New PPP Rules Answer 8/24 Week Question; Others Still Remain!

On June 22, the SBA released new Interim Final Rules (IFR) relating to Loan Forgiveness. The IFR updates prior IFRs to conform to the PPP Flexibility Act (PPPFA), specifically relating to the maturity of PPP loans, the deferral of PPP loan payments, and the PPP loan forgiveness process.

The highlights of the IFR are as follows:

1.  Borrowers can file for forgiveness during the 24-week period immediately after they have spent their PPP loan proceeds on “eligible expenses.” They do not have to wait until the end of their 24-week period, which is what was originally thought under the PPPFA. As addressed in a prior Legal Beat, under the PPPFA, borrowers who received their loans on or after June 5, 2020 have a 24-week forgiveness period, while those who received the loan prior to such date, could elect, instead, an 8-week forgiveness period.

The IFR specifically provides that a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. So long as a borrower has spent all of their loan proceeds, they will be able to apply for forgiveness at any point.

However, if borrowers reduced any employee's wages by more than 25 percent, they will have to extrapolate the salary/wage reduction over the full covered period (i.e. either 8 or 24 weeks) and not just for the chosen covered period. Additionally, if a borrower does not apply for forgiveness within 10 months after the last day of the covered period then the loan will no longer be deferred, and the borrower must begin making payments.

There appears to be no requirement for borrowers to maintain employee FTE levels throughout the entire 24-week period. If the borrower maintained the same number of employees and the same pay rate for those employees through the date it files the forgiveness application (or restored employee FTE levels or pay rates on such date, though it is not clear for how long this must be done), there should be no reduction in the amount of loan forgiveness.

2. Forgiveness for owners-employees will, for the most part, be limited to 385% for the 8-week period or 20.833% for the 24-week period of their 2019 compensation. This essentially means that any independent contractor who did not pay wages to another employee will have the entirety of their loan automatically forgiven if they use the 24-week period. The IFR clarified that the term “owners-employees” include S and C Corporation shareholders, as well as self-employed individuals and independent contractors.

With regard to same, the IRF states:

For borrowers that received a PPP loan for June 5, 2020 and elect to use an eight-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals' payroll compensation is capped at eight weeks’ worth (8/52) of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For all other borrowers, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months' worth (2.5/12) of 2019 compensation (i.e., approximately 20.83 percent of 2019 compensation) or $20,833 per individual, whichever is less, in total across all businesses.

In particular, C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf. S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation. Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment, multiplied by 0.9235. For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.”

The IFR does not address an inconsistency between the instructions to the PPP Loan Forgiveness Application Form 3508EZ, but not on the full application Form 3508 or elsewhere in any SBA Q&As or Rules, that subjects retirement contributions on behalf of owner-employees to a cap of 2.5 months’ worth, or 20.833%, of their 2019 contribution amount. One reason for this inconsistency is that this is an error and that, hopefully, this limitation will be deleted from the EZ application!

At this point the IFR leaves room for interpreting that retirement contributions on behalf of owner-employees are not included in such cap. Hopefully, the SBA will release revised forgiveness applications and the instructions which will conform to the guidance contained in the latest IFR.

3. Clarification on new PPPFA employee reduction exceptions. State mandated closings, and the inability to rehire or find qualified replacement employees will be liberally interpreted, to increase the likelihood of full forgiveness.

The CARES Act allowed borrowers to avoid reductions in forgiveness for a reduced number of employees compared to the pre-pandemic period in the form of four exemptions: (1) the employee rejected a rehire offer; (2) the employee was fired for cause during the covered period; (3) the employee requested a reduction in hours; and (4) the employee voluntarily resigned.

The PPPFA added two more, relatively liberal, exemptions: (1) the inability to hire “similarly qualified” individuals to fill a spot; and (2) the inability to operate due to restrictions from government agencies. The new exemptions under the PPPFA, while intended to help borrowers avoid forgiveness reductions, raised a number of new questions.

The IFR provides the following clarification:   

“Borrowers are exempted from the loan forgiveness reduction arising from a proportional reduction in FTE employees during the covered period if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee's rejected rehire offer within 30 days of the employee's rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include, but are not limited to, the written offer to rehire an individual, a written record of the offer's rejection, and a written record of efforts to hire a similarly qualified individual.

Borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance). Specifically, borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.

The SBA is interpreting the above statutory exemption to include both direct and indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.”

The exemptions for (1) an employee who rejected a rehire offer, and (2) the exemption for an inability to hire similarly qualified individuals, have essentially been merged into one single exemption which now appears to require that the employer first attempt to rehire a former employee and then unsuccessfully attempt to find similarly qualified individuals.

Regarding the exemption for an inability to operate due to compliance with COVID Requirements or Guidance, the SBA is allowing businesses indirectly affected by these orders to claim this exemption. When the exemption was first created it appeared borrowers could only claim the exemption if they were affected by guidance from one of the agencies specifically listed (HHS, the CDC or OSHA). The SBA, however, has recognized that many state and local authorities are imposing restrictions based on guidance from these agencies. As a result, the SBA will permit borrowers suffering from those indirect impacts to claim the exemption. Borrowers will still need to be able to reference the specific COVID Requirement or Guidance from the such agencies that either directly or indirectly affected them.

Finally, it is important to note that on Friday, June 19, 2020, the SBA announced that it will release the names of borrowers that received PPP loans greater than $150,000 and up to $10 million. They expect to release the names of approximately 75% of borrowers that received PPP loans.

As Covid-19 cases are spiking here in Florida, please take care and be safe!!