May 27, 2020

New PPP Interim Final Rules Address Loan Forgiveness Requirements and Agency Review Procedures

Holland & Knight Alert
David A. Surbeck | David Matuszewski | David S. Cole | Daniel T. Sylvester | Tim Ryan | Keith N. Sambur


  • A new Interim Final Rule (IFR) from the U.S. Small Business Administration (SBA) supports the use of bonuses and hazard pay and solidifies use of Paycheck Protection Program (PPP) loan proceeds for costs paid or incurred during the Covered Period, but it also adds a new owner-employee concept.
  • A second new IFR from the SBA stipulates lender requirements if the SBA is reviewing an application and that lenders will not be entitled to fees for any PPP loan deemed ineligible by the SBA (and will be subject to a clawback for any such fees paid).

The U.S. Small Business Administration (SBA) published two new Interim Final Rules (IFRs) on May 22, 2020, related to the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The first IFR addresses various loan forgiveness requirements, and the second IFR addresses certain review procedures and lender responsibilities.

Loan Forgiveness Calculation Guidance

This forgiveness guidance comes as the initial wave of PPP borrowers approach the end of the eight-week "Covered Period" during which PPP Loan proceeds that are spent on forgivable uses can be entitled to forgiveness subject to various testing requirements. As noted in an earlier alert relating to the PPP Loan Forgiveness Application (Forgiveness Application), certain borrowers now have the option of using a Covered Period or an Alternative Payroll Covered Period, and they can apply for loan forgiveness as early as the end of their chosen Covered Period. (See Holland & Knight's previous alert, "SBA Paycheck Protection Program Loans: Forgiveness Guidance, Part II," May 18, 2020.) Once received, the lender would have up to 60 days to complete its review of the Forgiveness Application and issue its determination to the SBA.

Paid or Incurred Guidance

Although there was considerable uncertainty whether PPP loan proceeds used 1) to pay permitted costs that were incurred prior to the Covered Period or 2) after the Covered Period to pay permitted costs incurred during the Covered Period would be eligible for forgiveness, the Forgiveness Application supported the broader interpretation that borrowers could seek forgiveness for eligible amounts paid or incurred during the Covered Period. The IFR further supports this interpretation so long as payroll costs incurred but not paid during the Covered Period are paid by the next regularly scheduled payroll date or non-payroll costs are paid by the next billing date. The IFR reiterates that no advance payments of interest on mortgage obligations will be eligible for loan forgiveness (citing statutory support for such conclusion), but does not specifically address whether the prepayment of payroll costs, rent and utilities are forgivable. Because the IFR does not address these other costs specifically, it is unclear whether the SBA will take the same view of advance payments of these other non-payroll costs. There is no discussion as to any cutoff time for any payroll or non-payroll costs incurred prior to the Covered Period but paid during the Covered Period.

The IFR clarifies that payroll costs are generally incurred on the day that the employee's pay is earned (i.e., on the day the employee worked) or, for those on the payroll and not working, on a schedule established by the borrower. The IFR instructs that the CARES Act defines payroll costs broadly, and permits borrowers to include bonuses and hazard pay – subject to the cap of $100,000 of annualized cash compensation per employee (i.e., capped at $15,385 maximum per individual for the Covered Period).

Caps on Owner-Employee Compensation

The IFR places a new cap on loan forgiveness available to owner-employees and self-employed individuals with respect to their payroll compensation. An owner-employee and self-employed individual cannot seek forgiveness for payroll compensation in an amount greater than 8/52 of the individual's 2019 compensation (or if less, $15,385). In connection with compensation paid in 2019, this cap applies to both employee cash compensation and employer retirement and healthcare contributions made on behalf of the employee. The regulation states that this cap applies "in total across all businesses" (implying that if such an individual owns more than one business, the cap is an aggregate covering all businesses owned by such owner-employee and perhaps also acknowledging the affiliation rules potentially applicable to borrowers under common ownership). The government likely enacted this regulation to limit the ability of an owner-employee to pay himself or herself large sums of compensation or very generous benefits (in lieu of compensation payments to other employees).

This cap on forgivable owner-employee compensation is not addressed in the statutory language of the CARES Act. Furthermore, nowhere in the regulation is the term "owner-employee" defined. Although an employee that owns 100 percent of the equity of a borrower would likely be considered to be an "owner-employee," it is not clear, however, whether an employee that owns only a portion of the equity of a borrower would always be considered an "owner-employee." For example, some co-owners might agree to contractual restrictions on their ability to affect the management and policies of the borrower. In these cases, questions might arise as to whether this individual rises to the level of "owner-employee." Although there may policy reasons that support the regulation, those policy reasons would appear to diminish as the percentage of ownership held by the employee-owner decreases and the restrictions on the individual's ability to direct management increase.

In cases where a borrower is partially or fully owned by an employee stock ownership plan (ESOP), one could argue that each employee participant in the ESOP should be treated an "owner-employee," and thus subject to the aforementioned cap on forgivable compensation. As the actual owner of the borrower is the ESOP (and not the employees), it is not expected that the government would take such a position.

