Forgive or Regret?: SBA and Treasury Release Long-Awaited PPP Loan Forgiveness Final Interim Rules
Late last Friday night, as most were preparing for the Memorial Day holiday, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury (Treasury) released a pair of eagerly anticipated interim final rules (the Forgiveness Rules) regarding the key feature of the Paycheck Protection Program (PPP), forgiveness of the loans. The Forgiveness Rules can be found here and here.
The PPP is the well-intentioned but increasingly maligned – due it its complexity and rapidly evolving set of rules – aid package (in the form of forgivable loans) from the CARES Act to help small businesses retain their employees and cover certain expenses for an eight (8) week period after they receive the PPP funds. The Forgiveness Rules supplement the previously issued patchwork of guidance on PPP loan forgiveness in prior interim final rules, the PPP Frequently Asked Questions (FAQ) post on the Treasury’s website and the SBA’s form of loan forgiveness application (the Forgiveness Application). The Forgiveness Rules answer or clarify many, but not all, of the lingering forgiveness questions and, importantly, detail the process through which borrowers and lenders apply for forgiveness.
Part I summarizes the key points on determining the amount of loan forgiveness. Part II summarizes the procedural aspects of requesting loan forgiveness, as well as the SBA’s PPP loan review process.
Part I – Determining the Loan Forgiveness Amount
The Forgiveness Rules largely aggregate prior guidance with respect to determining the amount of loan forgiveness, discussed in more detail here. However, they do offer important context in making the forgiveness amount calculation and do address a handful of the lingering forgiveness questions, as we explain below.
Eligible Costs – Payroll
- Alternative Payroll Covered Period. In general, the Forgiveness Rules provide that payroll costs paid or incurred during the consecutive eight-week (56-day) period following the loan disbursement (Covered Period) are eligible for forgiveness. However, the Forgiveness Rules formally recognize a borrower’s ability to elect to measure payroll costs using an alternative period (the Alternative Payroll Covered Period) rather than the Covered Period. The Alternative Payroll Covered Period, which was first introduced in the Forgiveness Application, begins on the first day of the first pay period following the loan disbursement date (e.g., if the loan disbursement date was April 20 and the first day of the borrower’s first pay period following PPP loan disbursement is April 26, the Alternative Payroll Covered Period will start on April 26 and end on June 20). Borrowers that elect to use the Alternative Payroll Covered Period to calculate forgivable payroll costs must continue to use that period consistently, for example, when calculating possible forgiveness reductions based on average full-time equivalent employees (FTEs) and compensation reductions (discussed below).
- Payments after Covered Period (or Alternative Payroll Covered Period). Payroll costs generally must be paid during the Covered Period (or Alternative Payroll Covered Period) to be eligible for forgiveness. However, the Forgiveness Rules confirm that payroll costs that are incurred during the Covered Period (or Alternative Payroll Covered Period), but not paid until after the end of the Covered Period (or Alternative Payroll Covered Period), are eligible for forgiveness if paid no later than the first regular payroll date thereafter. Payroll costs that are both paid and incurred during the Covered Period (or Alternative Payroll Covered Period) may only be counted once.
- Non-Working Employees. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., the day the employee worked). In the case of employees that are not performing work, but still on the borrower’s payroll, the Forgiveness Rules provide that payroll costs will be deemed incurred based on a schedule established by the borrower (typically the day the employee would have worked).
- Bonuses; Hazard Pay; Payments to Furloughed Employees Forgivable. The Forgiveness Rules confirm that salary, wages or commissions paid to furloughed employees during the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness as long as total compensation to the employee during the period does not exceed $15,385 (i.e., the prorated portion of an annualized compensation of $100,000). Similarly, an employee’s hazard pay and bonuses paid during the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness as long as such employee’s total cash compensation (inclusive of such hazard pay or bonus) does not exceed $100,000 on an annualized basis.
- Cap on Employee-Owner Payroll Costs. As reflected in the borrower certifications required on the Forgiveness Application and prior interim final rules, the Forgiveness Rules also confirm that forgivable payroll costs for self-employed individuals or employee owners of a borrower (for example, members of an LLC or general partners of a partnership) are limited to the lesser of (i) $15,385 or (ii) an amount equal to 8/52 of the individual's 2019 compensation.
Specifically, owner-employees are capped by the amount of their 2019 cash compensation and employer retirement and healthcare contributions made on their behalf. Schedule C filing self-employed individuals are capped by the amount their 2019 Schedule C net profit. General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expenses, un-reimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235.
