On May 22, 2020, the Small Business Administration (SBA) and the Department of Treasury issued two interim final rules related to the Paycheck Protection Program (PPP). The first
provides guidance to borrowers and lenders on forgiveness requirements for PPP loans. The second
informs borrowers and lenders of SBA’s process for reviewing PPP loans and loan forgiveness applications. We have provided key takeaways and a step-by-step summary of the loan forgiveness process below.
Payroll Costs Eligible for Forgiveness
Borrowers may seek forgiveness for payroll costs paid or incurred during an eight-week period beginning on either the date of disbursement of the borrower's PPP loan proceeds from the lender (the covered period) or the first day of the first payroll cycle in the covered period (the alternative payroll covered period). The alternative payroll covered period is available for borrowers whose payroll schedule is inconsistent with the eight-week covered period.
Payroll costs are “incurred” on the day the employee worked. Payroll costs are "paid" on the day paychecks are distributed. For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work).
Other eligible payroll costs include the following, so long as they do not exceed an annual salary of $100,000 as prorated for the covered period:
Non-payroll Costs Eligible for Forgiveness:
- salary, wages, and commission payments to furloughed employees;
- bonuses; and
- hazard pay.
The following non-payroll costs (which cannot exceed 25% of the loan forgiveness amount) are eligible for loan forgiveness, so long as they 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 after the covered period):
Reductions to Loan Forgiveness Amount:
- interest payments on any business mortgage obligation on real or personal property that were incurred before February 15, 2020 (but not any prepayment or payment of principal);
- payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
- business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Under, Section 1106(d)(2) and Section 1106(d)(3) of the CARES Act, certain reductions to a borrower’s loan forgiveness amount are required based on reductions in full-time equivalent employees or in employee salary and wages during the covered period, subject to an existing statutory exemption under Section 1106(d)(5) of the CARES Act for borrowers who have rehired employees and restored salary and wage levels by June 30, 2020 (with limitations).
Additionally, SBA and the Department of Treasury are adopting a regulatory exemption to the reduction rules for borrowers who have offered to rehire employees or restore employee hours, even if the employees have not accepted. This exemption allows a borrower to exclude any reduction in full-time equivalent employee headcount attributable to an individual employee if:
- the borrower made a good faith, written offer to rehire such employee (or restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
- the offer was for the same salary or wages and the same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
- the offer was rejected by such employee;
- the borrower has maintained records documenting the offer and its rejection; and
- the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of that offer.
The first interim final ruling provides a detailed formula to calculate a borrower’s number of full-time equivalent employees.
Loan Forgiveness Process for Applications NOT Reviewed by SBA Prior to the Lender’s Decision:
The borrower must complete and submit the Loan Forgiveness Application to its lender.
- See Baylor Evnen’s blog post on the Loan Forgiveness Application for more information about the application requirements.
The lender will review the application and make a decision regarding loan forgiveness.
- The lender has 60 days from receipt of a complete application to issue a decision to SBA.
- If the lender determines the borrower is entitled to forgiveness of some or all of the amount applied for, the lender must request payment from SBA at this time.
- A detailed explanation of the lender’s review process is contained in the second interim final ruling.
SBA remits the appropriate forgiveness amount to the lender (plus any interest accrued through the date of payment) no later than 90 days after the lender issues its decision to SBA.
Loan Forgiveness Process for Applications Reviewed by SBA:
- If the amount remitted to the lender exceeds the remaining principal balance of the PPP loan, the lender must remit the excess amount, including accrued interest, to the borrower.
SBA is authorized to review borrower eligibility, loan amounts and use of proceeds, and loan forgiveness amounts. SBA may begin a review of any PPP loan of any size, at any time, under SBA’s discretion. Therefore, borrowers must retain loan documentation for six years after the loan is repaid in full or forgiven.
If SBA undertakes such a review, SBA will notify the lender in writing, and the lender must notify the borrower in writing within five business days of receipt. Within five business days of receipt of such notice, the lender shall transmit to SBA electronic copies of several documents listed in the second interim final rule.
If SBA has notified the lender that SBA has commenced a loan review, the lender shall not approve any application for loan forgiveness for such loan until SBA notifies the lender in writing that SBA has completed its review.
If SBA determines a borrower is ineligible, the borrower will be responsible for repaying the loan before its two-year maturity. The borrower will have an opportunity to respond to the inquiry and provide additional information before SBA reaches a final determination. A separate interim final rule will be issued by SBA to establish an appeal process for eligibility decisions.
Additional information regarding potential fees that lenders may or may not incur based on denial by SBA is detailed in the second interim final rule.
Baylor Evnen’s summary of the Paycheck Protection Program is available here. Additionally, Baylor Evnen’s synopsis and link to the Paycheck Protection Program Loan Forgiveness Application is available here. Please visit our Firm blog for the most recent updates regarding COVID-19 and our updated list of Coronavirus Resources.
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