Around or after 10:00 pm on the evening of Friday, May 22, 2020, the Small Business Administration (“SBA”) and the Treasury Department issued an Interim Final Rule on PPP Loan Forgiveness (the “Forgiveness IFR”). This Rule confirmed much of the guidance previously issued by the SBA in its forgiveness Application, SBA Form 3508, but it added additional substance for PPP Loan borrowers and lenders. The following is a summary of the Forgiveness IFR.
THE BASICS OF FORGIVENESS
The Forgiveness IFR reiterates that loan forgiveness applies to:
- Payroll costs, which include: compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; 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; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation;
- Nonpayroll costs, including:
a. Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
b. Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
c. Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
THE FORGIVENESS REVIEW PROCESS AND DEADLINES
The process begins at the end of the eight-week (56-day) Forgiveness Covered Period, with the borrower filing SBA Form 3508 (although the lender may require the use of its own equivalent forgiveness application form) (the “forgiveness Application”). The timeframe for review has not changed – (i) the lender has 60 days after receipt of the forgiveness Application to determine the amount of forgiveness and to apply to the SBA for payment, and (ii) the SBA then has 90 days after receipt of the lender’s determination and submission of the application for payment to review, determine final forgiveness, and submit payment of the finally determined forgiveness amount to the lender.
The Forgiveness IFR does not specify a deadline for when the borrower must submit the forgiveness Application. In fact, it actually contemplates the possibility that a borrower could delay filing its forgiveness Application for an amount of time that could result in payments under the PPP loan becoming due prior to the completion of the 150-day Application review process described above. In this case, if loan payments were to come due and be paid, but then subsequently the SBA actually pays the same amounts as forgiveness payments, then the lender would be obligated to remit to the SBA any portion of the funds paid by the SBA that exceed the loan principal and interest due at the time that the lender received funds from the SBA “(because the borrower [had] made scheduled payments on the loan after the initial deferment period).”
MORE SPECIFICS
- Payroll Costs: The Forgiveness IFR reiterates the provisions of the forgiveness Application by allowing a borrower with “a bi-weekly (or more frequent) payroll cycle” to calculate its payroll costs using either the eight-week (56-day) Forgiveness Covered Period or an “Alternative Payroll Covered Period” (see Trenam’s “PPP Loan Forgiveness Application Release” alert dated May 18, 2020), but with a number of confirmations and clarifications, including:
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- Confirmation that payroll costs can be eligible for forgiveness if “paid or incurred [emphasis added] during the eight consecutive week (56 days) covered period” or if “incurred [emphasis added] during the Alternative Payroll Covered Period, . . . as long as they are paid [emphasis added] on or before the first regular payroll date occurring after “the end of [applicable covered period].”
- Planning Opportunity: The italicized distinction noted above may actually allow a borrower to include up to ten weeks of payroll costs in calculating forgiveness using the regular eight-week Forgiveness Covered Period. Example: PPP loan is received on April 23, and regular payroll payment to borrower’s employees is made on April 24 (covering the two-week period ended on April 22). This full payment was “paid” during the Forgiveness Covered Period (which began on April 23) and so would be eligible for forgiveness, even though the entire pay period ended (and thus none of the payroll was “incurred”) during the Forgiveness Covered Period. Thus, borrowers would be advised to calculate payroll costs using both the Forgiveness Covered Period and the Alternative Payroll Covered Period before deciding which approach to take. Remember, once chosen, the period must be used for all purposes (including for calculation of FTEs and the like). On the other hand, if payroll during the Alternative Payroll Covered Period is sufficient to allow for full forgiveness, then using the Alternative Payroll Covered Period might be administratively simpler.
- Confirmation that payroll costs can be eligible for forgiveness if “paid or incurred [emphasis added] during the eight consecutive week (56 days) covered period” or if “incurred [emphasis added] during the Alternative Payroll Covered Period, . . . as long as they are paid [emphasis added] on or before the first regular payroll date occurring after “the end of [applicable covered period].”
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- Confirmation that, whether the borrower uses the Forgiveness Covered Period or the Alternative Payroll Covered Period, if the final payroll period ends after the close of the chosen eight-week period, then the portion of that payroll that was “incurred” prior to the end of the applicable eight-week period is eligible for forgiveness. Payroll is deemed to be “incurred” on the date that the employee worked and earned it. Example: The eight-week covered period ends on June 23, but the last bi-weekly pay period does not end until June 26 (and is payable on June 29). As long as the payroll is paid to the employees on the scheduled date (i.e., on June 29), then the portion of that payroll that is “incurred” through June 23 can be included in the forgiveness amount.
