Late in the evening over the Memorial Day Holiday weekend, the Small Business Administration (“SBA”) issued two Interim Final Rules addressing loan forgiveness, loan review procedures, and borrower and lender responsibilities under the Paycheck Protection Program (“PPP”), providing formal guidance to go along with its earlier released forgiveness application package.

While much of the rules duplicate what is found in the PPP loan forgiveness application and instructions, there are some significant new items of guidance.

The first of these Interim Final Rules addresses the requirements and process for PPP loan forgiveness. The rule leaves unresolved when a forgiveness application must be filed.  However, the rule confirms that once a complete application is submitted, lenders must issue decisions on loan forgiveness to the SBA within 60 days. The SBA will then, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount, plus any accrued interest, to the lender within 90 days thereafter. The rule is further qualified by the rule’s acknowledgement that some loans may be reviewed by the SBA prior to the lender’s decision on forgiveness in which case these periods also would not apply:[1] 

If SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness.

The borrower will be informed of the SBA’s decision by the lender. If only a portion or none of the loan is forgiven, “any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan.” The two-year maturity date is calculated from the date the loan was made.

Consistent with the previously released forgiveness application, this new Interim Final Rule provides details on payroll costs incurred or paid that are eligible to be considered in the forgiveness calculation. “In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness.” Thus, payments made early in the eight-week period are eligible for forgiveness even if they relate to payroll incurred prior to the start of the eight-week period. Similarly, costs incurred at the end of the 56-day period but not paid until the first payroll issued outside the 56-day period also count as payroll costs. The Interim Final Rule confirms that the eight-week period begins on the date of loan disbursement, although borrowers may elect an “alternative payroll covered period.” 

Further answering payroll questions that have plagued many, the Interim Final Rule newly establishes that payments of salary, wages, or commissions to furloughed employees, bonuses, and hazard pay are eligible payroll costs, subject to the limitation that cash compensation to individual employees does not exceed $100,000 on an annualized basis. The rule further establishes that payroll costs for employees who are not performing work but are still on the borrower’s payroll may be incurred based on a schedule established by the borrower (typically, each day that the employee would have performed work). Payroll costs that were both paid and incurred during the covered period (or alternative payroll covered period) may only be counted once.

The rule also confirms prior SBA guidance that nonpayroll costs are eligible for forgiveness if (i) paid during the covered period, or (ii) incurred during the covered period and paid on or before the next regular billing date. The rule provides the following example:

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.

The Interim Final Rule restates that reductions in loan forgiveness are waived for those employees who received but rejected a good faith, written re-hiring offer during the applicable eight-week period. However, employers must inform the state unemployment office of the employee’s rejected offer of employment within 30 days of such rejection to use the waiver.[2] 

The rule provides further information about the reduction in salary or wage rate provision that can lead to a reduction in the amount of loan forgiven, noting that “[u]nder section 1106(d)(3) of the CARES Act, a reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, unless an exception applies.” While the forgiveness application uses annualized salary for the calculation and comparison in its instructions, the example newly provided in the rule uses a simpler weekly calculation:

A borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period.  The employee continued to work on a full-time basis during the covered period with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the reduction. Borrowers seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).

The rule also clarifies for borrowers that salary/hourly wage reductions will only be taken into account if the reductions are not attributable to a full time equivalent (“FTE”) employee reduction, thus clarifying a significant ambiguity created in the application’s instructions. Now, if an employee that had been working 40 hours per week is reduced to 20 hours per week during the covered period, and the employee’s hourly wage rate itself is not reduced, the reduction in hours is taken into account for FTE purposes but the borrower is not required to also apply the salary/hourly wage reduction despite the 50% loss of wages to such employee.

The second SBA rule issued last Friday governs loan review procedures and responsibilities. As described in Footnote 1 above, the SBA may use its discretion to examine any loan application. However, each lender is required to confirm (1) receipt of the borrower’s application certifications, (2) receipt of documentation to aid in verifying payroll and nonpayroll costs, (3) the borrower’s calculations on the loan forgiveness application (including cash compensation, non-cash compensation, and compensation to owners, as well as nonpayroll costs) by reviewing the documentation submitted with the application, and (4) confirm that nonpayroll costs do not exceed 25% of the loan forgiveness request.

The Interim Final Rule states that lenders are expected to perform a good-faith review in a reasonable amount of time, though the accuracy of the calculations is ultimately the responsibility of the borrower. The rule states that minimal lender review is appropriate where payroll costs are based on a payroll report prepared by a recognized third-party processor, while a more extensive review is necessary for payroll costs not documented with recognized sources.