SBA and Treasury Release PPP Interim Final Rule Regarding Loan Forgiveness
Author: Glenn Burlingame, Esq.
On May 23, 2020, the Small Business Administration (SBA) and Department of Treasury (Treasury) released the Paycheck Protection Program (PPP) Interim Final Rule Regarding Loan Forgiveness (Loan Forgiveness Rule). The SBA and Treasury also released another set of rules relating to the SBA loan review process. This Alert only discusses the Loan Forgiveness Rule.
The Loan Forgiveness Rule is available here: https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf. The Loan Forgiveness Rule supplements previous regulations and guidance on the discrete issues relating to loan forgiveness, including the Loan Forgiveness Application and Instructions released by the SBA and Treasury on May 15, 2020.
Highlighted below are some of the key elements of the Loan Forgiveness Rule.
Payroll Costs Definition
The statutory definition of payroll costs was clarified with respect to cash tips or the equivalent and payroll costs for independent contractor and sole proprietors. Regarding cash tips or the equivalent, the Loan Forgiveness Rule clarifies that such cash tips or the equivalent are based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips. Regarding independent contractors and sole proprietors, the Loan Forgiveness Rule clarifies that for an independent contractor or sole proprietor, payroll costs include wages, commissions, income, or net earnings from self-employment, or similar compensation.
Timing Of Payroll Costs
The Loan Forgiveness Rule states that payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). 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 that the employee would have performed work).
If a borrower pays furloughed employees their salary, wages, or commissions during the applicable covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the applicable covered period.
HAZARD PAY AND BONUSES
The Loan Forgiveness Rule states that if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.
CAPS FOR OWNER-EMPLOYEES AND SELF-EMPLOYED INDIVIDUALS
The Loan Forgiveness Rule states that the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses. In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.
EXEMPTION FOR EMPLOYEES THE BORROWER OFFERED TO REHIRE
Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
- the borrower made a good faith, written offer to rehire such employee (or, if applicable, 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 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.
The Loan Forgiveness Rule also notes that further information regarding how borrowers should report information concerning rejected rehire offers to state unemployment insurance offices will be provided on SBA’s website.
REDUCTION IN FULL-TIME EQUIVALENT (FTE) EMPLOYEES
In general, a reduction in FTE employees during the applicable covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. The borrower must first select a reference period: (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) 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 FTE employees during the applicable covered period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees.
The Loan Forgiveness Rule provides the following example:
Example: If a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness.
WHAT DOES FTE EMPLOYEE MEAN?
FTE employee means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single FTE employee and aggregated, as explained further below.
Borrowers seeking forgiveness must document their average number of FTE employees during the applicable covered period and their selected reference period. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.
For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be a FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be a FTE employee of 0.25. Second, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee.
Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the applicable covered period and the selected reference period. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the applicable covered period, by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the applicable covered period by the average FTE employees during the selected reference period, resulting in the reduction quotient.
SALARY AND WAGE REDUCTIONS
Under the CARES Act, a reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries (see below). This reduction calculation is performed on a per employee basis, not in the aggregate.
The Loan Forgiveness Rule provides the following example:
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 a 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).
REDUCTION IN NUMBER OF EMPLOYEES VERSUS REDUCTION IN SALARY AND WAGES
The CARES Act does not address the intersection between the FTE employee reduction provision and the salary/wage reduction provision. To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
The Loan Forgiveness Rule provides the following example:
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 applicable covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the applicable 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.
SALARY AND WAGE RESTORATION
The CARES Act provides that if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages under the CARES Act. Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.
If the borrower meets the requirements for the FTE reduction safe harbor, it will not be subject to any loan forgiveness reduction based on a reduction in FTE employees.
EMPLOYEES FIRED FOR CAUSE, WHO VOLUNTARILY RESIGN OR WHO VOLUNTARILY REQUEST A SCHEDULE REDUCTION
When an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the applicable covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty. Such employees are exempt from the calculation of the FTE reduction penalty.
Borrowers that avail themselves of this exemption must maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. The borrower shall provide such documentation upon request.