- Clarification that, for employees who are furloughed and continue to be paid, the payroll is deemed to be “incurred” based upon “the schedule established by the borrower (typically, each day that the employee would have performed work).” As with all payroll costs, the amount subject to forgiveness with respect to any particular employee is limited to $100,000 annually (i.e., no more than $15,385 during the eight-week period).
- Clarification 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.”
- Clarification that compensation for owner-employees’ and self-employed individuals’ payroll compensation “can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses” (the last part being a reference to the SBA’s affiliation rules). The clarification goes on to say that:
- an owner-employee is capped by “the amount of 2019 cash compensation and employer retirement and health care contributions made on their behalf;”
- a self-employed person (who files Schedule C to Form 1040) is capped by “the amount of their owner compensation replacement, calculated based on 2019 net profit”;
- a general partner is capped at “the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and [certain] depletion from oil and gas properties)”; and
- Neither self-employed individuals nor general partners may seek forgiveness for any retirement plan costs, because “such expenses are paid out of their net self-employment income.”
Unfortunately, the Forgiveness IFR does not provide a definition of “owner-employee.”
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- No change or clarification was made to the language of the forgiveness Application with respect to which payments for retirement benefits and health insurance costs may be included in the payroll costs eligible for forgiveness. Likewise, neither document includes a provision indicating that these costs must be “incurred” during the applicable eight-week period.
- Planning Opportunity: The total payroll costs paid during the applicable eight-week period that are eligible for forgiveness are limited only by the PPP loan amount, and it appears that the payroll costs could be increased by a prepayment of retirement plan and health insurance expenses. For example, if the 2019 contribution to the retirement plan has not yet been paid in full, a borrower who pays this outstanding sum during the applicable eight-week covered period can include that payment in payroll costs. Likewise, a prepayment of the borrower’s 2020 plan contribution also appears to count, as would a prepayment of employer-paid health insurance premiums. However, we caution that this opportunity should be tempered by the old adage “pigs get fat, but hogs get slaughtered.”
- No change or clarification was made to the language of the forgiveness Application with respect to which payments for retirement benefits and health insurance costs may be included in the payroll costs eligible for forgiveness. Likewise, neither document includes a provision indicating that these costs must be “incurred” during the applicable eight-week period.
- Nonpayroll Costs: The Forgiveness IFR contains a couple of confirmations concerning nonpayroll costs, including:
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- Confirmation that nonpayroll costs are eligible for forgiveness if they are “(i) paid [emphasis added] during the covered period [reminder: only the eight-week Forgiveness Covered Period applies to nonpayroll costs]; or (ii) incurred [emphasis added] during the covered period and paid [emphasis added] on or before the next regular billing date, even if the billing date is after the covered period.” An example is included, in which the borrower received its PPP loan on June 1 (so its covered period ends on July 26), and it pays its May and June electric bills during the covered [period and its July electric bill on August 10, the date that the bill is due. The borrower may include in its forgiveness amount the full amounts of the May and June bills (because they were paid during the covered period) and the portion of the July bill through July 26 (because it was incurred during the covered period and paid on the due date).
- Planning Recommendation: A borrower who was in arrears on its interest payments on its loans secured by a pledge of real estate or personal property or on rent payments can bring those expenses current and include them as forgivable payments, even though the payments relate to periods before the PPP loan was obtained.
- Confirmation that prepayment of loan interest is not eligible for forgiveness, because the CARES Act specifically excludes prepayments.
- Confirmation that nonpayroll costs are eligible for forgiveness if they are “(i) paid [emphasis added] during the covered period [reminder: only the eight-week Forgiveness Covered Period applies to nonpayroll costs]; or (ii) incurred [emphasis added] during the covered period and paid [emphasis added] on or before the next regular billing date, even if the billing date is after the covered period.” An example is included, in which the borrower received its PPP loan on June 1 (so its covered period ends on July 26), and it pays its May and June electric bills during the covered [period and its July electric bill on August 10, the date that the bill is due. The borrower may include in its forgiveness amount the full amounts of the May and June bills (because they were paid during the covered period) and the portion of the July bill through July 26 (because it was incurred during the covered period and paid on the due date).
