8 Key Updates From New SBA Regulations on Loan Forgiveness

26 May 2020

After releasing the PPP Loan Forgiveness application on May 15, 2020, the SBA has now released additional “Interim Final Rules” or IFR in relation to the forgiveness procedures and regulations. These IFRs will generally carry a higher legal standing than the applications themselves and help to formalize the rules that were presented with the application. The IFR also provides a few more key updates for borrowers.

1. Explicit confirmation that a borrower can use both payroll costs incurred or paid during the covered period.

In the original application, there was still some question as to whether costs had to be both incurred and paid or if they were able to be incurred or paid to count. The IFR states that an expense that is either paid or incurred during the 56-day covered period will be a forgiveness eligible cost. The regulations include an example which states payroll costs paid during an alternative covered period (without any reference to when incurred) are eligible for forgiveness and in addition, payroll costs incurred during this alternative covered period and paid by the next regular cycle will be eligible for forgiveness.

This gives borrowers more flexibility in getting up to the maximum allowable, as it conceptually allows borrowers to have more than 8 weeks of payroll in the forgiveness period – the amount paid during the start of the covered period and the amounts incurred and paid thereafter. Note, however, the limit for compensation is still based on 8-weeks prorated at $100,000 for the covered period, or $15,385.

2. Hazard Pay or Bonuses are acceptable.

Many borrowers have been looking to increase rates of pay for staff providing services during the pandemic in the form of hazard pay or bonuses. Until this IFR, there were some lingering questions as to if these would be forgiveness eligible costs. The IFR specifically states both are considered other compensation and eligible, with the statement too that payroll costs are broadly defined.

3. Employees that are furloughed or not working still count for incurred for when they would have been working.

Many borrowers who received PPP loan funding may still have employees they are paying not to work or otherwise on paid leave. These employee’s compensation count as incurred when they would have otherwise been working if not for the pandemic.

4. Owner-employee compensation is capped.

One of the bigger, and frankly, less pleasant surprises borrowers found with the release of the forgiveness application was the imposition of a cap on the compensation of “owner-employees” to be limited to 8/52 their 2019 compensation. While not specifically stated, this limitation should cover:

a. S Corporation Owners

b. C Corporation Owners

c. LLC partners

d. Schedule C sole-proprietors

One major open point that still remains is if this will impact direct relationships of these categories, meaning is there a limit on bona-fide payments to children or spouses of owner-employees or partners?

5. Nonpayroll costs also can either be paid or incurred, including those in arrears.

The IFR clearly states that a nonpayroll can be eligible for forgiveness if it were paid or incurred and paid by the next regular billing cycle during the covered period. In the provided example, a borrower received a loan on June 1st and made payments of May and June electricity (note that May is before the date of loan disbursement, so an arrears payment is allowed) and that the prorated amount of the July payment can be eligible, so long as it is paid by the next regular cycle.

The IFR only addresses advance payments of mortgages, meaning that advance utility or rent payments seem to be allowable. The IFR makes mention of the 25% limitation, which should limit nonpayroll costs inherently.

6. Borrowers will now have to report any declined offers to the state unemployment office.

The SBA FAQs in the past offered a “safe harbor” to borrowers, stating that any borrower who makes a bona fide written offer to rehire (at the same rate of pay) and the employee rejects will not face a penalty for reduction of FTEs. The new IFR formalizes this FAQ and adds a new wrinkle, requiring borrowers to notify the state unemployment office (under a new procedure to follow) of these rejections.

7. FTEs remain calculated at 40-hours, but the IFR uses more digits.

Many borrowers were unpleasantly surprised when they saw the SBA FTE calculation was based on 40-hour work week, rather than something smaller. The SBA notes they considered a 30-hour week at one point but, think 40 is the most accurate measure for most employers. On the calculation, the application for forgiveness has the FTE’s rounded to the nearest tenth (i.e. 30 hours is a .8 FTE) but the examples in the IFR are to the nearest hundredth (i.e. 30 hours is a .75 FTE). Technically the IFR has a higher standing than the application, so it is likely that hundredth will be how it works.

Nothing in the IFR addresses, other than the confirmation of its existence, the use of the simplified method for FTEs wherein any employee working less than 40 hours is counted as a .5 FTE, which could allow borrowers to quickly pad FTE counts with employees only working a few hours.

8. Borrowers will NOT be double penalized for a salary and FTE Reduction

With many employees being paid a salary, some borrowers were concerned that a reduction in hours that in turn reduced salary could end up being a double penalty for a borrower. The new IFR states that salary or wage reductions apply only to the portion of the decline in employee salary or wages that is not attributable to the FTE reduction. So an employee going from 40 to 24 hours per week, which results in a reduction in pay due to less hours worked, will not count as a salary reduction (but still as an FTE reduction) for the amount that the salary declined as a result of the change in hours. If the person ALSO has a rate reduction and hours reduction, nothing here prevents them from being counted in both as appropriate. So, if an employee making $1,000 per week was reduced to 3 days (24 hours) at $600 per week, there is only an FTE and no salary reduction. If the reduction was to $440 per week for 24 hours, this is still a salary reduction of more than 25% that needs to be included as a reduction of forgiveness in the amount of $80 over the covered period ($10 per week above 25% ($600 x .75 = $450) -$440 per week x 8 weeks).

The IFR was another welcome piece of guidance that provided more clarity for borrowers, particularly covering information regarding bonus or additional payroll and confirming no double penalty for a reduction in FTE and salary. Like other guidance, this would also be classified as borrower friendly. The SBA also released on Friday an IFR that covers some guidance on the SBA review procedures, which can be found here. There are still rumblings of an extended period of up to 24 weeks to use funds which has bipartisan support, but has yet to be enacted; until then borrowers still need to follow the guidance and act as if this will be an 8 week program. There are also still many uncovered topics, include retirement plan contribution windows, further guidance on utilities, and what health-care expenses may be covered.


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