Paycheck Protection Program: Two New Interim Final Rules
What will the SBA review? How does Forgiveness work?
May 24, 2020 | By: Keith A. Krauss, Esq.
The SBA released two new interim final rules informing recipients and lenders of Paycheck Protection Program (“PPP”) loans the components of a borrower’s application that the SBA intends to review and memorializing some of the principles of forgiveness contained in the Loan Forgiveness Application and Instructions issued last week.
SBA Loan Review Procedures:
The rules state that the SBA may review the following representations/certifications made by borrowers in their application:
- Eligibility: Whether a borrower is eligible for a PPP loan based on the provisions of the CARES Act and rules and guidance ‘available at the time of the borrower’s PPP application’, and the terms of the borrower’s PPP application.
- Calculation of the PPP Loan Amount and Use of Proceeds: Whether a borrower calculated the loan amount correctly and used the proceeds for allowable uses.
- Loan Forgiveness Amounts: Whether a borrower is entitled to loan forgiveness in the amount claimed in its loan forgiveness application.The SBA reserves its rights to undertake this review at any time in its discretion, noting that the borrowers must retain PPP documentation for 6 years after the loan is forgiven or repaid in full.
Borrowers will have an opportunity to respond to SBA’s questions in a review; the borrower’s lender or the SBA, directly, may seek additional information be provided by the borrower. Failure to respond to an SBA inquiry may result in a determination of ineligibility. Note that a determination by the SBA of ineligibility for a PPP loan means that a borrower is ineligible for forgiveness. The rules contemplate that there may be an appeals process for borrowers – rules to be subsequently issued to define the process.
These interim rules reaffirm the instructions contained in the loan forgiveness application, and provide some new clarification (noted below*) with respect to payroll costs eligible for forgiveness:
- Payroll costs paid or incurred during the eight week consecutive week (56 days) covered period are eligible for forgiveness. Note that this slightly alters the language in the CARES Act – which states that “costs incurred and payments made during the covered period” are eligible for forgiveness. The rules also confirm that employers with biweekly or more frequent pay cycles may utilize an alternative payroll covered period for employers, which, per the instructions in the loan forgiveness application, permits the delay of the 8-week forgiveness period for payroll costs to the first day of the first payroll cycle after receipt of the PPP loan funds. Note that payroll costs are generally incurred on the day the employee’s pay is earned – i.e. on the day the employee worked. The rules state that for employees who are not working during this period (or any portion thereof), payroll costs are “incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).”
- *Commissions, bonuses and hazard pay are eligible for forgiveness, as long as the employee’s total compensation does not exceed $100,000 on an annualized basis.
- Loan forgiveness for owner-employees and self-employed individuals is capped at the lesser of (i) 8 weeks of 52 weeks based on the 2019 compensation (i.e 15.38% of 2019 compensation) or (ii) $15,385 per individual in total across all businesses.
- Employers will not be penalized (i.e. their forgiveness amount will not be reduced) as a result of employees’ refusal to return to employment after the employer makes a good faith, written offer to rehire such employee at the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours. Note that the SBA added a requirement that the employer have informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. Also this does not discuss the timing of the furloughs subject to this safe harbor – the CARES Act speaks to the applicability of this exemption only to furloughs/layoffs/workforce reductions that occurred between February 15, 2020 and April 26, 2020. It is unclear that this exemption will apply to furloughs that occurred after April 26, 2020.
- In addition, employers will not be penalized for workforce reductions due to (i) termination of employees for cause or (ii) voluntary resignations or voluntary reductions in schedule.
- Full-time equivalent employee means an employee who works 40 hours or more, on average each week.
- The rules also provide an illustrative example for aiding in computing the loan forgiveness amount due to reductions in salary or total wages of an employee during the 8-week forgiveness period.
- The rules clarify that employers will not be doubly penalized, in the forgiveness amount reductions for reduction of workforce and reduction in salary or total wages – that is, it states that salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
Please see the specific rules, at the links provided below:
• Business Loan Program Temporary Changes; Paycheck Protection Program – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities:
• Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Loan Forgiveness.