No additional forgiveness is provided for retirement or health insurance contributions from self-employed individuals or general partners, as such expenses are paid out of their net self-employment income.
Eligible Costs – Non-Payroll
Eligible non-payroll costs (i.e., interest payments on a real or personal business mortgage, rent for real or personal property leases and utility payments – electricity, gas, water, transportation, telephone and internet access) must be paid during the Covered Period or incurred during the Covered Period – even if a borrower elects to use the Alternative Payroll Covered Period – and paid on or before the next regular billing date (even if the billing date is after the Covered Period). Neither prepayments of mortgage interest nor payments of principal on secured obligations are eligible for loan forgiveness.
The CARES Act provides that a borrower’s loan forgiveness amount will be reduced based on (1) a reduction in the borrower’s average weekly FTE headcount (the FTE Reduction) and/or (2) a reduction in an employee’s compensation of more than 25% (the Salary/Hourly Wage Reduction). The mechanics of these two statutory forgiveness reduction formulas were previously explained in the Forgiveness Application instructions and are now adopted by the Forgiveness Rules as follows:
- FTE Definition. The Forgiveness Rules confirm that the SBA considered a 30-hour standard, but concluded that an FTE for PPP purposes is an employee that works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single FTE and aggregated.
- FTE Calculation. A borrower divides the average number of hours paid for each employee by 40, rounded to the nearest tenth. The value for employees who worked more than 40 hours per week is capped at 1.0. In the case of employees who were paid for less than 40 hours per week, a borrower may elect to calculate the FTE value as either:
- Calculate the FTE value for each employee by dividing the average number of hours worked per week by 40; or
- Electing (for convenience) to use an FTE value of 0.5 for each employee working less than 40 hours.
The borrower then determines the aggregate FTE totals for both the Referenced Period (see below) and the Covered Period (or Alternative Payroll Covered Period) by adding together all of the employee-level FTE values.
- FTE Reduction Quotient. The FTE Reduction potentially applies if the borrower’s average weekly FTE employees during the Covered Period (or the Alternative Payroll Covered Period) is less than the borrower’s average weekly FTE employees during a chosen reference period (Reference Period) of:
- February 15, 2019 - June 30, 2019;
- January 1, 2020 - February 29, 2020; or
- in the case of seasonal employers only, either of the two the preceding periods or a consecutive 12-week period between May 1, 2019 - September 15, 2019.
The FTE Reduction quotient is obtained by dividing the Covered Period average FTE by the Reference Period average FTE. If the quotient is less than 1.0, the FTE Reduction will apply to the borrower’s requested loan forgiveness and the loan forgiveness amount will be proportionately reduced by the same percentage as the reduction in FTE headcount.
- FTE Reduction Exceptions
Offer to Rehire. An employee whom the borrower offered to rehire is excluded from the FTE Reduction calculations (and as a result, will not reduce a borrower’s loan forgiveness amount) if:
- the borrower made a good-faith, written offer to rehire an employee during the Covered Period (or Alternative Payroll Covered Period, if elected);
- the offer was for the same salary/wages and same number of hours as earned in the last pay period prior to the separation or reduction of hours;
- the offer was rejected by the employee;
- the borrower has maintained records documenting the offer and rejection; and
- the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection.
Although this exception was previously known, the requirement that the borrower notify state unemployment insurance offices is newly added by the Forgiveness Rules (the Forgiveness Rules provide that additional information regarding this requirement will be made available on the SBA’s website).
Other Exceptions. In addition, in the case of employees who during the Covered Period (or Alternative Payroll Covered Period) (i) were fired for cause, (ii) voluntarily resigned or (iii) voluntarily requested and received a reduction of their hours, a borrower may count each employee at the same FTE value as before the reduction event for purposes of the FTE Reduction calculation.
A borrower can only include such former employees in the FTE average if the borrower has not filled the position with a new employee.
- FTE Reduction Safe Harbor. A borrower is exempt from the FTE Reduction entirely if the borrower restores its FTE employee level by no later than June 30, 2020 to its FTE employee level in the pay period that included February 15, 2020. There had been speculation that the SBA would extend the FTE restoration deadline in the case of borrowers whose Covered Period (or Alternative Payroll Covered Period) extend beyond June 30, 2020. However, the Forgiveness Rules state that the June 30th date is statutorily prescribed by the CARES Act (and, therefore, cannot be extended without amendment of the Act).
