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Treasury releases rules regarding PPP loan reviews and forgiveness
Late on Friday, May 22 (on a holiday weekend no less), Treasury released two interim final rules addressing questions concerning reviews of Paycheck Protection Program (PPP) loans and forgiveness of such loans. While much of the content of these rules codifies previous guidance, there are new substantive provisions that add to the ongoing evolution of the PPP program. Borrowers should be aware of these rules when they apply for forgiveness of their PPP loans.
Interim Final Rule on Loan Forgiveness
Much of the Interim Final Rule on Loan Forgiveness codifies previous guidance, including instructions to the form of application for loan forgiveness, which we previously summarized here. The summary below focuses on parts of the rule that include new requirements or clarification of previously unanswered questions.
What is the general process to obtain loan forgiveness? The borrower must submit an application for forgiveness to its bank. (The form is available here.) The SBA has 60 days to review the application and notify the borrower of its decision. (Separately, the bank must then notify the SBA of its decision and the SBA then has 90 days to remit funds to the bank to fund the forgiveness.)
Any amounts not forgiven must be repaid in accordance with the terms of the promissory note governing the PPP loan.
Can borrowers include bonuses, “hazard pay” or payments to furloughed employees in “payroll costs”? Confirming what the CARES Act seemed to say by omission, the rule clarifies that borrowers may include bonuses or hazard pay to employees in the forgiveness amount. Also, payments to furloughed workers may be included. This had been an open question for many borrowers who had been forced to provide special incentives to retain front-line employees or who chose to continue payments to furloughed workers. While nothing in the CARES Act or previous guidance had excluded such payments from the forgiveness amount, it is reassuring that these are now expressly included.
For purposes of the formula that reduces the forgiveness amount based on reductions in FTEs and the safe-harbor there from available to borrowers who rehire recently terminated employees by June 30, does the borrower get “credit” for employees whom they offer to rehire if the employee rejects the offer? Yes, but the borrower must satisfy several requirements. Treasury previously released an FAQ stating that a borrower would not be deemed to have a reduction in its FTEs for an employee who was terminated between Feb. 15 and April 26, if the borrower makes an offer to rehire the employee that the employee rejects. The instructions to the forgiveness application form provided more specifics for a borrower to rely on this guidance. The new rule, however, sets out the complete list of requirements. The borrower must satisfy each one of these requirements for each applicable employee, to be deemed to have no FTE reduction:
- the borrower made a good faith, written offer to rehire or restore the hours of such employee;
- 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;
- 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 the offer.
Note: The last requirement to notify state unemployment offices is a new requirement, and borrowers should make sure they take this step.
How does a borrower calculate its FTEs for purposes of the forgiveness reduction formula based on this figure? Following the same procedure provided in the application form for forgiveness, the rule defines an FTE based on a 40-hour workweek. Borrowers divide the average number of hours paid for each employee per week by 40, with a maximum FTE of 1.0 per employee. For example, an employee paid for an average of 48 hours per week during the applicable eight-week period would be considered 1.0 FTE.
For employees who worked less than an average of 40 hours per week, the borrower may use the actual calculation for each employee or simply assign an FTE value of .5 to all such employees. Borrowers may only use one of these methods and must apply the chosen method to all employees.
How does the wage reduction formula apply to reduce the amount of forgiveness? The rule provides an example to clarify how this formula applies. Specifically, only the amount of wage reduction in excess of 25 percent is counted. Example: 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).
Does reduction in FTEs also cause a reduction in wages that reduces the forgiveness amount under both formulae? No. The rule clarifies that borrowers will not be doubly penalized for reductions in FTEs. Example: An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.
Interim Final Rule on Loan Reviews
The Interim Final Rule on Loan Reviews provides guidance on the process for SBA to review loans for compliance with requirements of the CARES Act and applicable rules.
What aspects of a PPP loan may the SBA review? While Treasury’s most recent guidance indicated the SBA would not conduct automatic reviews of loans below $2 million, the new rule clarifies that SBA retains the right and authority to review any PPP loan. Specifically, the SBA may review:
- the eligibility of any borrower based on the statutory provisions in the CARES Act, the various rules and guidance issued by the Treasury and the information in the borrower’s loan application;
- the calculation of a borrower’s eligible loan amount;
- the eligibility of a borrower for loan forgiveness and the amount that is eligible, if any, for such forgiveness.
When will the SBA choose to review a PPP loan? Treasury previously indicated that it would generally not conduct “audits” of loans under $2 million and that borrowers of loans under this amount would be presumed to have made the economic need certification in good faith. The interim final rule clarifies that the SBA retains discretion to review any loan for any reason. It specifically provides that the SBA may choose to review a loan if the application indicates that the borrower may not have been eligible, the loan amount was calculated incorrectly, or the forgiveness amount is calculated incorrectly. In these cases, borrowers may be required to provide the documentation that is subject to the six-year record retention specified in the forgiveness application.
What happens if the SBA reviews a loan? If the SBA determines that the borrower may be ineligible to receive a loan or to have a loan forgiven, it will notify the borrower and request additional information. This request may come directly from the SBA or through the lending bank. Borrowers will have appeal rights, which will be outlined in an upcoming interim final rule.
If a borrower is ultimately determined to be ineligible to have received a PPP loan, it will be required to repay the loan. It is unclear what terms for repayment will be demanded in such a situation.