SBA Publishes Loan Forgiveness Interim Final Rule

By Eric L. Kintner, Brett W. Johnson, Victor J. Roehm III and Jennifer R. Yee

On May 22, the Small Business Administration (SBA) published its long-awaited Interim Final Rule regarding loan forgiveness requirements (IFR) for the Paycheck Protection Program (PPP).  The new IFR confirms several key terms included in the Loan Forgiveness Application (Application) and also provides some additional guidance.  Below is a summary of the forgiveness guidance as set forth in the IFR.

Payroll Costs – Paid and/or Incurred

Consistent with the Application, the IFR clarifies that borrowers can seek forgiveness for payroll costs paid and/or incurred during the eight consecutive weeks following the date of the loan disbursement (Covered Period) or the first day of the first payroll cycle after the date of the loan disbursement (Alternative Payroll Covered Period).  Payroll costs are considered “paid” on the day that paychecks are distributed or the borrower originates an ACH transaction. Payroll costs are considered “incurred” on the day that the employee’s pay is earned (i.e., on the day the employee worked).  

Payroll Costs – No “10-Week” Covered Period

The IFR confirms a special rule for payroll costs incurred during the last pay period of the Covered Period or Alternative Payroll Covered Paid.  These payroll costs incurred during the last pay period are eligible for forgiveness so long as such payroll is paid on or before the next regular payroll date.  The IFR states that “otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period) to be eligible for forgiveness.” 

Accordingly, the IFR seems to confirm that a so-called “10-week” Covered Payroll Period is not possible.  For example, if a borrower’s Covered Period starts on April 20 and on the same day (April 20) the borrower initiates an ACH transaction that would cover wages for the two-week period prior to the Covered Period, the borrower cannot seek forgiveness for the payroll costs incurred during the two-week period prior to April 20 because those costs were not incurred during the last pay period of the Covered Period.

Payroll Costs – Furloughed Employees

The IFR states that borrowers can include payroll costs paid to employees who are not performing work or were furloughed, but who are still on the borrower’s payroll.  In that case, payroll costs are incurred based on the schedule established by the borrower (i.e., each day that the employee would have performed work).

Payroll Costs – Hazard Pay and Bonuses

The IFR states that borrowers also may seek forgiveness for hazard pay and bonuses paid to employees during the eight-week covered period, if an employee’s total compensation does not exceed $100,000 on an annualized basis (i.e., a $15,385 cap) during the applicable Covered Period. The IFR explains that such 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.

Nonpayroll Costs – Paid or Incurred

Consistent with the Application, the IFR states that an eligible nonpayroll cost (i.e., mortgage interest, rent, or utility payments in effect as of February 15, 2020) must be either (i) paid during the Covered Period or (ii) incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

For example, if a borrower has a covered period begins on June 1 and ends on July 26 and 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 IFR notes that this 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 July electricity bill prorated through July 26.

Nonpayroll Costs – No Advance Payments for Covered Mortgage Interest Payments

The IFR clarifies that advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness because the CARES Act’s loan forgiveness provisions regarding mortgage obligations specifically exclude “prepayments.”   It is not clear whether this “no advance” rule also applies to advance payments made during the Covered Period for other nonpayroll costs, like rent or utility payments. 

FTE Reduction and Wage Reductions Not Subject to Double Penalty

The IFR also clarifies that the reduction of the forgiveness amount for salary and wage reductions¹ applies only to the portion of the decline in the employee’s salary and wages that is not attributable to FTE reduction to prevent double penalizing borrowers.  As such, if an employee’s hourly wage was unchanged, but their hours were reduced from 40 hours per week (FTE employee of 1.0) to 20 hours per week (FTE employee of .50), the loan forgiveness amount may be reduced based on the reduction in FTE, but the loan forgiveness amount will not also be reduced because the employee’s total wages decreased solely as a result of their FTE reduction.

Expanded Provisions for Offers of Rehire or Wage Restoration to Employees

Consistent with the Application, the IFR clarifies that when calculating the loan forgiveness amount, a borrower may exclude any reduction in FTE employee headcount that is attributable to an individual employee if: (i) 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; (ii) 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; (iii) the offer was rejected by such employee; and (iv) the borrower has maintained records documenting the offer and its rejection.

However, the IFR added a new requirement that the borrower must inform 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 IFR promises that further information regarding how borrowers will report information concerning rejected rehire offers to state unemployment insurance offices will be provided on SBA’s website.

The IFR also expanded the rehire offer exemption to cover employees who were laid off before February 15, 2020 (the start of the statutory FTE reduction safe harbor period). The IFR rationalizes this expansion by stating that such pre-February 15, 2020 reductions likely represent a relatively small portion of aggregate, given the historically strong labor market conditions before the COVID-19 emergency.

Certain Changes in a Borrower’s FTE Headcount Because of Employee Actions Will Not Reduce Forgiveness Amount

Consistent with the Application, the IFR explains that when an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the Covered Period or the Alternative Payroll Covered Period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty.

Borrowers who avail themselves of this “de minimis” exemption to the FTE employee reduction penalty must maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction, and shall provide such documentation to the SBA upon request.

Documentation and Enforcement

It appears that the SBA and the Department of Justice are going to scrutinize loan forgiveness requests.  In addition, it is possible that State attorney generals may also seek to review such requests made by businesses subject to their jurisdiction pursuant to a consumer fraud or other state legal remedy theory.  As such, companies should consider internally preparing all documentation and justifications that support assertions made in the forgiveness request.  As companies are in the process of spending the PPP loan monies, they should consider maintaining such documentation contemporaneously with the actions.  Further, consider an evaluation of any forgiveness request by a board of directors or organizational managers. 

Several agencies have sent inquiries to companies about the utilization of PPP funding. As scrutiny continues, companies should consider developing a response plan to be initiated upon such governmental request.  Such a plan would include a centralized point of contact to field such requests and potentially the initiation of an internal review, protected by attorney client privilege, as to the scope of the request and response.