Hot Off the Grill: SBA Kicks-Off MDW with Further Loan Forgiveness Guidance
May 24, 2020
On May 15, 2020, the SBA released the PPP Loan Forgiveness Application. While the application clarified an amount of questions surrounding the mechanics of the calculation, it created others. In what is seemingly becoming a habit for Friday evenings, the SBA started Memorial Day Weekend with a bang, issuing their 14th Interim Final Rule (“IFR 14”) on May 22, 2020.
IFR 14 “supplements previous regulations and guidance on the discrete issues related to loan forgiveness.” Discrete issues, indeed. There is some new guidance in IFR 14, but much of it was expected and mimics previous guidance issued. Below is a summary of the main provisions of IFR 14 that will be important as borrowers as they begin to consider the loan forgiveness process.
Loan Forgiveness Process
- Borrowers must complete and submit a Loan Forgiveness Application (SBA Form 3508 or lender equivalent).
- Lenders have 60 days from receipt of the application to issue a decision to the SBA. Once submitted, the SBA has 90 days to review the application and remit the amounts requested for forgiveness to the lender. This could potentially lead to a 150-day lag time between when a borrower submits their application and when the final decision is made. EIDL grant amounts will be deducted from the final forgiveness amount issued to the lender. The lender is responsible for communicating the final decision to borrowers.
- If a borrower is required to make scheduled payments prior to the final forgiveness decision, the lender will be required to remit excess amounts that are forgiven, including accrued interest, to the borrower. While this rule is helpful, it highlights the liquidity crunch that can be created for borrowers who are obligated to repay their loans until they receive a decision on their loan forgiveness applications. It also suggests the SBA should allow a period of time where borrowers in good faith can stop repayments on their loans by the amount of their anticipated loan forgiveness. This period should start when a borrower submits its application for forgiveness and ends when it receives a decision from its lender.
- Additional information to be provided for loans in excess of $2M or loans that are selected for review by the SBA (see IFR #15).
Payroll Costs Eligible for Loan Forgiveness
- Reiterates that payroll costs paid or incurred during the 56-day covered period are eligible for forgiveness. Payroll costs incurred (defined as the day an employee’s pay is earned) before the end of the period that are paid on or before the next regular pay date are eligible. If a borrower in the ordinary course would not pay for such incurred amounts until its second payroll cycle after the covered period, then it would be advisable to make a catch-up payment at the end of the covered period.
- Reaffirms the opportunity to use an alternative payroll covered period, but only for borrowers who have a bi-weekly, or more frequent, payroll cycle.
- Furloughed employees – payroll costs paid to furloughed employees are deemed to be includable as eligible for forgiveness. Curiously, the IFR did not define the meaning of a “furloughed” employee or address how to count a furloughed employee for purposes of the FTE count
- Bonuses/hazard pay – IFR 14 indicates that if an employee’s compensation does not exceed $100,000 on an annualized basis, then the employee’s hazard pay and bonuses are eligible for loan forgiveness because they are a similar form of compensation. No other limits have been imposed on the payment of bonuses, so the bonus payment apparently can exceed 8 weeks’ worth of the annual bonus amount and still be eligible for forgiveness.
- Caps on owner compensation, defined by corporate structure – loan forgiveness, in general, is limited to the lesser of 8/52 of 2019 compensation, or $15,385, in total, across all businesses. This is a new limitation for owner-employees and self-employed individuals that operate multiple Schedule C businesses, that earn self-employment income from two or more partnerships, or that operate a Schedule C business and earn self-employment income from a partnership. It not clear if this new limitation also applies to an employee that receives a PPP-funded salary and earns self-employment income or operates a Schedule C business. Business-type considerations are as follows:
- Owner-employees are capped by the amount of their 2019 employee cash compensation and employer-paid retirement and health care contributions made on their behalf.
- Schedule C filers are capped by the amount of their owner compensation replacement (defined in IFR 3), calculated based on 2019 net profit. No additional forgiveness is provided for retirement or health insurance contributions for Schedule C filers.
- General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 and unreimbursed partnership expenses), multiplied by .9235. No additional forgiveness is provided for retirement or health insurance contributions for partners.
Nonpayroll Costs Eligible for Loan Forgiveness
- Nonpayroll costs are eligible for forgiveness if they are either (i) paid during the covered period or (ii) incurred during the covered period and paid on or before the next regular billing date.