- Reductions in Loan Forgiveness Amount: The Forgiveness IFR contains a number of additions and confirmations addressing reductions in loan forgiveness amounts, including:
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- Addition of a regulatory exemption providing that if: (a) a borrower laid off or reduced the hours of an employee, and (b) during the Forgiveness Covered Period or the Alternative Payroll Covered Period (as applicable), the borrower made a good faith written offer to rehire the employee or restore the hours at the same salary or wages and the same number of hours worked by the employee during the last pay period prior to separation or reduction, and (c) the employee or former employee rejects the offer, then the employer may exclude that person from its calculations of FTEs, but only if: (i) the borrower maintains records of the lay-off or reduction, the good faith written offer and the employee’s rejection, and (ii) the borrower informs the State unemployment insurance office of the employee’s rejection of the offer within 30 days after the employee rejects the offer.
- Planning Recommendation: Be sure to document each lay-off or reduction in hours (in our view, this should be done by way of a written notice), keep a copy of each written offer (and have evidence that the offer was delivered to and received by the employee), and require that the employee reject the offer in a signed writing or other method (e.g., e-mail or text message).
- Addition of a regulatory exemption providing that if: (a) a borrower laid off or reduced the hours of an employee, and (b) during the Forgiveness Covered Period or the Alternative Payroll Covered Period (as applicable), the borrower made a good faith written offer to rehire the employee or restore the hours at the same salary or wages and the same number of hours worked by the employee during the last pay period prior to separation or reduction, and (c) the employee or former employee rejects the offer, then the employer may exclude that person from its calculations of FTEs, but only if: (i) the borrower maintains records of the lay-off or reduction, the good faith written offer and the employee’s rejection, and (ii) the borrower informs the State unemployment insurance office of the employee’s rejection of the offer within 30 days after the employee rejects the offer.
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- Confirmation that, as stated in the forgiveness Application, a borrower also may exclude from the FTE reduction any employee who: (a) was fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours, but only if the position was not filled by a new employee. Of course, the borrower should appropriately document the incident to support the exclusion.
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- Confirmation that the reduction in FTEs during the Forgiveness Covered Period or the Alternative Payroll Covered Period (as applicable) compared to the number of FTEs during the selected period of either February 15 to June 30, 2019 or January 1 to February 29, 2020, subject to a special period for seasonal employers (the “chosen reference period”), is what results in a reduction in the forgiveness amount based upon the FTE reduction. An example is given in which the FTEs during the chosen reference period is 10.0, and the FTEs are reduced to 8.0 during the Forgiveness Covered Period or the Alternative Payroll Covered Period (as applicable), and so the reduction is 20%, and an equal reduction in the forgiveness amount is applied (subject to the elimination of this reduction if the FTE count is restored by no later than June 30, 2020).
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- Confirmation that an FTE is determined in one of two alternative ways. First, the average number of hours paid each week by the borrower to each employee is divided by 40, with an employee working an average of 40 hours or more per week being counted as 1.0 FTE, and those under 40 hours being a percentage of 40 hours (e.g., average 30 hours per week ÷ 40 = .75 FTE). Second, for administrative convenience, a borrower can choose to calculate the FTE count as 0.5 FTE each employee who works less than an average of 40 hours per week. This alternative is useful for a small borrower who does not maintain records of actual hours worked each week. Only one method can be elected, and it must be used consistently for the chosen reference period and the Forgiveness Covered Period or the Alternative Payroll Covered Period (as applicable).
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- Confirmation that the borrower must reduce the total amount of forgiveness, with respect to any employee hired in 2020 or any employee who was not paid more than the annualized equivalent of salary or wages of $100,000 during any pay period in 2019, if the employee’s salary or wages was reduced by more than 25% during the Forgiveness Covered Period or the Alternative Payroll Covered Period (as applicable), as compared to the reference period of January 1 to March 31, 2020. The reduction is only on the amount in excess of 25%, and the calculation must be done for each employee on an individual basis. An example is given, in which an employee’s weekly salary during the reference period was $1,000, and this was reduced to $700 per week during the applicable covered period, so the reduction exceeds 25%. The first $250 of the reduction ($1,000 x 25%) is excluded from the calculation. The forgiveness amount thus would be reduced by $50 per week for the eight-week covered period, for a total of $400.
- Planning Opportunity: Although the language in the forgiveness IFR is somewhat difficult to follow, in conducting this analysis, a borrower can exclude any employee who, during any single pay period in 2019, was paid salary or wages in excess of $100,000 annualized, which works out to $4,167 for any one of 24 pay periods (i.e., 15th and 30th of each month), $3,847 for any one of 26 pay periods (i.e., bi-weekly) or $1,924 for any one of 52 pay periods (i.e., weekly). Thus, it may be possible to eliminate a significant number of employees from this calculation, even if, over the entire 2019 year, the employee earned less than $100,000 in the aggregate.
