SBA will review the request and remit reimbursement to the lender within 90 days.  If a lender or the SBA determines that all or a portion of the loan amount is not forgivable, the employer must repay the non-forgivable amount on or before the two-year maturity of the loan from the date of disbursement.

The SBA, in consultation with the Department of the Treasury, will review all PPP Applications in excess of $2 million.  In addition, the SBA may review a loan of any size at its discretion.  Among the areas subject to review are employer eligibility, the loan amount, use of proceeds, and the loan forgiveness amounts.3 If the SBA finds that an employer was ineligible for the loan in whole or in part, the employer will have a chance to respond and, if necessary, appeal the decision.

Moses & Singer attorneys can help clients determine whether loan disbursements will be subject to forgiveness and assist clients in minimizing reductions to the loan forgiveness amount where possible. 

This article is current as of May 26, 2020 and reflects the state of the relevant laws, regulations, and guidance to that point.  Any subsequently issued, legislation, rules, and guidance by Congress, the United States Treasury, the Small Business Administration and other various government agencies may change the information contained herein.  While this article is meant as a useful resource concerning matters arising under the Paycheck Protection Program, it should not be considered legal advice for any specific situation.

1 Payroll costs consists of:

(i) compensation to employees whose principal place of residence is the U.S. in the form of salary, wages, commissions, or similar compensation, including housing stipends or allowance provided to an employee;

(ii) supplemental wages, such as hazard pay and bonuses;

(iii) cash tips or the equivalent;

(iv) payment for vacation, parental, family, medical, or sick leave (unless otherwise covered by the FFCRA);

(v) allowance for separation or dismissal;

(vi) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees (payroll costs do not include the employer’s share of payroll tax); and

(vii) for an independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment, or similar compensation.

Payroll costs are capped at $100,000 on an annualized basis for each employee, excluding non-cash benefits as set forth in (vi) above, and must make up 75 percent of the loan proceeds.

2 Non-payroll costs include: (i) interest payments on any business mortgage obligation on real or personal property incurred before February 15, 2020 (excluding payment of principal); (ii) payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and (iii) business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. 

3 As noted in our May 13, 2020 Last Minute FAQ Creates Some Relief On Necessity Certification article, FAQ 46 states that the economic need certification for loans under $2 million will be deemed to have been made in good faith, and for those loans over $ 2 million, a borrower who, upon notification by SBA, returns loans that are challenged based on economic necessity will not face administrative proceedings or other referrals made by SBA.  It remains unclear whether SBA’s pronouncement here will preclude action by other agencies.