- Salary/Hourly Wage Reduction. The Salary Hourly/Wage Reduction applies if an employee’s average annual salary or hourly wage during the Covered Period (or, if elected, the Alternative Payroll Covered Period) is less than 75% of such employee’s average annual salary or hourly wage between January 1, 2020 and March 31, 2020. The Salary/Hourly Wage Reduction is determined on an employee-by-employee basis (as opposed to an average of all borrower employees). A safe harbor applies if an employee’s average annual salary or hourly wage as of February 15, 2020 is equal to or less than the employee’s average annual salary or hourly wage as of June 30, 2020. As is the case with the FTE Reduction safe harbor, the June 30th deadline is statutorily imposed and applies regardless of whether a borrower’s Covered Period (or, if elected, the Alternative Payroll Covered Period) extends beyond that time.
The Forgiveness Rules add an important new clarification that the Salary/Hourly Wage Reduction applies only to the portion of decline in compensation that is not attributable to the FTE Reduction. This ensures that borrowers are not penalized double for reductions.
Part II - Forgiveness & SBA Loan Review Process
General Forgiveness Process. A borrower will need to submit the Forgiveness Application to its lender to initiate a loan forgiveness determination. The lender has 60 days from receipt of a Forgiveness Application to make a determination regarding loan forgiveness and issue a decision to the SBA. If the lender determines that the borrower is eligible for some or all of the PPP loan amount, the lender must request payment from the SBA when issuing its decision (see further discussion below on the lender review).
Subject to any SBA review of the loan, the SBA will remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, within 90 days after the lender issues its decision to the SBA. Accordingly, a borrower may be required to wait up to 150 days following the submission of its Forgiveness Application for confirmation that the PPP loan is eligible for forgiveness. The Forgiveness Rules explain that the SBA considers this period of time is appropriate “to prevent fraud or misuse of PPP funds, ensure that recipients of PPP loans are within the scope of entities that the CARES Act is intended to assist, and confirm compliance with PPP requirements[.]”
The lender is responsible for notifying the borrower of the forgiveness amount. Any portion of the PPP loan that is not forgiven must be repaid by the borrower in accordance with the terms of the loan documents executed by the borrower in connection with the disbursement of the funds.
The general loan forgiveness process described in this section applies only to Forgiveness Applications that are not subject to review by the SBA prior to the lender’s decision on forgiveness eligibility – generally, loans of less than $2 million (see our prior alert here for more information on SBA audits).
In conducting this review, the Forgiveness Rules direct the lender to do the following:
- Confirm receipt of the borrower certifications contained in the Forgiveness Application;
- confirm receipt of the documentation borrowers must submit to verify payroll and non-payroll costs, as specified in the instructions to the Forgiveness Application;
- confirm the borrower’s calculations on the Forgiveness Application (including, without limitation, the dollar amounts of (1) cash compensation, non-cash compensation and owner compensation and (2) non-payroll costs claimed during the covered period); and
- confirm that the borrower correctly calculated whether the Salary/Hourly Wage Reduction applied to reduce the amount of its forgiveness.
The borrower remains ultimately responsible for calculating the forgiveness amount and attesting to the accuracy of the information on its Forgiveness Application. The lender is required to perform a good faith review, in reasonable time, of the borrower’s calculations and supporting documentation. The scope of a lender’s review, therefore, depends on the quality of the supporting documents provided by the borrower. A payroll report from a recognized third-party payroll provider may require only minimal review, whereas less formal documentation of payroll costs may require more extensive analysis.
The lender does not need to independently verify a borrower’s supporting information and are entitled to rely on borrower representations made on the Forgiveness Application. If, however, the lender identifies errors in the borrower’s calculations and/or material lack of supporting documentation, the lender should work with the borrower to remedy the issue before submitting a forgiveness determination to the SBA.
Lender Forgiveness Determination Issued to the SBA. After completing its review, the lender must issue a decision to the SBA within 60 days of receipt of the borrower’s Forgiveness Application. That decision on forgiveness may take the form of:
- An approval (in whole or in part);
- a denial; or
- if directed by the SBA, a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought (see below for discussion on SBA review).
If the loan is denied without prejudice, a borrower may subsequently request that the lender reconsider its Forgiveness Application unless the SBA review concluded that the borrower is ineligible to receive a PPP loan.
When the lender issues its decision to the SBA, it must (1) include the Loan Forgiveness Calculation Form and PPP Schedule A, which are both included as part of the Forgiveness Application; (2) confirm that the information provided by the lender to the SBA accurately reflects the lender’s records for the loan and (3) confirm that the lender made its determination in accordance with the procedures described in the Forgiveness Rules.
If the lender issues an approval determination (in whole or in part), the SBA will remit, subject to any SBA review of the PPP loan, the appropriate forgiveness amount to the lender (plus interest accrued through the date of payment) within 90 days.