- Confirmation that the borrower must reduce the total amount of forgiveness, with respect to any employee hired in 2020 or any employee who was not paid more than the annualized equivalent of salary or wages of $100,000 during any pay period in 2019, if the employee’s salary or wages was reduced by more than 25% during the Forgiveness Covered Period or the Alternative Payroll Covered Period (as applicable), as compared to the reference period of January 1 to March 31, 2020. The reduction is only on the amount in excess of 25%, and the calculation must be done for each employee on an individual basis. An example is given, in which an employee’s weekly salary during the reference period was $1,000, and this was reduced to $700 per week during the applicable covered period, so the reduction exceeds 25%. The first $250 of the reduction ($1,000 x 25%) is excluded from the calculation. The forgiveness amount thus would be reduced by $50 per week for the eight-week covered period, for a total of $400.
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- Confirmation that, in order to avoid double penalizing a borrower, the salary/wage reduction is calculated before the FTE reduction. In this way, “the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.” This approach is evident in the way that the reductions are calculated on the forgiveness Application. An example is given, in which a full-time employee’s hours (FTE of 1.0) are reduced to 20 hours per week (an FTE of 0.5), while the employee’s hourly wage remains the same. In this situation, the reduction is attributable solely to the FTE reduction, so no wage reduction would need to be taken. By calculating the wage reduction first, there is no reduction (the hourly wage was the same), so the only reduction is for the FTE change.
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- Confirmation that a borrower who reduced an employee’s salary/wage or laid off or reduced the FTE count between February 15 and April 26, 2020 (the “safe harbor period”), can avoid a reduction in the loan forgiveness amount by restoring the salary/wage and rehiring or increasing the hours of all FTEs to the levels of the safe harbor period no later than June 30, 2020. Although this was clear from the CARES Act, the Forgiveness IFR adds clarity to how this works. It also clarifies that this safe harbor “does not change or affect the requirement that at least 75 percent of the loan forgiveness amount must be attributable to payroll costs.” See the discussion below for more on this.
- No Change in 75% Requirement: Except for the statement noted in the preceding paragraph, the Forgiveness IFR does not address the SBA’s and Treasury’s requirement that at least 75% of the forgiveness amount must be used for payroll costs, and that no more than 25% of the forgiveness amount may be used for nonpayroll costs. As a result, no changes can be expected in this rule, unless Congress clarifies the law or the courts overturn the rule. Thus, as described in the forgiveness Application, the total amount of forgiveness will be limited to an amount equal to payroll costs ÷ .75. As a rule of thumb, many commentators are suggesting that, to avoid an issue in this regard, borrowers should be sure that aggregate nonpayroll costs do not exceed one-third of payroll costs.
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- Planning Opportunity: If nonpayroll costs are less than one-third of payroll costs, then search for ways to increase the nonpayroll costs, as this will enable the borrower to maximize the forgiven amount.
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- While no change was made in this regard, it is important to note that the forgiveness Application made clear that the 75% limitation is applied after accounting for the reductions in forgiveness resulting from a reduction in salary/wages or a reduction in FTEs (discussed above). In other words, the forgiveness amount is limited to the lesser of:
- Aggregate payroll and nonpayroll costs reduced by a reduction in wages, a reduction in FTEs or both (the “Modified Total”);
- Aggregate PPP loan amount; or
- Aggregate eligible payroll costs ÷ .75.
- While no change was made in this regard, it is important to note that the forgiveness Application made clear that the 75% limitation is applied after accounting for the reductions in forgiveness resulting from a reduction in salary/wages or a reduction in FTEs (discussed above). In other words, the forgiveness amount is limited to the lesser of:
- Forgiveness Documentation: The Forgiveness IFR does not add anything with respect to the documentation requirements. Instead, it states as follows: “The loan forgiveness application form details the documentation requirements; specifically, documentation each borrower must submit with its Loan Forgiveness Application (SBA Form 3508 or a lender equivalent), documentation each borrower is required to maintain and make available upon request, and documentation each borrower may voluntarily submit with its loan forgiveness application.” The documentation requirements are on page 10 of the forgiveness Application.
Additional guidance was provided in an Interim Final Rule, entitled “SBA Loan Review Procedures and Related Borrower and Lender Responsibilities,” which was issued simultaneously with the Forgiveness IFR. This material is described in a separate report found here.
If you have any questions regarding how to determine and calculate the forgiveness amount on your PPP loan, please feel free to contact any member of Trenam Law’s COVID-19 Relief Programs Team.
