SBA and Treasury Department Release PPP Forgiveness Regulations
The Regulations provide greater insight on how to apply for forgiveness of PPP loans, which largely echoes the details provided in the PPP Loan Forgiveness Application (Application) released on May 15, 2020, but both the Regulations and the Application leave some questions unanswered. The Regulations also come a full seven weeks after applications opened, leaving some borrowers less than two weeks before the end of their forgiveness period.
Key highlights of the Regulations (which change some aspects of forgiveness set forth in the CARES Act and subsequent guidance) include:
- Loan Forgiveness Process: Borrowers must apply through their lenders who will review the Application (or a lender’s equivalent application) and make the decision regarding loan forgiveness within 60 days after receipt of a complete forgiveness application. If the lender determines that the borrower is eligible for forgiveness, the lender must request payment from the SBA, giving the SBA the final say on forgiveness.
- Payroll Costs Eligible for Loan Forgiveness: As described in the Application, Borrowers may seek forgiveness for payroll costs paid or incurred during the eight-week period beginning on the date of disbursement of their PPP loan proceeds (the Covered Period) or the first day of the first payroll cycle in the Covered Period (the Alternative Payroll Covered Period). Payroll costs are considered incurred on the day an employee works or based on a borrower’s schedule, for those employees not performing work (usually, the day an employee would normally have worked). Payroll costs are considered paid on the day that paychecks are distributed or the borrower initiates an ACH credit transaction. 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 regular payroll date.
- Furloughed Employees, Hazard Pay, and Bonuses: The salary, wages, or commission payments to furloughed employees are forgivable expenses. Additionally, bonuses and hazard pay are eligible for forgiveness, as long each employee’s total compensation does not exceed $100,000 on an annualized basis.
- Non-Payroll Costs: Certain non-payroll costs (not to exceed 25% of the forgiveness amount) are eligible for forgiveness to the extent 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 forgiveness period. In that case, only the portion that was incurred during the Covered Period is eligible for forgiveness, not the entire bill. Advance payments of interest on mortgage obligations are not eligible for loan forgiveness.
- Offer to Rehire Exemption: Employees who (i) reject a good-faith written offer of reemployment, (ii) voluntarily resign, (iii) are fired for cause, or (iv) who voluntarily request and receive a reduction in hours, are generally exempt from the full-time equivalency (FTE) reduction to forgiveness. However, to qualify for this exemption in the case of a rejection of a good-faith written offer of reemployment, in addition to the requirements previously discussed in the answer to FAQ 40, the borrower must inform the applicable state unemployment insurance office of such employee’s rejected offer within 30 days of such rejection.
- Calculation of FTE Employees: To determine the number of FTE employees, a borrower must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For part-time employees, the borrower can decide to count all such employees either (i) using their actual hours worked based on the foregoing formula and rounding to the nearest tenth, or (ii) by counting each employee working 40 hours or greater as 1.0, and each employee working fewer than 40 hours as 0.5. Borrowers may select only one of these two methods and must apply it consistently.
- No FTE/Salary Reduction Exemption Double Counting: To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decrease in employee salary and wages that is not attributable to an FTE reduction. For example, if an employee is reduced from 40 hours to 20 hours, but is kept at the same hourly wage, the borrower will only count such employee towards the FTE reduction, but will not include such employee in the salary reduction, since their reduction in total wages is solely related to their FTE reduction.
Overall, the Regulations, while helpful, still leave a number of questions unanswered and various provisions of the CARES Act unclarified. Therefore, Arent Fox will continue to monitor new guidance, update, and expand on, this summary as more information becomes available.