Under the Paycheck Protection Program (PPP), borrowers can seek loan forgiveness of the full principal amount of loans as early as eight weeks after disbursement of the loan proceeds. On May 22, 2020, the U.S. Small Business Administration (SBA) issued its Interim Final Rule regarding the loan forgiveness application process in advance of anticipated loan forgiveness applications from PPP borrowers. Here are the important takeaways from the rule.
Borrowers Must Apply for Loan Forgiveness
Excepting loans separately reviewed by the SBA, to qualify for forgiveness, a borrower must complete and submit to its lender a Loan Forgiveness Application using SBA Form 3508 or the lender’s equivalent. A lender has 60 days thereafter to review the application and issue a decision to the SBA on loan forgiveness. If the lender determines that the borrower is entitled to forgiveness of any portion of the loan, the lender must request payment from the SBA when it issues its decision. The SBA will then remit payment of the amount forgiven, plus interest accrued through the date of payment, no later than 90 days after receipt of the lender’s decision. During its review of the lender’s decision, SBA may determine that the borrower was ineligible for a loan and the loan will not be eligible for forgiveness.
The lender must inform the borrower of the amount of loan forgiveness and any amount not forgiven must be repaid by the borrower on or before the date when the two-year loan matures. If the amount remitted by the SBA to the lender is greater than the remaining principal balance on the loan, the lender must remit to the borrower the excess amount, including accrued interest.
Costs Eligible for Loan Forgiveness
PPP borrowers are eligible to have loans forgiven in an amount equal to the total of costs incurred for payroll costs, plus non-payroll costs for interest payments on mortgages, payments due under lease agreements, and certain utility payments for service that began prior to February 15, 2020. When calculating the eligible amounts spent by a borrower for payroll costs, borrowers can seek forgiveness of payroll costs paid or incurred during the eight consecutive week period beginning on either the date the borrower’s PPP loan proceeds were disbursed (the covered period) or, alternatively, borrowers can calculate payroll costs incurred beginning on the first day of the first payroll cycle after the disbursement date (the alternative payroll covered period). Payroll costs incurred during the borrower’s last pay period of the covered period or alternative payroll covered period are eligible for forgiveness if paid on or before the next payroll date.
Similarly, non-payroll costs are eligible for forgiveness if the costs were paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is outside the covered period. The alternative payroll covered period is not applicable when calculating non-payroll costs.
Avoiding Reductions in Loan Forgiveness
If a borrower reduces its number of full-time equivalent employees (meaning employees who work 40 hours or more, on average, each week) or employee salaries and wages during the covered period, then the borrower’s loan forgiveness amount may be reduced by the same percentage as the percentage reduction in full time equivalent employees. This reduction is limited, however, if by June 30, 2020 the borrower eliminates reductions in the number of full-time equivalent employees or employee salaries or wages that were reduced between February 15, 2020 and April 26, 2020.
Additionally, the rule also implements a new regulatory exemption that allows a borrower to avoid a reduction in a borrower’s loan forgiveness amount when the borrower has offered to rehire an employee or restore an employee’s hours, but the employee has rejected the offer. To be eligible for this exemption, the borrower must have made a good faith, written offer to rehire the employee for the same salary or wages and same number of hours as earned by the employee in the last pay period prior to separation or reduction in hours and the employee must have rejected the offer. The borrower must also maintain records documenting the offer and rejection and inform the applicable state unemployment insurance office of the employee’s rejection of the offer of reemployment within 30 days of the employee’s rejection of the offer.
The Importance of Full-Time Equivalent Employees
For a borrower to demonstrate that it has maintained its full-time equivalent employees, the borrower must select a “reference period.” The reference period can be February 15, 2019 through June 30, 2019; January 1, 2020 through February 29,2020; or, in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019. If the average number of full-time equivalent employees during the covered period is less than the average during the reference period, then the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in full-time equivalent employees (reduction quotient).
When calculating full-time equivalent employees, borrowers must divide the average number of hours worked by each employee by 40. However, an employee that worked more than 40 hours per week on average cannot count as more than one full-time equivalent employee.
For employees that worked less than 40 hours per week on average, borrowers may calculate full-time equivalency in two ways. On one hand, a borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. So, an employee who was paid for 30 hours per week on average during the covered period would be considered three quarters (0.75) of a full-time equivalent employee. Alternatively, borrowers may elect to use a full-time equivalency of one-half (0.50) for all part-time employees. Whichever method is chosen, it must be applied consistently across all part-time employees, and the borrower must provide the aggregate total of full-time equivalent employees for the selected reference period and the covered period or alternative payroll covered period. To calculate the applicable reduction quotient, the borrower should divide the average full-time equivalent employees during the covered period, or the alternative payroll covered period by the average full-time equivalent employees during the reference period.
The Effect of Reduced Salaries and Wages
While borrowers may reduce employee salaries up to 25 percent during the covered period without a proportionate reduction in the amount of loan forgiveness, reductions of more than 25 percent will generally result in a reduction in the amount a loan may be forgiven proportionate to the reduction in wages or salaries greater than 25 percent. In other words, for each employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce its loan forgiveness request by the total amount of salary or wage reductions in excess of 25 percent of the base salary or wages between January 1, 2020 and March 31, 2020 (except to the extent such wages are restored by June 30, 2020). This calculation must be performed on a per-employee basis and not in the aggregate.
Comparatively, if an employee’s wages are reduced solely because of a change in the employee’s full-time equivalent employee status (i.e., a full-time employee’s hours are reduced to part-time during the covered period), then the borrower is not required to conduct a salary or wage reduction calculation for that employee.
For-Cause Terminations and Voluntary Employee Actions
Finally, if an employee is terminated for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or alternative payroll covered period, then the borrower may include that employee at the same full-time equivalency level prior to such event when calculating the full-time equivalent employee reduction penalty.
Undoubtedly, this latest Interim Final Rule from the SBA will spawn additional questions from borrowers and lenders alike as loan forgiveness applications are filed in the coming weeks. Bradley will continue to monitor and provide updates on subsequent guidance issued by the SBA. Please feel free to contact Aron Beezley, Elizabeth Boone, Frederic Smith, or Alex Thrasher if you have any questions regarding PPP loan forgiveness or the program generally.