- The included example indicates that borrowers can receive forgiveness for more than two months’ worth of nonpayroll costs, and it suggests that payments for amounts that accrued before the covered period are permitted, but that the payments for amounts that accrue after the covered period (i.e., prepayments) are not permitted. The SBA believes its simplified approach to the calculation of forgivable costs will create convenience to borrowers, and that the 25% cap on nonpayroll costs will avoid excessive inclusion.
- Nothing in the CARES Act limits forgiveness for the payment of items that accrue before the covered period and are paid during the covered period, and the SBA is correct to interpret the statute in this manner for nonpayroll costs; however, there is no analytical construct to differentiate between payroll costs and nonpayroll costs when it comes to making such payments, and the SBA’s reliance on its own 25% rule to justify following the statute seems odd.
- Advance payments of interest on mortgage obligations are expressly forbidden, however, there is no discussion on whether prepayments on rent or utilities are permissible.
Reductions to Loan Forgiveness Amount
Reduction in Headcount:
- IFR 14 formalizes and tightens the SBA’s prior safe harbor (FAQ #40) that eliminates reductions in forgiveness relating to borrowers who offer to rehire laid-off employees, and extends it to employees whose hours were reduced where the borrower offers to restore the employee’s wages at the same salary or wage.
- IFR 14 outlines the following documentation requirements in order to qualify for the above exemption:
- Borrower makes a good faith, written offer to rehire (or restore hours) during the covered period;
- Offer was for the same salary or wages and the same number of hours earned in the last pay period prior to the separation or reduction in hours;
- Offer was rejected by such employee;
- Borrower maintains records documenting the offer and its rejection; AND
- The borrower informs the applicable state unemployment insurance office of the rejected offer of reemployment within 30 days of the rejection (IFR 14 provides that further information on how to do this will be provided by the SBA).
- This puts employers in an extremely awkward position vis-à-vis their employees because they are being enlisted to enforce the states’ unemployment laws and are required to report their employees to the government for potential fraud, even in the absence of information that the employees intend to commit fraud (e.g., an employee that chooses to work somewhere else would not seek unemployment benefits). There is no requirement that the borrower notify employees that they intend to report them to the state unemployment office.
- Provides that borrowers will not be penalized in loan forgiveness if an employee is fired for cause, voluntarily resigns or voluntarily requests a schedule reduction.
- Formalizes the definition of full-time equivalent (“FTE”) as an employee who works 40 hours or more, on average, each week. Hours of employees who work less than 40 hours are calculated as proportions of a single FTE.
- The calculation of an FTE in IFR 14 does not require rounding to the nearest tenth, which is inconsistent with the PPP loan forgiveness application. We think this is an oversight and recommend borrowers follow the approach in the published application. An example provides that an employee who works 30 hours would qualify as .75 of an FTE, whereas the loan forgiveness application would result in a .8 for this individual. Provided that borrowers calculate this consistently across measurement periods, this variance should not create material differences in the calculation.
- Formalizes the ability to use an alternative methodology to treat all individuals working less than 40 hours as a .5 FTE. Consistent application is required across all measurement periods.
Reduction in Salary or Wages:
- Clarifies that this reduction should be considered for each new employee in 2020 and existing employees who were not paid more than the annualized equivalent of $100,000 during any pay period in 2019.
- The discussion and example conflicts with the language of the loan forgiveness application, because it reverts to a weekly salary amount as opposed to the annualized salary or wage rate calculation in the loan forgiveness application. We think this is an oversight and recommend borrowers follow the approach in the application.
- Clarifies that borrowers should consider salary/wage reductions that apply only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. This will “ensure borrowers are not doubly penalized.”
Restoration to Headcount or Salaries/Wages:
- Indicates that if a borrower eliminates any reductions in headcount or salaries/wages by June 30, 2020, or earlier, then it can calculate forgiveness without regard to any of the previously-calculated reductions.
- IFR 14 is not clear whether the elimination of such reductions must be continued through any specific date, but the loan forgiveness application requests that supporting documentation show that such reductions were eliminated as of June 30, 2020. We hope there is further clarification regarding this issue in the coming weeks, as it will be widely discussed.
Undoubtedly, IFR 14 answered some of the looming questions after the release of the PPP Loan Forgiveness Application. The SBA should be commended for making the process more ‘forgiving’ to borrowers, but there are still many important questions that need to be addressed. For that, we may just have to wait until next Friday evening.
SBA Financial Assistance Services