Small Business Administration (SBA) Issues Additional Paycheck Protection Program (PPP) Loan Forgiveness Guidance, Supplementing Loan Forgiveness Application
Late on Friday, May 22, 2020, the U.S. Small Business Administration (SBA), in consultation with the U.S. Treasury Department, released two new interim final rules providing further guidance on loan forgiveness-related issues and process considerations under the Paycheck Protection Program (PPP). This latest guidance compliments and supplements the PPP loan forgiveness application form (the Application) released by SBA on May 15, 2020, summarized in an earlier client update.
Overall, SBA’s latest interim final rules (IFRs) largely memorialize the guidance and instructions already included in the Application itself. However, SBA did address several open substantive issues and ambiguities that PPP borrowers had raised questions about and provided more information about the processes and procedures borrowers and lenders will need to follow throughout the loan forgiveness application process.
In the first of the two IFRs (the Loan Forgiveness IFR), SBA formalized much of the guidance and instruction included in the Application. Importantly, the Loan Forgiveness IFR does not change the timeframe for forgiveness (still eight weeks) or the requirement that at least 75% of a borrower’s PPP loan forgiveness be attributable to “payroll costs.” However, with bipartisan support for more borrower flexibility gaining momentum in both the U.S. Senate and House of Representatives, it is possible that these “rules of the road” may yet change. Separately, the Loan Forgiveness IFR does not provide borrowers with any additional guidance relevant to assessing their “need” certifications for participation in the PPP.
Among the notable new or clarifying guidance in the Loan Forgiveness IFR (that is, guidance that had not already been clearly communicated through release of the Application itself) is the following:
- Confirms that forgivable payroll costs may cover/include employees who are being paid during the forgiveness period, even though they are furloughed and/or not actually working or performing their typical day-to-day responsibilities.
- Reinforces the “paid or incurred” eligibility of payroll costs relative to the borrower’s forgiveness period, so that forgivable payroll costs may evidently include amounts paid during the forgiveness period even if those amounts relate to work performed prior to the forgiveness period. It is unclear how far back in arrears such forgiveness may be permitted.
- Confirms that hazard pay and bonuses may be included in forgivable payroll costs (subject to the $100,000 annualized cap on forgivable cash compensation).
- States that owner-employees’, general partners’ and self-employed individuals’ forgivable payroll costs are capped at the lesser of (i) 8/52 of their 2019 compensation (i.e., approximately 15.38% of their 2019 compensation) or (ii) $15,385 in total across all businesses. Further provides that no additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners.
- Reinforces the “paid or incurred” eligibility of forgivable non-payroll costs (rent, mortgage interest and utilities) relative to the forgiveness period. An example scenario included in the Loan Forgiveness IFR specifically states that a borrower whose forgiveness period begins on June 1 could obtain forgiveness for a May utility bill so long as the May bill was paid during the forgiveness period. Again, it is unclear how far back in arrears such forgiveness may be permitted.
- Confirms that advanced payments of mortgage interest are not eligible for forgiveness due to the clear prohibition on mortgage prepayments under the CARES Act. However, advance payments of rent and utilities are conspicuously not addressed by the Loan Forgiveness IFR, leaving open the possibility that these amounts may be prepaid and still qualify for forgiveness.
- Expands the “rehire offer” full-time equivalent (FTE) employee “cure” concept for previously laid-off employees to also apply to offers to restore working hours for those employees who, while not laid-off completely, had their paid hours reduced. Adds a new requirement that borrowers must report employees who decline these offers to their relevant state unemployment agencies within 30 days of an employee’s rejection of such an offer.
- Provides that FTE calculations should be based on average hours paid for work during relevant calculation periods.
- Confirms that borrowers will not be “doubly penalized” for reductions in hours worked that result in an overall decrease in an employee’s compensation: “To ensure that borrowers are not doubly penalized, 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.”
- Restates and reinforces extensive documentation provision and retention requirements for loan forgiveness included in the Application. Among other things, borrowers must retain their complete PPP loan files for six years following full loan forgiveness or repayment and must make these files available to SBA upon request.
In the second IFR (the Process and Procedures IFR), SBA provided PPP borrowers and lenders with additional information about the processes, procedures and timing considerations that will apply throughout the PPP loan forgiveness application process. Among the notable new or clarifying information and guidance include in the Process and Procedures IFR is the following:
- “For a PPP loan of any size, SBA may undertake a review at any time in SBA’s discretion.”
- “[SBA] may review whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application.”
- Specifies that the following may be within the scope of SBA’s review: (i) borrower eligibility; (ii) loan amounts; (iii) use of loan proceeds; and (iv) loan forgiveness amounts.
- Confirms that borrowers will have the ability to respond to SBA questions and/or provide additional information to SBA as part of the review process if SBA determines that the borrower was ineligible for a PPP loan or any portion of the loan forgiveness sought.
- States that there will be a process for PPP borrowers to appeal an adverse eligibility or forgiveness determination by SBA, which process will be described in a future IFR.
- Provides that PPP lenders must perform a “good faith review” of the borrower’s loan forgiveness application, including certain key calculations. However, ultimate responsibility for these calculations remains with the borrower.
- Confirms that lender forgiveness decisions must generally be made within 60 days after the complete forgiveness application is submitted by the borrower.
- However, one of the forgiveness decisions may be a “denial without prejudice,” which essentially means that SBA is still reviewing the borrower’s application for forgiveness. So, SBA effectively has the ability to extend the 60-day period indefinitely if it is still reviewing a PPP loan file or forgiveness application.
- States that if a PPP lender determines that a borrower’s loan is not forgivable, the lender must notify both SBA (providing its rationale for the decision) as well as the borrower. The borrower may then request that SBA review its lender’s adverse determination within 30 days after the lender first notified the borrower of its decision.
- SBA may use the 90-day period between a lender’s loan forgiveness determination and SBA’s payment of the forgiven amount to the lender in order to review a borrower’s loan file to confirm the lender’s decision.
- If SBA initiates a review, SBA will notify the lender. The lender must then notify the borrower that an SBA review is underway.
- If SBA initiates a review, the lender may be required to transmit the borrower’s loan file (including supporting documents and information) to SBA for review.
- Therefore, borrowers should assume that any documents or information they provide to their lender may ultimately be provided to SBA in connection with the forgiveness review process.
In summary, while SBA’s latest IFRs provide some additional guidance and useful information for PPP borrowers and lenders seeking more certainty relating to loan forgiveness concepts and process considerations, we anticipate more guidance (in the form of additional FAQs and IFRs) will be published to further clarify and address key open questions and ambiguities.
In addition, as the complexity of the PPP and related compliance challenges evolve, we encourage PPP borrowers to reach out to their Miller Johnson contacts to learn more about our flat-fee PPP Audit and Compliance Preparedness Program. This program offers clients a strategic solution to identify, gather and organize relevant documents and performance data to ensure their business is best positioned to comply with the ever-changing rules governing the PPP. The program will also involve identifying key legal arguments so that clients are prepared for any potential enforcement action or inquiry. Additional details regarding this program are available here.