Forgiveness Amount Reductions

Borrowers must apply two tests to determine whether they are required to reduce the amount of forgiveness for which they may request, one based on headcount of full-time equivalents (FTEs) and one based on payroll. Borrowers may also qualify for a safe harbor, in which case no forgiveness reduction would apply. The IFR explains how to calculate forgiveness amount reductions based on reduced FTEs and reduced salary, and explains how certain safe harbors can shield borrowers from having to do so.

"Employees whom the borrower offered to rehire are generally exempt from the CARES Act's loan forgiveness reduction calculation," and the SBA and the U.S. Department of the Treasury are adopting rules to address situations where rehire offers are not accepted. Borrowers should continue to keep track of rehire offers and responses, while awaiting publication of additional rules.

Reductions Based on FTEs

As in the application, the IFR defines "Full-Time Equivalent Employee" as an employee who works 40 hours or more, on average, each week of the Covered Period. Thus, if the employee is brought back after the start of the Covered Period, they will not get the benefit of a 1.0 FTE (the maximum allowed) unless relying on the separate safe harbor. Although a borrower can treat all part-time employees (less than 1.0 employees) as either part-time based on an actual percentage out of 40 hours worked (rounded to tenths) or part-time at 0.5 FTE, the borrower must apply the same methodology to all of its part-time employees. When determining whether there was any reduction in FTE from the reference period, the borrower may select a reference period of 1) Feb. 15, 2019, through June 30, 2019, or 2) Jan. 1, 2020, through Feb. 29, 2020 (or elect the seasonal option, if applicable).

The key for a borrower is that if it has reduced FTEs during the Covered Period or the Alternative Covered Period compared to FTEs on the payroll during the borrower's chosen reference period, it must reduce the forgiveness amount applied for proportionately. For example, a 20 percent reduction in FTEs over these periods would result in a 20 percent reduction in the total forgivable amount. 

Reductions Based on Salary

The salary reduction tests on a per-employee basis whether a borrower has reduced an individual's compensation by more than 25 percent.

The IFR explains that borrowers should reduce the forgivable amount dollar-for-dollar for each dollar that an employee's compensation in the Covered Period or the Alternative Covered Period was reduced compared to the borrower's chosen reference period above a 25 percent permitted reduction threshold. The IFR also interprets the CARES Act to exclude from this calculation employees who received 2019 compensation greater than $100,000 on an annualized basis. It is possible that this would exclude from salary reduction employees who earned less than an annualized compensation of $100,000 for 2019, but did have one or more pay period when that amount was exceeded (i.e., because of overtime, commissions or bonuses).

To avoid double penalizing a borrower, the IFR clarifies that this salary reduction test does not apply if compensation drops because an employee's hours decline.

Lastly, although the FTE and salary reduction tests could have a significant effect on the portion of a PPP loan eligible for forgiveness, the June 30, 2020, safe harbor remains without further explanation about how long a rehired employee would need to remain employed after June 30 or any further treatment for borrowers who have an Alternative Covered Period that extends beyond June 30.

Review Procedures and Responsibilities Guidance

In its second IFR, the SBA made clear that it retains the right to review any PPP loan and Forgiveness Application (subject to the 90-day review period provided in the CARES Act). Borrowers should not confuse the loan and Forgiveness Application review nor the safe harbor announced regarding the necessity certification for loans under $2 million with an absence of potential review for other eligibility requirements and forgiveness calculations. Borrowers are required, in accordance with the Forgiveness Application, to retain all PPP documentation for a period of six years after the loan is forgiven or repaid in full, and permit authorized SBA representatives access to such files as requested.

The second IFR also clarifies that a borrower is ultimately responsible for the forgiveness calculation it submits, although the second IFR assures lenders that minimal review by lenders of forgiveness calculations based on recognized third-party payroll company provided data is reasonable. Absent recognized third-party payroll company provided data, lenders should scrutinize borrower calculations more carefully.

If a borrower received but is ineligible for a PPP loan, the loan cannot be forgiven and the SBA will direct the lender to deny forgiveness. While the IFR makes clear that the SBA may also seek repayment or "pursue other available remedies" it leaves open the possibility that the SBA may take neither of these actions.

Lenders may either approve a Forgiveness Application, deny it in whole or deny it in part, and, prior to such determination, a lender may request a borrower to supplement its Forgiveness Application. If denied in whole or in part, a borrower may appeal. The SBA intends to issue a separate IFR to address appeals of forgiveness and eligibility determinations.

While calculations of forgiveness amounts remain the responsibility of the borrower, lenders are expected to perform a good-faith review in a reasonable time (noting that a decision must be issued to SBA within 60 days of receipt of a Forgiveness Application). However, the IFR provides that if a lender receives notice from the SBA that it is reviewing the loan, it must transmit related documents promptly (within five business days) and wait for the result of the SBA review before providing any approval.

Finally, the IFR makes clear that lenders are not entitled to fees for PPP loans if the borrower is determined to be ineligible – including a clawback for these fees. However, the IFR does not provide an exception for circumstances when the SBA elects not to demand repayment of the PPP loan and allows the PPP loan to remain outstanding for whatever reason, in which case the lender would presumably need to continue to service the PPP loan without the benefit of the fee.

A number of unanswered questions about the forgiveness process remain. The SBA invites public comment on these two IFRs. Holland & Knight attorneys, including the authors of this alert, can assist borrowers or those interested in borrowing PPP loans to submit public comments.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the authors of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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