If the lender issues a denial determination, the lender must explain the reason for its denial to the SBA and notify the borrower in writing that it has issued a decision to the SBA denying the Forgiveness Application. The SBA has the right (but not the obligation on its own) to review the lender’s decision and the borrower may, within 30 days of the lender’s decision notice, request that the SBA review the lender’s determination by conducting a full SBA review of the PPP loan.
SBA Review of PPP Loan. While the SBA has already advised that it would not review loans of less than $2 million for borrower compliance with the economic necessity certification, the Forgiveness Rules confirm that (subject to the foregoing) the SBA may, in its discretion, review a PPP loan of any size at any time (including after the loan has been repaid or forgiven). As a result, a borrower is required to retain PPP documentation for six (6) years following after the date its PPP loan is forgiven or repaid and lenders must comply with all applicable regulatory record retention requirements.
The SBA’s review of a PPP loan will focus on the following aspects of the loan:
- Borrower Eligibility. A borrower’s eligibility to receive a PPP loan will be assessed based on the requirements of the CARES Act, the SBA interim final rules or guidance available at the time the borrower submitted its loan application or the terms of the loan application itself.
- Loan Amounts & Use of Proceeds. The SBA will review whether a borrower determined the size of its PPP loan correctly and used the proceeds for allowable purposes.
- Loan Forgiveness Amount. The SBA may review whether a borrower is entitled to forgiveness in the amount claimed on the Forgiveness Application.
If the documentation submitted to the SBA indicates that a borrower may be ineligible to have received a PPP loan and/or to receive forgiveness of the amount claimed, the SBA will request additional information from the lender or directly from the borrower. The SBA will incorporate all information received in response to the request in its review. Any failure to respond to a request for additional information may result in a determination that the borrower was ineligible to receive the PPP loan or to receive forgiveness.
Lender Obligations in SBA Review. The SBA will notify the lender in writing if it undertakes a review of a PPP loan. Within five (5) days, the lender is required to confirm receipt of the notice and transmit electronic copies of the following to the SBA:
- The Borrower Application Form (SBA 2483 or the lender’s equivalent) and all of the borrower’s supporting documentation;
- the Forgiveness Application and all of the borrower’s supporting documentation;
- a signed and certified transcript of account;
- a copy of the executed promissory note evidencing the PPP loan; and
- any other documents requested by the SBA.
Outcome of SBA Review – Borrower. If the SBA determines that a borrower is ineligible for the PPP loan or to receive forgiveness, it will direct a lender to deny the Forgiveness Application in whole or in part (as appropriate). The Forgiveness Rules state that the SBA may, depending on the reason(s) for denial, also seek repayment of the outstanding loan balance or “pursue other available remedies,” although as we have previously noted, prior guidance provides that denial based on improperly making the economic necessity certification would be limited to repayment of the loan – because the SBA presumably has (rightfully) recognized that there are not clear rules regarding that certification.
The Forgiveness Rules do clarify, however, that if a borrower is determined not to be an eligible recipient of a PPP loan, there can be recourse against that borrower’s individual shareholders, members or partners if the borrower is unable to repay the loan amount.
Finally, the Forgiveness Rules briefly note that borrowers will be able to appeal an SBA finding of ineligibility, but the details of this process will be addressed in a future SBA interim final rule.
Outcome of SBA Review – Lender. If SBA’s loan review determines that the borrower is ineligible for a PPP loan, the lender is not eligible for a processing fee. In the event the ineligibility determination is made up to a year after the loan is disbursed, the SBA will seek repayment of the processing fee from the lender. A determination of borrower ineligibility, however, will have no effect on the SBA’s guaranty of the loan as long as the lender has complied with its obligations under the first interim final rule and the applicable document retention requirements described in the lender application (SBA Form 2484). But if a lender fails to satisfy such requirements, the processing fee is subject to clawback by the SBA and the PPP loan may not be eligible for a guaranty.
If you have questions or would like more information, please contact Ryan J. Udell (email@example.com; 215.864.7152), Adam J. Chelminiak (firstname.lastname@example.org; 215.864.7078) or another member of the Corporate and Securities Group.
As we continue to monitor the novel coronavirus (COVID-19), White and Williams lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors. Read all of the updates here.
 The Forgiveness Rules confirm that its eligibility review will include, in addition to the various interim final rules issued specifically with respect to PPP loans, consideration of the SBA regulations on ineligible borrowers (13 CFR §120.110) and affiliation rules applicable to 7(a) loans (13 CFR §121.301(f)) that pre-dated the CARES Act.