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SBA Releases Interim Final Rules on PPP Loan Forgiveness and Loan Review

May 27, 2020


Over Memorial Day weekend, the U.S. Small Business Administration (SBA) issued the interim final rule on Paycheck Protection Program (PPP) loan forgiveness. Many of the rules were consistent with our expectations after reviewing the forgiveness application, which was issued one week prior, but the guidance does provide a few significant confirmations and several new clarifications:

  • Clarification that bonuses and hazard pay count as forgivable payroll costs, with limitations on owner-employees, sole proprietors, and general partners
  • Clarification that the salary/wage reduction provision applies only to the portion of the decline in employee wages that is not attributable to the full-time equivalents (FTE) reduction
  • Confirmation that employees who are fired for cause, voluntarily resign, or voluntarily request a reduction in hours will not adversely affect the FTE calculation
  • Confirmation that the incurred and paid rules can encompass more than eight weeks of forgivable expense
  • A new requirement that the borrower notify the state unemployment insurance office regarding employees that turn down an offer of re-employment, provided an employer wishes to utilize the FTE reduction exception related to offers of re-employment

Bonuses and Hazard Pay

One of the biggest questions for employers has been whether they could give bonuses or increase wages for hazard pay in order to maximize the amount of loan forgiveness. In a welcome development, the SBA has blessed both strategies, with a general caveat for owners outlined below. However, this amount is mitigated by the general $100,000 annualized wage limitation ($15,385 per individual during the covered period). Here is the SBA’s take on the issue:

Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?

Yes. The Coronavirus Aid, Relief, and Economic Security (CARES) Act defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation. If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period.

The Administrator, in consultation with the Secretary, has also determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.

As mentioned, owners have an additional limitation in this regard:

  • Owner-employees: The term “owner-employee” is not defined, but it appears to include S-corporation and C-corporation shareholders. Owner-employees are limited by 2019 amounts paid for cash compensation and employer retirement plan/healthcare contributions made on their behalf.
  • Sole proprietor/self-employed individuals: Schedule C filers are limited by the amount of owner compensation replacement, calculated based on 2019 net profit. Note that while owner-employees are permitted to include retirement/health benefits, this treatment does not extend to Schedule C filers.
  • General partners: General partners are limited by the amount of their 2019 net earnings from self-employment (reduced by Section 179 expense, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. Note that while owner-employees are permitted to include retirement/health benefits, this treatment does not extend to general partners in a partnership.

No Double Penalty for Reducing Employee’s Hours

Many borrowers were concerned that if it was necessary to reduce an employee’s hours during the covered period it would reduce the borrower’s forgiveness amount by both the wage reduction and the FTE reduction. However, the guidance clarifies that even if there is a decline in an employee’s wages, there will not be a salary/wage forgiveness reduction if the decrease is due to a reduction in the number of hours (although there will be an FTE reduction). The SBA illustrates this concept with the following example:

An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0), and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction, and the borrower is not required to conduct a salary/wage reduction calculation for that employee.

Employee Departure Relief

A borrower’s loan forgiveness amount is generally reduced where there is a reduction in FTE during the covered period as compared to an elected base period (though borrowers may remedy this reduction in certain circumstances). There was much concern that this was an unjust result if an employee was terminated for cause. The new guidance confirms the FTE reduction exception referenced in the application that provides relief in the following circumstances:

  • Termination for cause
  • Voluntary resignation
  • Voluntary reduction in hours

Costs Paid and Incurred

The new guidance permits a borrower to include more than eight weeks of eligible expenses. This is due to a favorable interpretation of the costs paid and incurred language found in the statute. For eligible payroll and non-payroll expenses, the amounts paid during the covered period are eligible for forgiveness as well as any amount incurred, provided the payment is made by the next regular billing date (e.g., the next payroll in the case of compensation). The guidance provides the following examples:

A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period) because it was incurred during the covered period and paid on the next regular billing date.

A borrower has a biweekly payroll schedule (every other week). The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on Aug. 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after Aug. 1.

While this may seem to open the door to prepayment of expenses, caution should be exercised since the SBA may view prepayment of expense as a deposit instead of a forgivable expense.

Unemployment Office Notification

Employees that a borrower offers to rehire are generally exempt from the PPP loan forgiveness reduction calculation. But the new guidance adds a new requirement that the borrower notify the state unemployment insurance office. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in FTE headcount that is attributable to an individual employee if it meets the following criteria:

  • The borrower made a good-faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period.
  • The offer was for 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.
  • The offer was rejected by such employee.
  • The borrower has maintained records documenting the offer and its rejection.
  • 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 of the offer.

The SBA’s website will provide further information on how borrowers will report rejected rehire offers to state unemployment insurance offices.

Loan Review Procedures

In addition to the forgiveness guidance, the SBA also issued an interim final rule on the loan review procedures and borrower-lender responsibilities. The guidance primarily discusses concepts that have been stated or implied by previous guidance, including informal guidance such as FAQs, the loan application, etc. A few of the more significant reminders are as follows:

  • The borrower has the responsibility of providing an accurate forgiveness amount; the lender may rely on the borrower’s documentation and will not perform a detailed review.
  • The SBA may review the loan at any time in their discretion.
  • The borrower must maintain documentation for six years.

While the new guidance improves our understanding of the forgiveness amount determination, there are still many questions that we hope will be addressed. We will provide updates as more information becomes available.

KSM Can Help

KSM is here to answer your questions, assist with the calculation of eligible expenses for loan forgiveness, and help prepare the necessary documentation to support your loan forgiveness application. Please reach out to your KSM advisor for help or complete this form.

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