The Small Business Administration (SBA) has finally issued the long-awaited guidance on Paycheck Protection Program (PPP) loan forgiveness. This follows the release of the Loan Forgiveness Application which had provided initial guidance in a number of areas.  While this guidance does provide some clarity to loan forgiveness, it also leaves several unanswered questions that may be addressed in future guidance. Let’s review a few key aspects of the new forgiveness guidance.

Qualifying Payroll Costs

Payroll costs will qualify for forgiveness if they are either paid during the covered period (or alternative covered period) or incurred during this period and paid by the next regular payroll date. The compensation (wages, commissions, bonus, etc.) portion of payroll costs cannot exceed $15,385 per employee. The SBA confirmed that both hazard pay and bonuses paid during the covered period can be included in compensation qualifying for forgiveness. Additionally, compensation paid to furloughed employees will also qualify for forgiveness.

The guidance was generally silent on health and retirement benefits for most employees. It appears that if they are to qualify for forgiveness, they must either be paid during the covered period or be incurred during the period and paid on or before the next regular payroll date. The guidance is also silent as to whether or not these benefits can be accelerated and paid during the covered period to increase qualifying payroll costs. While it appears that advanced payments may qualify, borrowers may want to be cautious when advancing payments for benefits as we’ve seen the rules for PPP loans change often throughout the process, and this is another area they may target for stricter rules.

It is also possible that new legislation will be passed to extend the covered period making it easier for employers to qualify for forgiveness.

Certain Advanced Payments Appear to be Allowed

The new guidance provides that to qualify for forgiveness, nonpayroll costs (rents, mortgage interest, utilities) must be either (1) paid during the covered period or (2) incurred during the covered period and paid on or before the next regular billing date. The fact that payments made during the covered periods qualify without needing to also be incurred would seemingly allow for advanced payments of nonpayroll costs to be paid and qualify for forgiveness in most instances. This could provide flexibility for businesses that are short on qualifying costs to maximize forgiveness. While most costs initially appear to qualify, advanced payments of mortgage interest were specially identified as not qualifying for forgiveness.

What appears to not qualify are expenses that are incurred during the covered period but were paid prior to the receipt of the PPP loan proceeds. For example, if May rent was paid on May 1st when it was due, while loan proceeds were received on May 7th, the rent payment would not qualify since it could not be paid with the loan proceeds as the expense was paid prior to the loan being received.

Owner-Employee’s Benefits are Subject to a Cap

The new guidance has set a cap for owner-employee payroll costs in total (including health insurance and retirement benefits) to 8/52 of 2019 compensation not to exceed $15,385 per individual across all businesses. This puts the owners of corporations on more equal footing with the owners of partnerships and self-employed individuals who are not able to include benefits when calculating payroll costs. It is of note that this combined limitation on employee-owner payroll costs was not included in the CARES Act, and consequently, many initial loan balances may have included amounts exceeding $15,385 related to owner-employees.

How to Address Employees Who will not Return from Unemployment

Many employers were concerned about how employees refusing to return to work from unemployment would impact their PPP forgiveness due to the reduction required by law for not maintaining the same level of full-time equivalent employees. The SBA has decided that employees refusing to return to work will not require a reduction in the amount qualifying for forgiveness if the borrower has taken the following steps.

  • Made a good faith, written offer to rehire the employee during the covered period or alternative covered period;
  • The offer was for the same salary or wages and the same number of hours as earned by the employee in the last pay period prior to the separation or reduction in hours;
  • The offer was rejected by the employee;
  • Records are maintained documenting the offer and rejection; and
  • The borrower informs the applicable state unemployment insurance office of the employee’s rejection within 30 days of the employee’s rejection of the offer. (additional guidance will be provided on how to notify the state)

Additionally, the SBA provided an exemption for a reduction in full-time equivalent employees due to voluntary resignations, terminations for cause, and where the employee requests a reduction in hours. Based on the guidance, this exemption only applies to these changes in employment status if they occur during the covered period or alternative covered period. Therefore, it appears that any changes in status under these circumstances which occurred prior to the covered period will not qualify for the exemption.

Interaction Between Loan Forgiveness Reduction Calculations

Under the CARES Act, PPP loan forgiveness is subject to two potential reductions, one for a reduction in full-time equivalent (FTE) employees and a second if employees earning less than $100,000 had their wages reduced in excess of 25%. As these two calculations are independent, there was concern that employees who had their hours reduced could impact both calculations and essentially create a double penalty relating to the same employee as both FTE’s and salary would be reduced if an employee needed to be laid off or have their hours reduced. Fortunately, the SBA recognized this potential unintended consequence and determined that the reduction in wage limitation will only apply for those employees where the salary reduction is not attributable to the FTE reduction.

It’s important to note that borrowers can entirely eliminate these limitations if they are able to restore FTE’s and the salary reductions by June 30, 2020.

As this guidance was not entirely comprehensive, it can be expected that additional rules will be issued by the SBA either in the form of an additional interim final rule or new frequently asked questions. As we’ve seen throughout the PPP process, the rules have changed weekly and even daily at times, so borrowers will need to be cognizant of any additional rule changes issued regarding loan forgiveness. Please contact our offices to learn more about PPP loan forgiveness.

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Len Nitti

Author Len Nitti

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